Policy Research Catalog The World Bank November 1993 WPS 135 (Update) Policy Research Working Papers Catalog of Numbers 801-1200 PolicyEsrchWedingPap-sdinauthcnrmgsofwadminpmgandcomauagtchenchaneaEidsamongBankstaffand anioauincdeden-vdepmeatis.uc.sThescpapcas,distrilmnbythrRescaschAdvisnyStaff,canyd namcsaEdicautozsdocl h ban diredaca mmg anntrpmaioandcnclusiaazthamsown.Theysa nct be aminuedto theWardBank,imsBaard atDirecaossitsmneent,atanyofitsmambceountrims Policy Research WPS 135 (Update) Copies of this catalog only are available free from the World Bank Bookstore, 1818 H Street NW, Washington, DC 20433. Order stock #31326. To obtain copies of individual working papers listed in the catalog, please call or write to the contact person listed in the last paragraph of each abstract Policy Research Working Papers disseminate the findings of work under way in the Bank. An objective of the series is to get these findings our quicIdy. even if presentafions are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced by the Policy Research Dissemination Center Policy Research Working Paper Series Catalog of Numbers 801-1200 Index WPS # Author Workng Paper Tide Page Agdcultural Policies 823 Steven M. Jaffee How Private Enterprise Organized Agricultural Markets in Kenya 12 836 Richard H. Adams, Jr. and Harold Sources of Income Inequalityin Rural Pakistan: Alderman A Decomposition Analysis 18 S 865 Harold Alderman and Marito Garcia Food Security and Health Security: Explaining the Levels of Nutrition in Pakistan 31 - 875 Jacob Yaron Rural Finance in Developing Countries 36 884 Harold Alderman Intercommodity Price Transmittal: Analysis of Food Markets in Ghana 40 888 Csaba Csfid Transformation of Agriculture in Central Eastern Europe and the Former USSR: Major Policy Issues and Perspectives 42 949 Hans Binswanger and Shabidur The Impact of Formal Finance on the Rural Economy Khandker of India 75 1008 Harold Alderman and Christina HK Do the Poor Insure? A Synthesis of the Literature Passon on Risk and Consumption in Developing Countries 107 1009 Paul A. Higgins and Harod Alderman Labor and Women's Nutrition- A Study of Energy Expenditure, Fertility, and Nutritional Status in Ghana 108 1055 MarkR. Rosensweig and Hans P. Wealth, Weather Risk, and the Composition and Profitability Binswanger ofAgricultural Investments 128 1116 Antario Salazar P. Brandio and Will Martin Implications ofAgricultural Trade Liberalization for the Developing Countries 157 1140 Bruce Gardner and Karen ML Brooks How Retail Food Markets Responded to Price Liberalization in Russia after January 1992 168 1164 Hans P. Binswanger, Klaus Deininger, Power, Distortions, Revolt6 and Reform and Gershon Feder in Agricultural Land Relations 178 Co-Financing and Financial Advisory Service 886 Sudarshan Gooptu and Maria Soledad Factors That Affect Short-Term Commercial Bank Martinez Peria Lending to Developing Countries 41 895 Mohua Mukheriee How Can Debt Swaps Be Used for Development? 46 Debt and International Finance 812 Stijn Claessens Alternative Forms of External Finance: A Survey 7 817 Mohua Mukherjee How Does Brad-Type Commercial Debt Restructuring Work? 10 835 Patricio Arran and Stin Claessen Commodity Stabilizaton 'Nmde 18 ii Index WPS # Author Working Paper Title Page 840 Alfredo E. Thorne and Azita Dastgheib Public Sector Debt Fiscal Deficits, and Economic Adjustment A Comparative Study of Six EMENA Countries 20 842 Ishrat Husain and Kwang W. Jun Capital Flows to South Asian and ASEAN Countries. Trends. Determinants, and Policy Implications 21 855 Jonathan Eaton Sovereign Debt A Primer 26 861 Patricio Arran and Daniel Oks Private Saving in Mexico, 1980-90 29 901 James A. Hanson Opening the Capital Account A Survey of Issues and Results 53 916 Marc Chesney and Jacques Marisset Measuring the Risk of Default in Six Highly Indebted Countrie' 60 917 Ash Demirgok-Kunt Creditor Country Regulations and Commercial Bank Lending to Developing Countries 60 932 AsH Demirgng-Kint and Enrica Interest Rates, Official Lending, and the Debt Crisis: Detragiache AReassessment 67 933 Ash Demirgaf-Kunt Developing Country Capital Structures and Emerging Stock Markets 68 943 Asli Demirga4-Kunt and Eduardo Burden-sharing Among Official and Private Creditors FernAndez-Arias 73 993 S. Ibi Ajayi An Economic Analysis of Capital Flight from Nigeria 98 995 Stijn Claessens, Ishac Diwan, Recent Experience with Commercial Bank Debt and Eduardo Fernandez-Arias Reduction 99 1012 Haluk Unal, AsH Demirgag-Kunt, The Brady Plan, the 1989 Mexican Debt Reduction and Kwok-Wai Leung Agreement, and Bank Stock Returns in the United States and Japan 109 1043 Stin CLessens and George Pennacchi Deriving Developing Country Repayment Capacity from the Market Prices of Sovereign Debt 122 1058 Ishac Diwan, Vihang Errunza, The Pricing of Country Funds and Their Role in Capital and Lemma W. Senbet Mobilization for Emerging Economies 129 1073 Peter J. Montiel Fiscal Aspects of Developing Country Debt Problems and Debt and Debt-Service Reduction Operations: A Conceptual Framework 136 1103 Peter J. Montiel Capital Mobility in Developing Countries. Some Measurement Issues and Empirical Estimates 151 1117 Sudarshan Goopta Portfolio Investment Flows to Emerging Markets 158 1121 Herald Eggerstedt, Rebecca Brideas Hall, Measuring Capital Flight: A Case Study of Mexico 160 and Sweder van lWijnbergen 1141 Maxwell J. Fry Foreign Direct Investment in a Macroeconomic Framework Finance, Efficiency, Incentives, and Distortions 169 Index iii WPS # Author Working Paper Tde Page 1147 Stijn Claessens, Daniel Oks, Interest Bates, Growth, and External Debt: and Sweder van Wijnbergen The Macroeconomic Impact of Mexico's Brady Deal 171 1160 Punm Chuhan, StUn Claessens, and Equity and Bond flows to Asia and Latin Americ= Nlandu Mamingi The Role of Global and Country Factors 176 1169 Eduardo Ferndndez-Arias Costs and Benefits of Debt and Debt Service Reduction 181 1180 Harry Huizinga The Financing and Taxation of U.S. Direct Investment Abroad 186 - 1186 Stijn Claessens and David Naud6 Recent Estimates of Capital Flight 189 Development Economics 807 Rudiger Dornbusch and Stanley Fischer Moderate Inflation 5 844 Ravi Kanbur Heterogeneity, Distribution, and Cooperation in Common Property Resource Management 21 894 Gregory Ingram Social Indicators and Productivity Convergence in Developing Countries 46 905 Lawrence H. Summers Investing inAl the People 54 1168 Rasbid Faraqee How Macroeconomic Projections in Policy Framework Papers for the Africa Region Compare with Outcomes 180 Education and Social Policy 822 Nancy Jesurun-Clements Paternalism and the Alleviation of Poverty 12 825 Marlaine E. Lockheed and Qinghua Zhao The Empty Opportunity: Local Control of Secondary Schools and Student Achievement in the Philippines 13 828 Arvil Van Adams, Robert Goldfarb, How the Macroeconomic Environment Affects Human and Terence Kelly Resource Development 15 837 Arvil Van Adams, John Middleton, Manpower Planning in a Market Economy with Labor and Adrian Ziderman Market Signals 19 - 856 George Psacharopoulos and Zafiris Latin American Women's Earnings and Participation Tzannatos in the Labor Force 27 862 Alan Richards Higher Education in Egypt 29 889 Stephen W. Raudenbush, Suwanna On-the-Job Improvements in Teacher Competence: Eamsuklawat, Ikechuku Di-Ibor, Policy Options and Their Effects on Teaching and Mohamed Kamali, and Wimol Taoldam Learning in Thailand 43 896 George Psacharopoulos, Carlos Rojas, Achievement Evaluation of Colombias Escuela Nueuw- and Eduardo Velez Is Multigrade the Answer? 47 897 Daniel S. Hamermesh Unemploymeaul.wrars- for Developing Countries 47 iv Index WPS # Author Working Paper ri Page 913 Maitreyi Das The Women's Development Program in Rajasthan: A Case Study in Group Formation for Women's Development 58 944 Gail Stevenson How Public Sector Pay and Employment Affect Labor Markets: Research Issues 73 946 Duane E. Leigh Retraining Displaced Workers: What Can Developing Countries Learn from OECD Nations? 74 947 Stephen I.. Mangum, Garth L Mangum, Strategies for Creating Transitional Jobs during and Janine Bowen Structural Adjustment 75 977 Estelle James Income Security for Old Age: Conceptual Background and Major Issues 90 1013 AnalRevenga, Michelle Riboud, The Impact of Mexico's Retraining Program and Hong Tan on Employment and Wages 109 1014 George Psacharopoulos Ethnicity, Education, and Earnings in Bolivia and Guatemala 110 1028 Harry Anthony Patinos and George Socioeconomic and Ethnic Determinants of Grade Psacharopoulos Repetition in Bolivia and Guatemala 116 1037 Ann-Maria Arriagada and Adrian Vocational Secondary Schooling, Occupational Choice, Ziderman and Earnings in Brazi 120 1039 Martin Weale Education, Externalities, Fertility, and Economic Growth 121 1045 Kalanidhi Subbereo and Laura Raney Social Gains frcom Female Education: A Cross-National Study 128 1056 George Psacharopoulos and Ying Chu Ng Earnings and Education in Latin America Assessing Priorities for Schooling Investments 128 1065 Thomas Owen Eisemon, John Sheehan, Strengthening Uganda!s Policy Environment for Investing George Eyoku, Franklin Van Buer, in University Development Delane Welscl, Louisa Masutti, Nat Colletta, and Lee Roberts 132 1067 George Psacharopoulas Returns to Investment in Education: A Global Update 133 1069 Estele James Why is There Proportionately More Enrollment in Priv-we Schools in Some Ccuntries? 134 1075 Adrian Ziderman and Robin Horn Many Paths to Skilled Employment: A Reverse Tracer Study of Eight Occupations in Colombia 137 1086 George Peacharopoulos, Jorge Teachers? Salaries in Latin America: A Comparative Valenzuela, and Mary Arends Analysis 141 1099 Harry C. Katz, Sarosh Kuruvilla, Trade Unions and Collective Bargaining and Lowell Turner 146 1106 Hall Dander and Jennifer Haworth Improving Women's Access to Higher Education: A Review of World Bank Project Experience 153 Index v WPS # Author Wot*ing Paper Title Page 1113 Christisan Grootaert and Ravi Kanbur The Lucky Few Amidst Economic Decline: Distributional Change in Cate dvoire As Seen Through Panel Data Sets, 1985488 156 1118 Olivia S. Mitchell Trends in Retirement Systems and Lessons for Reform 158 1123 Nancy Birdsall Social Development is Economic Development 161 1130 Michael Lipton and Martin Ravallion Poverty and Policy 164 1181 Zeliko Bogetic and Dennis Heffley Reforming Health Care: A Case for Stay-Well Health Insurance 186 Finance and Private Sector Development 815 Deborah Brautigam Governance and Economy- A Review 9 819 Robert G. King and Ross Levine Financial Indicators and Growth in a Cross Section of Countries 11 864 Ralph Bradburd Privatization of Natural Monopoly Public Enterprises: The Regulation Issue 30 891 Andrew Stone, Brian Levy, Public Institutions and Private Transactions: and Ricardo Paredes The Legal and Regulatory Environment for Business Transactions in Brazil and Chile 44 899 Christian Harm The Financing of Small Firms in Germany 48 900 Christian Harm The Relationship between German Banks and Large German Firms 49 923 Andrew H. W. Stone Listening to Firms: How to Use Firm-Level Surveys to Assess Constraints on Private Sector Development 63 997 John R. Harris, Fabio Schiantarelli, How Financial Liberalization in Indonesia Affected and Miranda G. Siregar Firms' Capital Structure and Investment Decisions 100 1019 Anita M. Schwarz How Effective are Directed Credit Policies in the United States? A Literature Study 112 1027 Guillermo Barnes Lessons from Bank Privatization in Mexico 115 1083 Robert G. King and Ross Levine Finance and Growth: Schumpeter Might Be Right 140 1114 Anita George and Jacques Morisset Does Price Uncertainty Really Reduce Private Investment? A Small Model Applied to Chile 156 1115 Ross Levine and Sara Zervos Looking at the Facts: What We Know about Policy and Growth from Cross-Country Analysis 157 1159 Asli Demirgag-Kunt and Ross Levine Stock Market Development and Financial Intermediary Growth: A Research Agenda 176 1199 Olivia Mitchell Public Pension Governance and Performance: Lessons for Developing Countries 194 vi Index WPS # Author Wolng Pper Title Page 1200 Jane Falkingham and Paul Johnson The Life-Cycle Distributional Consequences of Pay-As-You-Go and Funded Pension Systems 195 Financial Sector Development 803 Millard Long and Dimitri Vittas Financial Regulation: Changing the Rules of the Game 3 806 Dimitri Vittas Measuring Commercial Bank Efficiency: Use and Misuse of Bank Operating Ratios 5 814 Mark Gertler and Andrew Rose Finance, Growth, and Public Policy 8 829 Terry M. Chuppe and Michael Atkin Regulation of Securities Markets:- Some Recent Trends and Their Implications for Emerging Markets 15 843 Ejaz Ghani How Financial Markets Affect Long-Run Growth: A Cross-Country Study 21 847 Silvia B. Sagari and Loic Chiquier Coping with the Legacies of Subsidized Mortgage Credit in Hungary 22 849 Ross Levine Financial Structures and Economic Development 23 853 Gerard Caprio Policy Uncertainty, Information Asymmetries, and Financial Intermediation 25 857 Kenneth M. Wright The Life Insurance Industry in the United States. An Analysis of Economic and Regulatory Issues 27 858 Dimitri Vittas Contractual Savings and Emerging Securities Markets 28 866 Robert Pardy Regulatory and Institutional Impacts of Securities Market Computerization 31 867 Dimitri Vittas and Augusto Iglesias The Rationale and Performance of Personal Pension Plans in Chile 32 907 Robert Pardy Institutional Reform in Emerging Securities Markets 55 910 Dimitri Vittas Policy Issues in Financial Regulation 57 984 Ash Demirga;-Kumt and Harry Huizinga Barriers to Portfolio ivestmentsin Emerging Stock Markets 93 1010 Dimitri Vittas and Craig Neal Competition and Efficiency in Hungarian Banking 108 1084 Dong He and Robert Pardy Stock Market Development and Financial Deepening in Developing Countries: Some Correlation Patterns 140 1091 Fidel Jaramillo, Fabio Schiantarelli, Capital Market Imperfections Before and After Financial and Andrew Weiss Liberalization: A Euler-Equation Approach to Panel Data for Ecuadorian Firms 143 1092 Fidel Jaramillo, Faio Schiantarelli, The Effect of Financial Liberalization on the Allocation and Andrew Weiss of Credit: Panel Data Evidence for Ecuador 143 Index vii WPS# Author Working Paper Tifle Page 1095 Samuel H. Talley Are Pailproof Banking Systems Feasible? Desirable? 144 1107 Gerard Caprio, Jr., Izak Atiyas, Financial Reform Lessons and Strategies 153 and James Hanson 1109 Andrew Sheng and Yoon Jo Cho Risk Management and Stable Financial Structures 154 1145 Dimitri Vittas The Simple(r) Algebra of Pension Plans 170 1153 Alberto Musalem, Dimitri Vittas, and North American Free Trade Agreement: Issues AsH Demirgf-Kunt on Trade in Financial Services for Mexico 173 1154 Dimitri Vittas Options for Pension Reform in Tunisia 174 1155 Martin F. Grace and Michael M. Barth The Regulation and Structure of Nonlife Insurance in the United States 174 1171 Gerard Caprio, Jr. and Lawrence H. Finance and Its Reform: Beyond Laissez-Faire 181 Summers 1190 Yoon Je Cho and Thomas Hellmann The Government's Role in Japanese and Korean Credit Markets: A New Institutional Economics Perspective 190 Infrastructure 929 Antonio Estache and Kangbin Zheng Managing Pollution Control in Brazil: The Potential Use of Taxes and Fines by Federal and State Governments 66 1006 Jorge ME Rebelo Preparing Multiyear Railway Investment Plans- A Market-Oriented Approach 106 1066 Antonio Estache and Kangbin Zheng Pollution Control in a Decentralized Economy: Which Level of Government Should Subsidize What in Brazil 133 internallonal Economic Analysis and Prospects - 834 Shabrokh Fardoust and Jian-Ping Zhou Scenarios for Growth in the 1990s 18 870 F. Desmond McCarthy and Ashok Economic Shocks and the Global Environment Dhareshwar 33 922 Sylvia Saborio and Constantine Central America at a Crossroads Michalopoulos 63 954 Chris Allen, David Currie, T. G. How OECD Policies Affected Latin America in the 1980s Srinivasan, and David Vines 78 1102 Andrew M Warner Did the Debt Crisis or Declining Oil Prices Cause Mexico's Investment Collapse? 151 1187 Andrew M. Warner How Should Sovereign Debtors Restructure Their Debts? Fixed Interest Rates, Flexible Interest Rates, or Inflation-indexed 189 viii Index WPS # Author Working Paper Tite Page International Trade 804 Boum-Jong Choe Global Trends in Raw Materials Consumption 4 813 Takamasa Aluyama and Panos Varangis Price Stabilization for Raw Jute in Bangladesh 8 827 Refik Erzan and Alexander Yeats Free Trade Agreements with the United States: What's in It for Latin America? 14 848 Merlinda D. Ingco and Donald 0. Mitchell How EC-1992 and Reforms of the Common Agricultural Policy Would Affect Developing Countries' Grain Trade 23 854 Takamasa Akiyama Is There a Cae for an Optimal Export Tax on Perennial Crops? 26 860 Refik Erzan and Christopher Holmes The Restrictiveness of the Multi-Fibre Arrangement on Eastern European Trade 28 874 James E. Anderson and Geoffrey The Trade Restrictiveness Index: An Application Bannister to Mexican Agriculture 35 885 A. J. Hughes Hallett The Impact ofEC-92 on Developing Countries' Trade: ADissenting View 41 911 Ying Qian and Panos Varangis Does Exchange Rate Volatility Hinder Export Growth? Additional Evidence 58 935 Boum-Jong Choe The Precautionary Demand for Commodity Stocks 69 955 George Alogoskoufis and Panos Varangis OECD Fiscal Policies and the Relative Prices of Primary Commodities 79 958 Brent Borrell and Maw-Cheng Yang EC Bananarama 1992: The Sequel - The EC Commission Proposal 80 973 Refik Erzan, Christopher Holmes, How Changes in the Former CMEAArea May Affect and Raed Safadi international Trade in Manufactures 88 974 C. A Primo Braga and Alexander Yeats How Minilateral Trading Arrangements May Affect the Post-Uruguay Round World 38 994 Geoffrey Bannister and Patrick Low Textiles and Apparel in NAFTA* A Case of Constrained Liberalization 99 1003 Kala Krishna and Ling Hui Tan Rent-Sharing in the Multi-Mibre Arrangement Evidence from US.-Hong Kong Trade in Apparel 105 1021 Jonathan R. Coleman and Chris Jones Measuring Welfare Changes from Commodity Price Stabilization in Small Open Economies 113 1022 James E. Anderson and J. Peter Neary A New Approach to Evaluating Trade Policy 113 1023 James E. Anderson Tariff Index Theory 114 1024 Will Martin and Julian M. Alston An Exact Approach for Evaluating the Benefits from Technological Change 114 Index ix WPS# Author Woking Paper Titie Page 1077 Pance Varangis, Elton Thigpen, Risk Management Prospects for Egyptian Cotton and Takamasa Akiyama 137 1089 StUn Claessens Equity Portfolio Investment in Developing Countries: A Literature Survey 142 1097 Takamasa Akiyama and Jonathan R. A Production Function-Based Policy Simulation Model Coleman of Perennial Commodity Markets 145 1110 Will Martin What Would Happen If All Developing Countries Expanded Their Manufactured Exports? 155 1112 Ving Qian and Ronald C. Duncan Privatization, Concentration, and Pressure for Protection: A Steel Sector Study 156 1119 Raed Safadi and Alexander Yeats The North American Free Trade Agreement: Its Effect on South Asia 159 1120 Donald F. Larson Policies for Coping with Price Uncertainty for Mexican Maize 159 1127 Vikram Nehru How International Economic Links Affect East Asia 162 1129 Jonathan R. Coleman, Takamasa Akiyama, How Policy Changes Affected Cocoa Sectors in and Panos N. Varangis Sub-Saharan African Countries 163 1136 Kia Krishna and Ling Hui Tan The Dynamic Behavior of Quota License Prices Theory and Evidence from the Hong Kong Apparel Quotas 166 1139 Jonathan R. Coleman and M. Elton Should Sub-Saharan Africa Expand Cotton Exports? Thigpen 168 1144 Bartlomiej Kaminsd The Foreign Trade Dimension of the Market Transition in Poland- The Surprising Export Performance and Its Sustainability 170 1156 Panayotis N. Varangis, Carlos A. Primo Tropical Timber Trade Policies: What Impact Will Braga, and Kenji Takeuchi Eco-Labeling Have? 175 1163 James E. Anderson and J. Peter Neary Domestic Distortions and International Tkade 178 * 1174 Raed Safadi and Alexander Yeats Asian Trade Barriers Against Primary and Processed Commodities 183 1175 Bartlomiej Kaminsaki and Alexander Yeats OECD Trade Barriors Faced by the Successor States of the Soviet Union 183 1179 Bardomiej Kamineld How the Market Transition Affected Export Performance in the Central European Economies 185 1191 Geofiry J. Bannister Rent-Sharing in the Multi-Fibre Arrangement The Case of Mexico 191 Legal 1198 Natalie Lichtenstein Enterprise Reform in China: The Evolving Legal Framework 194 x Index WPS # Author Workng Paper Tle Page National Economic Management 811 Peter T. Knight and Sulaiman S. Wasty Comparative Resource Allocations to Human Resource Development in Asia, Europe, and Latin America 7 1166 Simon Commander, Leonid Liberman, The Behavior of Russian Firms in 1992- Evidence Cecilia Ugaz, and Ruslan Yemtsov from a Survey 179 1167 Simon Commander, Leonid Liberman, Unemployment and Labor Market Dynamics in Russia and Ruslan Yemtsov 180 1184 Simon Commander and Richard Jackman Providing Social Benefits in Russia: Redefining the Roles of Firms and Government 188 Pollution and Environmental Economics 824 Sergio Margulis Back-of-the-Envelope Estimates of Environmental Damage Costs in Mexico 13 1151 Charles van Marrewjk, Federick van Is Growth Bad for the Environment? Pollution, Abatement der Ploeg, and Joe Verbeek and Endogenous Growth 173 Population, Health, and Nutrition 802 Steven W. Sinding Strengthening the Banks Population Work in the Nineties 3 826 Ariel Fiszbein Do Workers in the Informal Sector Benefit from Cuts in the Minimum Wage? 14 841 Susan Cochrane and David K. Guilkey How Access to Contraception Affects Fertility and Contraceptive Use in Tunisia 20 846 Larry Forgy, Diana M. Measham, Incorporating Cost and Cost-Effectiveness Analysis and Anne G. Tinker into the Development of Safe Motherhood Programs 22 851 Eduard Boa, My T. Vu, and Patience Sources of World Bank Estimates of Ccrrent W. Stephens Mortality Rates 24 852 Joseph Kutzin and Howard Barnum How Health Insurance Affects the Delivery of Health Care in Developing Countries 25 868 Michael Koenig Mortality Reductions from Measles and Tetanus Immunization: A Review of the Evidence 32 883 Pedro L, Alonso, Allan G. Hill, Patricia Malaria. The Impact of Treated Bed-Nets on Childhood H. David, Greg Fegan, Joanna R. M. Mortality in the Gambia Armstrong, Andrea Francisco, K. Cham, and Brian M. Greenwood 40 890 Denise Vaillancourt, Janet Nassim, Population, Health, and Nutrition: Fiscal 1991 Sector and Stacye Brown Review 43 914 J. Patrick Vaughan Health Personnel Development in Sub-Saharan Africa 59 Index 3i WPS # Author Woding Paper T Page 924 Rafael Rofman How Reduced Demand for Children and Access to Family Planning Accelerated the Fertility Decline in Colombia 64 934 Maureen A. Lewis, Margaret B. Public Hospital Costs and Quality in the Dominican Sulvetta, and Gerard M. La Forgia Republic 68 938 Nancy Birdsall and Estelle James Health, Government, and the Poor The Case for the Private Sector 70 940 Karen G. Foreit Private Sector Approaches to Effective Family Planning 71 941 Rodolfo A. Bulatao and Eduard Bos Projecting the Demographic Impact ofAIDS 72 952 Susan Horton Unit Costs, Cost-Effectiveness, and Financing of Nutrition Interventions 77 975 George B. Simmons, Sara Koerber, Techniques for Improving Client Relations in Family and Ruth Simmons Planning Programs 89 976 Cynthia P. Green Strategic Management of Family Planning Programs 89 987 Jose Luis Bobadilla and Cristina How the Epidemiological Transition Affects Health de A. Possas Policy Issues in Three Latin American Countries 95 996 Michael H. Bernhart Strategic Management of Population Programs 99 1004 Regina McNamara, Therese McGinn, Family Planning Programs in Sub-Saharan Africa: Donald Lauro, and John Ross Case Studies from Ghana, Rwanda, and the Sudan 106 1007 Rodolfo A. Bulatao and Patience W. Global Estimates and Projections of Mortality Stephens by Cause, 1970-2015 107 1016 My T. Vu, Eduard Boo, and Ann Levin Europe and Central Asia Region, Middle East and North Africa Region Population Projections, 1992-93 Edition 111 1020 Nancy Birdsall Another Look at Population and Global Warming 112 1032 Eduard Bos, My T. Vu, and Ann Levin East Asia and Pacific Region, South Asia Region Population Projections, 1992-93 Edition 118 1033 My T. Vu, Eduard Bos, and Ann Levin Latin America and the Caribbean Region (and Northern America) Population Projections, 1992-93 Edition 118 1041 Moni Nag Family Planning Success Stories in Bangladesh and India 121 1042 Jane T. Bertrand and Judith E. Brown Family Planning Success in Two Cities in Zaire 122 1044 Adam Wagstaff and Howard Barnum Hospital Cost Functions for Developing Countries 123 1046 J. Price Gittinger and Carol Bradford World Bank Project-Financed Research an Population, Health, and Nutrition 123 1048 George Baldwin Targets and Indicators in World Bank Population Projects 124 1052 Hoda Rashad A Reappraisal of How Oral Rehydration Therapy Affected Mortality in Egypt 126 1053 Alex F. Zinanga Development of the Zimbabwe Family Planning Program 127 xii Index WPS# Author Woring Paper rile Page 1072 Brooke R. Johnson, Janie Benson, Janet Costs of Alternative Treatments for Incomplete Abortion Bradley, Auromra Rbago, Ordaiez, Catia Zambrano, Leonard Okoko, Leticia VAsquez Chfvez, Paulina Quiroz, and Rhama Rogo 135 1085 Cristino R Arroyo III Economic Approaches to Modeling Fertility Determinants: A Selective Review 141 1131 Jeffrey S. Hammer Prices and Protocols in Public Health Care 164 1152 Denise Vaillancourt, Stacye Brown, Population, Health, and Nutrition* Annual Operational and Others Review fr Fiscal 1992 173 1158 Nancy Birdsall and Charles Griffin Population Growth, Externalities, and Poverty 176 1161 Molly Maguire Teas Increasing Women's Participation in the Primary School Teaching Force and Teacher Training in Nepal 177 Poverty Analysis and Policy 925 Ngee-Choon Chia, Sadek Wahba, and A General-Equilibrium-Based Social Policy Model John Whalley for C5te d'Ivoire 64 Poverty and Human Resources 1078 Christiasan Grootsert The Evolution of Welfare and Poverty Under Structural Change and Eccnomic Recession in COte d'aire, 1985-88 138 1079 Christiaan Grootsert How Useful are Integrated Household Survey Data for Policy-Oriented Analyses of Poverty? Lessons from the C5te d7voire Living Standards Survey 138 1080 Christinan Grootaert and Ravi Kanbur A New Regional Price Indexfor Cbte d1vaire Using Data from the International Comparisons Project 139 1081 Lionel Demary and Christisan Grootaert Correcting for Sampling Bias in the Measurement of Welfare and Poverty- The Case of the Cate dIvoire Living Standards Survey 139 1146 Shaohua Chen, Gaurav Datt, Is Poverty Increasing in the Developing World? and Martin Ravallion 171 Private Sector Development 1047 Enrique Rueda-Sabater and Andrew Stone Cate dIvoire Private Sector Dynamics and Constraints 124 1105 Philippe Le Honeron and Hector Sierra Estimating Quasi-Fiscal Deficits in a Consistency Frameworic . The Case of Madagascar 152 Pubilc Economics 863 Roy Bahl and Christine Wallich Intergovernmental Fiscal Relations in China 30 869 Richard Bird and Christine Wa!lich Financing Local Government in Hungary 33 Index xdii WPS # Author Working Paper Tide Page 871 Dominique van de Wale The Distribution of the Benefits from Social Services in Indonesia, 1978-87 34 887 William Jack Power Sharing and Pollution Control: Coordinating Policies Among Levels of Government 42 892 Antonio Estache and Sweder Evaluating the Asset-Based Minimum Tax van Wijnbergen on Corporations An Option-Pricing Approach 45 902 Paul Beckerman Public Sector "Debt Distress" in Argentina, 1988-89 53 908 Dagmar Rjagopal and Anwar Shah Tax Incentives, Market Power, and Corporate Investment: A Rational Expectations Model Applied to Pakistani and Turkish Industries 56 919 Roberto de Rezende Rocha and Fernando Fiscal and Quasi-Fiscal Deficits, Nominal and Real: Saldanha Measurement and Policy Issues 61 920 Raymond J. Kopp Economic Incentives and Point Source Emissions: Choice of Modeling Platform 62 927 Andrew Feltenstein and Anwar Shah General Equilibrium Effects of Investment Incentives in Mexico 65 936 Andrew Lyon Taxation, Information Asymmetries, and a Firm's Financing Choices 69 945 Barbara Nunberg Managing the Civil Service: What LDCs Can Learn from Developed Country Reforms 74 1011 Robin Boadway and Anwar Shah How Tax Incentives Affect Decisions to Invest in Developing Countries 109 1015 Thomas M. Selden and Michael J. Benefit Incidence Analysis in Developing Countries Wasylenko 110 1018 Anand Rejaram Tariff and Tax Reform- Do World Bank Recommendations Integrate Revenue and Protection Objectives? 112 1029 Robert T. Deacon Controlling Tropical Deforestation: An Analysis of Alternative Policies 116 1030 Alan J. Krupnick Measuring the Effects of Urban Transportation Policies on the Environment; A Survey of Models 117 1031 Robert Bacon Measuring the Possibilities of Interfuel Substitution 117 1076 Gunnar S. Eskeland A Presumptive Pigouvian Tax on Gasoline- Analysis of an Air Pollution Control Program for Mexico City 137 1082 Shantayanan Devarajan, Vinaya Swaroop, What Do Governments Buy? The Composition of Public and Heng-fu Zou Spending and Economic Performance 140 1090 Thanos Catsambas Government Expenditures as a Citizen's Evaluation of Public Output. Public Choice and the Benefit Principle of Taxation 143 1093 Dimitzi Vitas Swiss Chilanpore: The Way Forward for Pension Reform? 144 xiv Index WPS # Author Wodring Paper Title Page 1108 Thanos Catsambas Public Output and Private Decisions: Conceptual Issues in the Evaluation of Government Activities and Their Implications for Fiscal Policy 154 1122 Richard Bird and Christine Wallich Fiscal Decentralization and Intergovernmental Relations in Transition Economies: Toward a Systemic Framework of Analysis 160 1125 Adriaan Ten Kate Industrial Development and the Environment in Mexico 161 1138 Daniel Landau The Economic Impact of Military Expenditures 167 1177 Neil Bruce and Gregory K Ellis Environmental Taxes and Policies for Developing Countries 184 1178 John Baffes and Anwar Shah Productivity of Public Spending, Sectoral Allocation Choices, and Economic Growth 185 1183 Cheih Kane and Jacques Morisset Who Would Vote for Inflation in Brazil? An Integrated Framework Approach to Inflation and Income Distribution 187 1192 Jacques Morisset and Alejandro Izquierdo Effects of Tax Reform on Argentina's Revenues 191 1196 Jeffrey Bernstein and Anwar Shah Corporate Tax Structure and Production 193 1197 Bruno Boccara and Shantayanan Determinants of Inflation among Franc Zone Countries Devarajan in Africa 193 Social Policy and Resettlement 1100 Shelton H. Davis and Alaka Wali Indigenous Territories and Tropical Forest Management in Latin America 147 SocIoeconomic Data 953 Michael Hee The 'Pedigree of IEC Conversion Factors for Per Capita GNP Computations for the World Banks Operational Guidelines and Atlas 78 956 Sultan Ahmad Regression Estimates of Per Capita GDP Based on Purchasing Power Parities 80 1057 Socio-Economic Data Division, Measuring the Incomes of Economies of the Former Soviet Internatical Economics Department Union 128 1060 Dmitri Steinberg Economies of the Former Soviet Union: An Input-Output Approach to the 1987 National Accounts 130 1124 Vikram Nehru, Eric Swazison, A New Database on Human Capital Steele Sources, and Ashutosh Dubey Methodology, and Results 161 1132 Andrew Feltenstein and Jiming Ka An Analysis of Repressed Inflation in Three Transitional Economies 165 1135 Zdenek Drabek, Kamil Janacek, Inflation in Czechoslovakia, 198-91 and Zdenek Tuma 166 Index xv WPS # Author Workong Paper Tide Page 1157 Sultan Ahmad Intertemporal and Interspatial Comparisons of Income: The Meaning of Relative Prices 175 Trade Policy 801 Arvind Panagariya Unraveling the Mysteries of China's Foreign Trade Regime: A View from Jiangsu Province 3 808 Ann Harrison The New Trade Protection: Price Effects of Antidumping and Countervailing Measures in the United States 6 809 Ann Harrison Openness and Growth A Time Series, Cross-Country Analysis for Developing Countries 6 810 Francois Bourguignon, Jaime de Melo, Poverty and Income Distribution During Adjustment: and Christian Morrisson Issues and Evidence from the OECD Project 6 818 J. Michael Finger and Sumana Dhar Do Rules Control Power? GATT Articles and Arrangements in the Uruguay Round 10 839 David G. Tarr Regional Integration under VEe-c When Trade Diversion is Unambiguously Beneficial 19 850 Kazi M. Matin Fiscal Adjustment and the Real Exchange Rate: The Case of Bangladesh 24 873 Francois M. Ettori Measure and Interpretation of Effective Protection in the Presence of High Capital Costs: Evidence from India 35 878 Kazi M. Matin and Bernard Wasow Adjustment and Private Investment in Kenya 37 903 Federico Changanaquf and Patrick The Economic Effects ofMinimum Import Prices Messerlin (With an Application to Uruguay) 53 915 W. Max Corden Trade Policy and Exchange Rate Issues in the Former Soviet Union 59 918 Jaime de Me1o David Roland-Holst, Tax Evasion and Tax Reform in a Low-Income and Mona Haddad Economy: General Equilibrium Estimates for Madagascar 61 928 Nalin M. Kishor Pesticide Externalities, Comparative Advantage, and Commodity Trade: Cotton in Andhra Pradesh, India 66 951 Glenn W. Harrison, Thomas F. Piecemeal Trade Reform in Partially Liberalized Rutherford, and David G. Tarr Economies: An Evaluation for Turkey 77 967 Santiago Levy and Sweder Transition Problems in Economic Reform: Agriculture van Wijnbergen in the Medco-U.S Free Trade Agreement 85 969 M. Ataman Aksoy and Helena Tang Imports, Exports, and Industrial Performance in India, 1970-8 86 985 Jaime de Melo Claudio Montenegro, Regional Integration, Old and New and Arvind Panagariya 94 989 M. Ataman Aksoy The Indian Trade Regime 96 xvi Index WPS # Author Working Paper Title Page 990 M. Ataman Aksoy and Francois M. Ettori Protection and Industrial Structure in India 97 992 Faezeh Foroutan Regional Integration in Sub-Saharan Africa: Experience and Prospects 98 1025 Kazi M. Matin Openness and Economic Perrormance in Sub-Saharan Africa: Evidence from Time-Series Cross-Country Analysis 115 1035 Wendy E. Takacs How Import Protection Affects the Philippines' Motor Vehicle Industry 119 1040 Jaime de Melo and Sumana Dhar Lessons of Trade Liberalization in Latin America for Economies in Transition 121 1074 David G. Tarr How Moving to World Prices Affects the Terms of Trade in 15 Countries of the Former Soviet Union 136 1088 Riccardo Faini, Jaime de Melo, A Primer on the MFA Maze and Wendy Takacs 142 1094 Jaime de Melo, Arvind Panagariya, The New Regionalism: A Country Perspective and Dani Rodrik 144 1096 Mona Haddad How Trade Liberalization Affected Productivity in Morocco 145 1104 Asad Alamn and Sarath Rajapatirana Trade Policy Reform in Latin America and the Caribbean in the 1980s 152 1142 Martin Rama Rent-Seeling Trade Policy A Time-Series Approach 169 1143 Lant Pritchett and Geeta Sethi Tariff Rates, Tariff Revenue, and Tariff Reform: Some New Facts 170 1170 Avner Bar-Elan and Anat Levy Job Search by Employed Workers: The Effects of Restrictions 181 1172 Garry Pursell and Ashok Gulati Liberalizing Indian Agriculture: An Agenda for Reform 182 1173 Thomas F. Rutherford, E. E. Rutstram, Moroccos Free Trade Agreement with the European and David Tarr Community: A Quantitative Assessment 182 1185 Morrie E. Moricre and David G. Tarr Reforming Hungarian Agricultural Trade Policy- A Quantitative Evaluation 188 Transition and Macro-Adjustment 805 Sergei Shatalov Privatization in the Soviet Union: The Beginnings of a Transition 4 816 Gerhard Pohl Economic Consequences of German Reunification: 12 Months After the Big Bang 9 820 Christopher J. Heady and Pradeep Taxation in Decentralizing Socialist Economies: KM.itra The Case of China 11 821 Fabrizio Coricelli and Ana Revenga Wages and Unemployment in Poland- Recent Developments and Policy Issues 11 Index Xvii WPS # Author Working Paper rife Page 830 Ibrahim A. Elbadawi and Nader Maid Fixed Parity of the Exchange Rate and Economic Performance in the CFA Zone: A Comparative Study 16 831 Ibrahim A. Elbadawi Real Overvaluation, Terms of Trade Shocks, and the Cost to Agriculture in Sub-Sabaran Africa 16 833 Daniel P. Oks Stabilization and Growth Recovery in Mexico: Lessons and Dilemmas 17 838 Brian J. Aitken Measuring Trade Policy Intervention: A Cross-Country Index of Relative Price Dispersion 19 845 Luc Everaert Inflation Stabilization in Turkey. An Application of the RMSM-X Model 22 859 Ibrahim A. Elbadawi Macroeconomic Management and the Black Market for Foreign Exchange in Sudan 28 872 Cheryl W. Gray, Rebecca J. Hanson, Romania's Evolving Legal Framework for Private and Peter G. Ianachkov Sector Development 34 876 Ross Levine and David Scott Old Debts and New Beginnings: A Policy Choice in Transitional Socialist Economies 38 877 Gay H. Jefferson and Wenyi Xu Assessing Gains in Efficient Production Among China?s Industrial Enterprises 37 880 Miguel A. Kiguel Exchange Rate Policy, the Real Exchange Rate, and Inflation: Lessons from Latin America 38 881 Nita Ghei and Miguel A. Kiguel Dual and Multiple Exchange Rate Systems in Developing Countries: Some Empirical Evidence 39 882 Alfredo Thorne Issues in Reforming Financial Systems in Eastern Europe: The Case of Bulgaria 39 893 Cheryl W. Gray and Frajo D. Stibla The Evolving Legal Framework for Private Sector Activity in Slovenia 45 898 Gerard Caprio, Jr. and Ross Levine Reforming Finance in Transitional Socialist Economies: Avoiding the path from Shell Money to Shell Games 48 906 Cheryl W. Gray and Peter Ianachkov Bulgaria's Evolving Legal Framework for Private Sector Development 55 909 Janine Axon and 1brabim A. Elbadawi Parallel Markets, the Foreign Exchange Auction, and Exchange Rate Unification in Zambia 56 912 Andr4s Solimano Understanding the Investment Cycle in AUustment Programs: Evidence from Reforming Economies 58 931 Alex Cukierman, Miguel A. Kiguel, How Much to Commit to an Exchange Rate Rule: and Nissan Liviatan Balancing Credibility and Flexibility 67 937 Evan Kraft and Milan Vodopivec How Soft is the Budget Constraint frr Yugoslav Firms? 70 939 Daniel Kaufnann and Yan Wang How Macroeconomic Policies Affect Project Performance in the Social Sectors 71 xviii Index WPS # Author Woring Paper Title Page 948 Mohua Mukherjee Factors Affecting Private Financial Flows to Eastern Europe, 1989-91 75 970 Alberto Alesina Political Models of Macroeconomic Policy and Fiscal Reform 86 971 Milan Vodopivec The Effects of Democratic Determination of Wages: Theory and Evidence from Self-Managed Firms 87 981 Andrds Solimano After Socialism and Dirigisme - Which Way? 92 982 Brian Pinto, Marek Belka, and Stefan Microeconomics of Transformation in Poland Krajewski A Survey of State Enterprise Responses 92 983 Cheryl W. Gray, Rebecca J. Hanson, Legal Reform for Hungary's Private Sector and Michael Heller 93 999 Miguel A. Kiguel and Nissan Liviatan Stopping Three Big Inflations (Argentina, Brazil, and Peru) 101 1000 Ibrahim A. Elbadawi, Dhaneshwar World Bank Ajustment Lending and Economic Performance Ghura, and Gilbert Uwujaren in Sub-Saharan Africa in the 1980s: A Comparison with Other Low-Income Countries 101 1001 Ibrahim A- Elbadawi World Bank Adjustment Lending and Economic Performance in Sub-Saharan Africa: A Comparison of Early Adjusters, Late Adjusters, and Nona4usters 105 1026 Paul D. McNelis and Klaus Schmidt- Financial Liberalization and Adjustment in Chile Hebbel and New Zealand 115 1034 David H. Scott Revising Financial Sector Policy in Transitional S&Aalist Economies: Will Universal Banks Prove Viable? 119 1036 Simon Commander and Fabrizio Output Decline in Hungary and Poland in 1990-91: Coricelli Structural Change and Aggregate Shocks 119 1038 Ibrahim A. Elbadawi and Robert de Determinants of Expatriate Workers' Remittances Rezende Rocha in North Africa and Europe 120 1049 William Easterly, Paolo Mauro, and Klaus Money Demand and Seignorage-Ma3imizing Inflation Schmidt-Hebbel 125 1050 William Easterly and Sergio Rebelo Marginal Income Tax Rates and Economic Growth in Developing Countries 125 1051 Cheryl W. Gray The Legal Framework for Private Sector Activity in the Czech and Slovak Federal Republic 126 1054 Branko Milanovic Distributional Impact of Cash and In-Kind Social Transfers in Eastern Europe and Russia 127 1059 Ziya Onis and Steven B. Webb Political Economy of Policy Reform in Turkey in the 1980s 129 1061 Klaus Schmidt-Hebbel and Luis Serven Dynamic Response to Foreign Transfers and Terms-of-Trade Shocks in Open Economies 130 1063 Cerdet Denizer and Alan Gelb Mongolia. Privatization and System Transformation in An Isolated Economy 131 Index zix WPS# Author Wodring Paper rite Page 1064 George R. G. Clarke More Evidence on Income Distribution and Growth 132 1068 Sweder van Wijnbergen Enterprise Reform in Eastern Europe 133 1087 Alberto F. Ades, Miguel A. Kiguel, Exchange-Rate-Based Stabilization: Tales from and Nissan Liviatan Europe and Latin America 141 1098 Jean Baneth Fortress Europe and Other Myths Concerning Trade 146 1101 Brian Pinto, Marek Belka, Transforming State Enterprises in Polandh and Stefan Krajewsli Microeconomic Evidence on Adjustment 151 1111 Cheryl W. Gray and William Jaross Foreign Investment Law in Central and Eastern Europe 155 1126 Milan Cvild, Evan Kraft, The Costs and Benefits of Slovenian Independence and Milan Vodopivec 162 1133 Ibrahim A. Elbadawi and Nader Majd Macroeconomic Framework far an Oil-Based Economy. The Case ofBahrain 165 1134 ibrahim A Elbadawi and Nader Maid Managing a Nonrenewable Resource: Savings and Exchange-Rate Policies in Bahrain 185 1148 Robert S. Pindyck and Andrds Solimano Economic Instability and Aggregate Investment 172 1149 Martin Rama flow Labor Markets and Imperfect Competition Affect TariffPolicy 172 1162 Milan Vodopivec and Samo Iribar-Milic The Sloveniin Labor Market in Transition- Issues and Lessons Learned 177 1165 Branko Milanovic Social Costs of the Transition to Capitalism: Poland, 1990-91 179 1176 Branko Milanovic Cash Social Transfers, Direct Taxes, and Income Distribution in Late Socialism 184 1182 Cheryl W. Gray and Rebecca J. Hanson Corporate Governance in Central and Eastern Europe: Lessons from Advanced Market Economies 187 - 1188 Mario Marcel and Andrds Solimano Developmentalism, Socialism, and Free Market Reform: Three Decades of Income Distribution in Chile 189 1189 Alan Gelb, Gary Jefferson, Can Communist Economies Transform Incrementally? and Inderjit Singh China's Experience 190 1193 Milan Vodopivec and Wayne Vroman The Armenian Labor Market in Transition. Issues and Options 192 1194 Tom Rawski How Fast Has Chinese Industry Grown? 192 1195 Mark Schaffer The Enterprise Sector' and Emergence of the Polish Fiscal Crisis, 1990-91 193 x Index WPS # Author Working Paper Title Page Transport 921 Cesar Queiroz and Surhid Gautam Road Infrastructure and Economic Development- Some Diagnostic Indicators 62 926 Neil E. Moyer and Louis S. Thompson Options for Reshaping the Railway 65 950 Hans Jurgen Peters Service: The New Focus in International Manufacturing and Trade 76 986 Roy Bahl The Administration of Road User Taxes in Developing Countries 95 998 Esra Bennathan, Julie Fraser, What Determines Demand for Freight Transport? and Louis S. Thompson 100 1070 Timothy D. Han Economic Fundamentals of Road Pricirg A Diagrammatic Analysis 134 1071 Timothy D. Hau Congestion Charging Mechanisms for Roads: An Evaluation of Current Practice 135 1128 Hans Jurgen Peters The International Ocean Transport Industry in Crisis- Assessing the Reasons and Outlook 163 1137 Philip W. Blackshaw and Louis Railway Reform in the Central and Eastern European S. Thompson Economies 167 Water and Sanitation 879 Peter Rogers Comprehensive Water Resources Management: A Concept Paper 38 1005 Laszlo Lovei An Approach to the Economic Analysis of Water Supply Projects 106 1992 Watrd Development Report Background Papers 904 Nemat Shafik and Susherdit Economic Growth and Environmental Quality- Bandyopadhyay Time-Series and Cross-Country Evidence 54 942 Arik Levinson and Sudhir Shetty Efficient Environmental Regulation: Case Studies of Urban Air Pollution (Los Angeles, Mexico City, Cubatao, and Ankara) 72 957 Anwar Shah and Bjorn Larsen Carbon Taxes, the Greenhouse Effect, and Developing Countries 80 959 Sheila Webb and Associates Waterborne Diseases in Peru 81 960 Edward B. Barbier and Joanne C. Burgess Agricultural Pricing and Environmental Degradation 81 961 Wilfred Beckerman Economic Development and the Environment: Conflict or Complementarity? 82 Index mx WPS # Author Working Paper rie Page 962 Margaret E. Slade Do Markets TJnderprice Natural-Resource Commodities? 82 963 Charles R. Blitzer, R. S. Eckaus, Growth and Welfare Losses from Carbon Emissions Supriya Lahiri, and Alexander Meeraus Restrictions: A General Equilibrium Analysis for Eygpt 83 964 Robert E. B- Lucas Toxic Releases by Manufacturing: World Patterns and Trade Policies 83 965 William Ascher Coping with the Disappointing Rates of Return on Development Projects that Affect the Environment 84 966 Judith M. Dean Trade and the Environment: A Survey of the Literature 84 968 David 0. Hall Bioniass 85 972 Robin W. Bates and Edwin A. Moore Commercial Energy Efficiency and the Environment 87 978 Charles R. Blitzer, R. S. Eckaus, How Restricting Carbon Dioxide and Methane Supriya Lahiri, and Alexander Meeraus Emissions Would Affect the Indian Economy 90 979 Dennis Anderson Economic Growth and the Environment 91 980 Piritta Sarsa The Environment: A New Challenge to GATT? 91 988 David Pearce Economic Valuation and the Natural World 96 991 Margaret E. Slade Environmental Costs of Natural Resource Commodities: Magnitude and Incidence 97 1002 Bjorn Larsen and Anwar Shah World Fossil Fuel Subsidies and Global Carbon Emissions 105 1017 Richard E. Bilsborrow Rural Poverty, Migration, and the Environment in Developing Countries: Three Case Studies in 1062 Robert E. B. Lucas, David Wheeler, and Economic Development, Environmental Regulation, and the Hemamala Hettige International Migration of Toxic Industrial Pollution, 1960-88 131 1993 Workf Development Report Background Papers 1150 Lant Pritchett and Lawrence H. Summers Wealthier is Healthier 172 Unclassifled 832 Richard B. Norgaard Sustainablity and the Economics of Assuring Assets for Future Generations 16 930 Robert Picciotto Participatory Development: Myths and Dilemmas 66 Volume IX Numbers 801 - 900 Policy Research Working Paper Series 3 801. Unraveling the Mysteries 802. Strengthening the Bank's egy papers and economic and sector work of China's Foreign Trade Regime: Population Work In the Nineties programs. A View from Jiangsu Province Population action plans where ana- Steven W. Sinding lytical work demonstrates a need; consid- ArvindPanagerlya (November 1991) oration of establishing Population Coor- (November 1991) dinators in each region to monitor and These recommendations for the nineties help in analytical work and preparation ProposedreformtargetsforChina'sforeign focus on changing Bank strategies, not of action plans; preparation of regional trade. Bank policy. population overviews. High priority to population training Panagariya describes briefly the evolution In this concise paper, written for Bank for managers and lead and country econo- 6f China's complex foreign trade regime, management, Sinding briefly reviews the mists as well as for technical staffi paying special attention to the implemen- rationale for Bank involvement in popula- - Explicit objectives for population im- tation of national trade policies at provin- tion work. He then establishesaconceptual pact in freestanding population projects cial and city levels. This is important for framework for determining appropriate and in population components of Popula- understanding developments in China's program approaches for reducing fertility. tion, Health and Nutrition projects; care- external sector because provinces came to Finally he suggests ways to strengthen the ful impact studies. enjoy a high degree of autonomy in the Banksapproachtopopulationanalysisand Longer term 1980s. Jiangsu, one of the fistest growing program support in the 1990s. Sinding * Bankleadershipin donor coordination provinces in China, experienced rapid recommends revising Bank strategy, not to increase flows and effective use of re- growth in exports. Bank policy. sources to population activities as part of Assuming that China will move toward Therationale has shifted somewhat, but overall efforts to implement the World a market economy only gradually, the Bank's long-standing concern for Development Report 1990 strategy for re- Panagariya proposes piecemeal reform of population and family planning remains ducing poverty. trade policy as most desirable for improv- compelling. The distinction between popu- * Building a consensus for Bank loans ing efficiency and fostering competition. lation and family planning is important to displace bilateral grants to large, more Among reforms he proposes: because the skills needed to deal with the mature population and family planning * At the national level, liberalizing two are different. We now know that in programs, freeing up grant funds for trade, expandingdirectexportrights, fur- most settings, family planning - while newer programs that enjoy less secure ther rationalizing the foreign exchange not a substitute for development-is the political support. retention system, extending the agency most cost-effective approach to reducing This paper - a product of the Popula- system to exports, and eliminating the fertility. Bank supportis particularlyim- tion, Health, and Nutrition Department discrepancybetween domestic and export portant in a critical set of countries (for - is part of a larger effort to reinforce prices. which Sinding provides an analytical consensus within the Bank about the role * More selective targeting of sectors for matrix). But in any country, access tofam- of policy dialogue and population lending export and greater willingness to exit ily planning improves the lives of the poor in the achievement of development objec- when a target sector appears to be the in many ways. tives. Copies are available free from the wrong one. Certain elements appear to be crucial World Bank, 1818HStreetNW, Washing- * Allowing town and village enter- to the success of Bank programs: govern- ton, DC 20433. Please contact Otilia prises to operate as freely as possible, re- ment commitment to the program; Bank Nadora, room S11-219, extension 31091 moving barriers to interprovincial trade support of such "software" and recurrent (34 pages). and mobility oflabor, and encouraging the costs as training, transport, management formation ofindustry groups only up to the information systems, and contraceptive point that they do not acquire monopoly supplies; strengthening of existing insti- 803. Financial Regulation: power. tutions rather than development of new Changing the Rules of the Game This paper - a product of the Trade ones; involvement of private and Policy Division, Policy Research Depart- nongovernment organizations in the de- Millard Long and Dimitri Vittas ment - is part of a larger effort in the liveryofservices; effectivemonitoringand (November 1991) Bank to understand the international evaluation systems (ofthe latter, the Bank trade regimes of centrally planned econo- has done little to date) Financial regulation in the 1980s w mies. Copies are available free from the Sinding draws two main conclusions characterized by far-reaching changes in World Bank, 1818 H StreetNW, Washing- from reviews ofBank performance: (1) no the rules ofthegameinbothdeuelopedand ton, DC 20433. Please contact Dawn satisfactory indicators edst to evaluate developingcountries. Threcriteria-sta- Ballantyne, room N10-023, extension Bank performance objectively, and (2) bility, efficiency, and fairness - can be 37947 ( 27 pages). there is scope and opportunity for the used to evaluate financial structures and Bank to build on recent advances to im- regulation. Tradeoffs between them must prove its efforts in population work. be determined on a country-by-country Sinding recommends the following: basis. Immediate * Greater attention to analysis of popu- In a brief history of financial regulation, lation issues in appropriate country strat- Long and Vittas note the removal or re- 4 Policy Research Working Paper Serles laxation of controls on credit and interest mote one criterion and disregard the oth- at timesofhighoil prices.Thiswasbecause ratesin the 1980s and the growing empha- ers would not be optimal. of relatively rapid expansion ofmaterials- sis on prudential controls. Thispaper-aproductofthePinancial intensive sectorsandlagainadaptingto the They argue that the 1980s were not a Sector Development Department - is latestmaterials-efficienttechnologies.The decade of financial deregulation but a partofalargereffortintheBanktostudy developingeountr,!,-especiallytherap- period when the rules of the game were theimpactofregulationonfinancial struc- idly industrializing countries - will con- substantiallychanged. They discuss three ture. Copies are available free from the tinue to provide the main growth market criteria for evaluating financial regulation World Bank, 1818 H StreetNW, Washing- for raw materials in the 1990s. and structure: stability, efficiency, and ton, DC 20433. Please contact Wilai Statistical tests of alternative hypoth- fairness. Pitayatonakarn, room N9-003, extension eses suggest that the downturn has been For forty years, financial stability was 37666 (18 pages). only partly cyclical. There is not strong not a significant concern, but today it is, evidence to support theview thatit was a as a result of massive losses suffered by one-timeimprovementin the efficiencyof financial institutions. Financial stability 804. Global Trends In Raw raw materials use. can be enhancedby increasing capital re- Materials Consumption The most plausible explanation, sup- quirements and strengthening financial parted by statistical evidence, is that supervision.Butthestabilityofthefinan- BounmJong Choe materials-saving technological changes cial system is also affectedbyits structure. (November 1991) have accelerated, probably because of Systems with'narrowr'banksor"nonpar" higher energy prices. Whether those banks wouldbe exposedtofewer systemic After the 1973 oil shock, demand for raw changes will continue at the accelerated risks. materials - especially base metals -de- ratewhenenergyprices are lowerremains The relationship between structure and clined drastically. The mostplausible ex- to be seen. Recent data suggest that the efficiency is also complex. In the research planation, supported by statistical evl- rate may already have slowed down, literature, the issues ofeconomies ofacale dence appears to be that materials-saving which supportsamare cautiously optimis- and scope in finance remain unresolved. technological changes have accelemated, tic outlook for developing countries' ex- In developed countries, there is growing probably because of higher energy prices. ports of raw materials than prevailed in concentration and a spread of universal the early 1980s. bankin& suggesting economies of both In this review of consumption of base This paper - a product ofthe Interna- scale and scope. Moreover, available evi- metals, steel, and agricultural rawmate- tional Trade Division, International Eco- dencesuggeststhatconcentmtedbanling rials, the author focuses on the causes for nomics Department -is part ofalarger systems tend to have lower margins and the drastic slowdown in the consumption effort in the Bank to understand the operating costs as well as higher profits. growth rate after the first oil price shock. changesin raw materials consumptionin Butindeveloping countries,largebanks From a range of 4 percent to 10 percent order to better assess the prospects for tend to be inefficient Their size is the annuallyformostmetals,thegrowthrates developing countries' exports of those result of controls and restrictions on com- declinedto lpercentto 2 percent. Whether materials. Copies are available free from petition and entry rather than superior the post-1973 decline in demand for raw the World Bank, 1818 H Street NW, efficiency. Allowing universal banking materialsrepresentsanirreversiblestruc- Washington, DC 20433. Please contact might exacerbate the dominant position tural change is important for developing Sarah Lipscomb, room S7-062, extension of large banks, with adverse effects on countries that depend heavily on exports 33718 (25 pages). competition and efficiency. of those commodities. And views on this Fairness covers many issues, such as issue have been divergent. protectingusers offinancial systemsfrom The fact that the decline started when 805. Privatization In the Soviet abusive behaviorby the financial institu- oil prices increased suggests that the en- Union: The Beginnings tions, creating a level playing field for ergy-saving drive, through material sub- of a Transition competing institutions, and tackling the stitution and technological changes, and problems caused by potential conflicts of the adverse macroeconomic impact of Sergei Shatalov interest. Fairness can be more easily higher energy prices had detrimental ef- (November 1991) achieved in systems with simple struc- fects on consumption of these materials. turea, butlimits on the permissible range For agricultural iaw materials, the de- Economic initiative has passed from the of activities of different types of institu- clinebasbeenmuchlesspronounced.Any centertothe republics, some afwhic have tions might undermine efficiency and, to increase in consumption of cotton and already moued from legislation to imple- a lesser extent, stability natural rubber thatresulted from higher menatiam oftheir own repubic divestiture Clearly there are tradeoffs between costs of synthetic fibers and rubber must policies. In an optimistic scenario, this these three criteria for evaluating finan- have been relatively small. trend will continue But even under the cial regulation and structure. Long and Most of the decline in raw materials most pessimistic scenario, it is unlikely Vittas suggest no general answers to the consumption occurred in the industrial that priuatisation processes identified is questions inherent in these tradeoffs. economies. In developing countries, the this study will be stopped. They contend that answers must be trend increase in the intensity ofraw ma- sought on a country-by-country basis, al- teria]soonsumption per unitofoutput con- Shatalov, a senior fellow at the USSR though clearly extreme solutions that pro- tinued with only temporary interruptions Academy of Sciences, completed this pa- Policy Research Working Paper Series 5 per before the events ofAugust 1991. But 806. Measuring Commercial Bank but not with differences in accounting his analysis of recent modes of privatiza- Efficiency: Use and Misuse conventions. ROE analysis can also shed tion in the Soviet Union is still important of Bank Operating Ratios light on the relationship between spreads, for understanding the evolving situation. leverage, and inflation. The `present" All-Union regime, Dimitri Vittas Vittasapplieshis analysis to the perfor- Shatalov explains, was the first regime to (November 1991) mance ofbanksin OECD countries in the implement wide-scale privatization. The 1980s. He shows that ULK. building soci- process may take different courses, being Measuring bank efficiency is difficult be- eties, German savings banks, and com- initiated frcm 'above" (for example, by cause there is no satisfactory definition of mercial banks in Canada, Germany, and ministries) and from below," by enter- bank output. International comparisons the Netherlands were highly profitable prises. Recent measures of the All-Union basedon operating costs and margins are and efficient American money center authorities, he contends, had the effect of fraught with problems. These starm from banks and foreign banks in Canada were restrictingany real role in privatization to substantial differences incapitalstructure the least prcfitable. the social and economic elite because, in (everage), business or product mix, range The data also suggest that banks in qarly 1991, monetary and price reform andquality ofservices, inflationm rates,and consolidated banking systems with high wiped out a significant part of household accounting conventions (especially about concentration, as in Canada, the Nether- savings. the valuation ofassets. the (evel ofloan oss lands, and Sweden, have lower operating Leadinginternational corporations are provisioning, and the use of hidden re- costs than banks in fragmented systems, still interested in getting a stake in such serves). Facile and uncritical use ofratios asinItaly, Norway,andtheUnitedStates. top Soviet performersas KAMAZ;in those cannot substitute for detailed knowledge The analysishasmajorimplications for few cases it will be possible to negotiate and understanding of banking structure assessingbankperformancein developing terms more advantageous than those dic- and practice. countries. Given the narrower range and tatedby the dwindling value of the ruble. lower quality of their services and the The All-Union governmenthas been ans- Measuring bank efficiency is difficultbe- lower level of wages, their cost-asset and ions to prevent"wild"foreign participation cause there is no satisfhctory definition of cost-incomeratiosshouldbesmallerthan atanycost. That costmayprove excessive, bank output. Neither the number of ac- for banks in developed countries. But in- however, as confidence in the ruble and counts nor total assets, total loans, and flation, higher risk, and operating ineffi- in the Soviet economy weakens, total deposits provide a good index ofout- ciencies often cause cost and other bank In the meantime, the economic initia- put- Moreover, the value added of banks ratios to be generally higher than in tive has passed from the center to the re- - given by their labor costs and profits OECD countries. publics. Some republics have already -measures both the output and the cost This paper-aproductafthe Financial movedfromlegislationtoimplementation of banking. Sector Development Department - is of their own divestiture policies. This Many analysts use accounting data on part of a larger effort in the Bank to dis- trend appears likely to continue. But one bank margins, costs, and profits as mea- seminate the results ofits research in fi- cannot exclude other scenarios, for ex- sures of bank efficiency. But the useful- nancial sector development- Copies are ample, a collapse that provides an oppor- ness of these data is undermined by sub- available free from the World Bank, 1818 tunity for some political force to try to stantial structural and accounting differ- H Street NW, Washington, DC 20433. reverse course and restore authoritarian ences across countries, among individual Please contact Wilai Pitayntonakarn, rule under the slogan of'law and order.7 banks, and over time. Great caution and roomN9-003, extension 37666 (49 pages). Eveninsuchacase,however,itisunlikely extensive knowledge oflocal bankingcon- that the processes of privatization identi- ditions are required to interpret bank ra- fled in the study will be stopped. tios. 807. Moderate inflation - This paper - a product of the Transi- Vittas uses three sets of operating ra- tion and Macro-Adjustment Division, tios to discuss the impactofdifferencesin Rudiger Dornbusch and StanleyFischer Policy Research Department- is part of structure and practice on bank perfor- (November 1991) alarger effort in the Bank to study, in a mance: :Imparative mode, the reform process * Operating asset ratios (which relate Most episodes of moderate inflation are under wayin socialistandformerlysocial- all revenues and costs to average assets). triggered by commodity price shocks, are stL countries. Copies are available free * Operating income ratios (which re- brief and seldom end in higher inflation. from the World Bank, 1818 H Street NW, late revenues and costs to gross income). Seigniorgeplays at most a modest role in Washington, DC 20433. Please contact * Operatingequityratios(whichrelate thepersistenceofmodmateinflation;such Angelica Bretana, room N11-029, exten- revenues and costs to average equity). inflations can be reduced ordy at a sub- 4-2-n 37176 (28 pages). He also uses return-on-equity (ROE) stantial short-term cost to growth. analysis to highlight the effects of differ- ences in banking structure and practice. Inflation persists at moderate rates (15- ROE analysis combines two simple iden- 30 percent) in all the countries that suc- tities between profitability ratios, bank cessfuflly reduced triple-digitinflation in leverage,andgrossmargins.Itcopesquite the 1980s. Several other countries-for well with the differential impact of capi- example, Colombia - have experienced tal structure, product mix, and inflation moderate inflation for prolonged periods. 6 Palky Research Working Paper Sedes Dornbusch and Fischer set out types of ing duties, by measuring their impact on And is it possible to disentangle short- theories of persistent inflation those import prices. run from long-run effects without throw- emphasizing seigniorage as a source of The datasetcombines cross-section and ing away annual data? governmentfinance and those emphasis- time series data for 1981-86, making it This paper, a background paper for the ing the costs of ending inflation. possible to control for differences across 1992 WorldDeuelopment Report, is aprod- They then examine the sources and industries and separately measure the act of the Office of the Vice President, persistence of episodes ofmoderate infla- effects of duties and investigations. DevelopmentEconomics. Copiesare avail- tion.Mostepisodeswere triggeredby com- The results suggest that for some sec- able free from the World Bank, 1818 H modity price shocks and were brief. Very tors the price offect o investigations is as Street NW, Washington, DC 20433. few ended in higher inflation. great as imposing r. duty. Investigations Please contact the World Development Dornhusch and Fischer present case that end in duties have different effects Report office, room 7-101, extension studies ofeight countries,including three than those resvlting in no action. 31393 (34 pages). that now suffer from moderate inflation Thi- paper is a product of the Trade and four that successfilly moved down to Policy ithision, Policy Research Depart- single-digitinflationrates.Theyexanine ment. Copies are available free from the 810. Poverty and Income the roles of seigniorage, indexation and World Bank, 1818 HStreetNW,Washing- Distribution during Adjustment: disindexation, the exchangerate commit- ton, DC 20433. Please contact Dawn Issues and Evidence ment, and monetary and fiscal policy. Ballantyne, room N10-023, extension from the OECD Project The evidence suggeststhatseigniorage 37947 (33 pages). plays at most a modest role in the persis- Francois Bourgaignon, Jaime de Melo, tence of moderate inflation and that such and Christian Morrisson inflation canbereducedonlyat asubstan- 809. Openness and Growth: (November 1991) tial short-term cost to growth. A Time Series, Cross-Country This paper - a product of the Office of Analysis for Developing Countries Adjustment programs will fail when they theVicePresident,DevelopmentEconom- donotrecgnitLeinterdependence ofthe ics-is part ofalarger effortin the Bank Ann Harrison three criteria of efiency, "oelfrm and to identify factors that inhibit the trans- (November 1991) politicalfeasibility. These programs must formation from stabilization to growthin be tailored to both the political and eco- manycountries.Thisresearchwasfunded Carrelationsacross openness measurws are nomic environments ofeach country. by the World Bank's Research Support sometimes weak, but openness does seem Budget, RPO 675-89, aStopping 20 Per- to be positively associated with GDP Drawing lessons from country studies, cent Inflation." Copies are available free growth-the more open the economy, the Bourguignon, de Melo, and Morrisson from the WorldBank, 1818 HStreetNW, higher the growth. examine the effects ofa4justmentpolicies Washington, DC 20433. Please contact onthedistributionofincomeinChile,C6te DECVP, room S9-035, extension 33766 Harrison draws togetheravarietyafmea- d1voire, Ecuador, Indonesia, Malaysia, (73 pages). sures of openness to test the association and Morocco. After analyzing the issues between growth and openness. that must be confronted in designing ad- Although the correlation across mea- justment programs with a focus on pow- 808. The New Trade Protection: sures is sometimes weak, there is gener- erty,they synthesize the mainconclusions Price Effects of Antidumping allyapositiveassociationbetweenallthese of the different country studies. and Countervailing Measures measures and GDP growth. The strength With simulation exercises they explore In the United States of the association generally depends on the effects ofthe design ofthe adjustment whetheranalystsusecross-sectionorpanel packages an poverty and on the - Ana Harrison data. sustainability of the measures under- (November 1991) For industrializing countries, trade taken in these countries. These exercises policies have varied too much over time to show considerable diversity in the evolu- For some sectors the effect onimportprices make the long-run averages used in cross- tion ofincome distribution duringa4just- of investigating antidumping cases and section estimates very meaningful. ment. They also expose the fatal flaws of countervailing measures is as great. as Inmanyrespects,theresultsaresurpris- narrowlydesigneda4justinentprograms. imposing a duty. And investigations that inglyrobustWhenopennessisstatistically Adjustment programs - whether fo- end in duties have different effects than significant in the many specifications cused on efficiency or on welfare - will those resulting in no action. Harrison explores, she always finds that fail when they do not recognize the inter- greater opennessis associatedwithhigher dependence of the three criteria of effi- The frequent application of antidumping growth. Tests of the sensitivity of these ciency, welfare, and political feasibility. and countervailing measures in the results to country size do not change the Adjustment programs must be carefully United States in the 1980s has been de- results. packaged to fit country circumstances, scribed as a new form of protection. Harrisonhighlightstwoissuesinterest- taking into accountboth the political and Harrison measures the effect not only ing for future research: economic environments. of investigations (to evaluate claims of Does openness cause growth? Orisit the This paper - a product of the Trade dumping or subsidies) but of the result- other way around? Policy Division, Policy Research Depart- Policy Research Working Paper Series 7 ment - is part of a larger effort in the Reviewing statistics compiled for se- Claessens identifies several gaps in the Bank to analyze the effects of alternative lected Latin American countries and two literature on external financing for devel- adjustment packages on poverty and on reference groups ofcountries in East Asia oping countries. Theoretical and empiri- the distribution of income. This research and northern/southern Europe, Knight cal research in three areas could help the wasfundedby the World Banks Research and Wasty emphasize the need to increase World Bank and other official creditors SupportBudget, "'1rade Reforms in SALs: attention to and expenditure on education define their role in a world with increased A Positive Analysis of Performance and and health systems in many developing capital mobility - and would be consis- Sustainability"(RPO 675-32). Copies are countries, especially in Latin America, to tent with their increased emphasis on available free from the World Bank,1818 improve the coverage and quality of the developing the private sector. The three H Street NW, Washington, DC 20433. services they provide. areas are: Please contact Dawn Ballantyne, room The paper notes that wider access to * The diffirences in country risk be- N10-023, extension 37947 (53 pages). secondary education and greater empha- tween alternativeforms oferternalfinane- sis on the quality ofhigher education tead ing ("alternative financing) and tradi- to be a distinguishing feature of the bet- tionalfinancing. Thisresearch wouldhelp 811. Comparative Resource ter performers (East Asian and northernl assess the type and amounts of alterna- Allocations to Human Resource southern European countries). Much of tive financing consistent with an (explicit Development in Asia, Europe, East Asia's success can be attributed to or implicit) enforcement of contracts and and Latin America the region's consistent efforts to improve the institutions needed to assure the technical and higher education-particu- proper treatment of claims. Peter T. Knight and Sulaiman S. Wasty larly in research and development and in * Incentive structures for and restric- (December 1991) engineering and other technical applica- tions on, alternative financing in the host tions. The Nordic countries, too, havepro- country. Research could focus on the effi- Major increases inattentiontoandexpen- vided thorough on-the-job training and ciencyof these schemesfrom thecountry's ditanoneducation and healthsystemsore establishedfirst-rate educational instita- perspective, and could identify the best needed in many developing countries, es- tions, led by world-class research scien- incentive structures for attracting the pecialy in Latin America, to improve the tistsin technical fieldsandsocial sciences. desired amount and type of foreign capi- coverage and quality of the services they In sum, since specialized technical hu- tal. This wouldhelp countries designbet- provide. Relying on trends and themes man resources take time to develop, no terpolicieson domesticregulations,taxes, emergiing from regional comparisons, the country today can afford not to provide accounting, institutions, and performance paper identiftes an agenda for policy re- enough financial resources to develop incentives.Research shouldaddress such form in human resource development to critical human resources. issues as the appropriateness of owner- improve a country's internationalcompeti- This paper -a product ofthe National ship andcapital controls, the enforcement tfueness in the decades ahead Economic Management Division, Eco- of private-to-private contracts, the moni- nonic Development Institute - is a re- toring of external private-to-private con- The quality of a country's human re- vised version of a paper presented at the tracts, the decision to allow foreign banks sources will determine its ability to com- Seminar on Planning and Evaluation of to enter a country, the design ofappropri- pete in international markets and assure Social Sectors in Latin America, held in ate financial instruments, and the appro- the well-being of its citizens in the next Rio de Janeiro, Brazil in December 1989, priateness of investment incentives. century as it does in this one. Consider- andorganizedbyEDrs HumanResources * Optimal participationmodesofinter- ingrapidlyadvancingtechnology, expand- Division. Copies are available free from national firms in developing countries. ing global links, and threats to the ecol- the World Bank, 1818 H Street NW, This research couldfocuson the (optimal) ogy, it is clear that whether a society Washington, DC 20433. Please contact capital structure ofa multinational carpo- maintains or improves its competitive- Dulce Afzal, room M3-045, extension ration seeking financing from domestic ness, ensures social equity,"acUusts"-or 36335(20 pages). and foreign capital markets, under the indeedsurvives-will ultimately depend constraint that capital in the host coun- on its success in developing its human re- try is mobile. Researchers could investi- sburces.Butindevisingtheirdevelopment 812. Alternative Forms of Eternal gate how international firms should fi- -trategies and public expenditure portfo- Finance: A Survey nance (and have been financing) them- lios, many developing societies - and selves and whether there have been shifts among them Latin American ones are Stijn Claessens in these patterns; develop contracts that proninent-haveyettoaccord due atten- (December 1991) deal with problems of moral hazard and Lion to their most vital resource. A major sovereign risk; and discuss the multina- ;-neiswhetherLatinAmericancountries Alternative forms of external finance for tional corporation's intermediation role will be forced to sell cheap labor and over- developing countries have increased in and the possible restrictions agovernment s-ploittheirnaturalresourcestomaintain importance in recent years. This paper should impose on private-to-private fi- :-en current,inadequateliving standards. identifes research that could help official nancing. Cc will these countries follow the lead of creditors define their role in a world with Current literature does not offerofficial -ecessfil European, NorthAmerican, and increased capital mobility - and would creditors much analytical support about w Asian countries that have invested be consistent with their increased empha- the prefenedforms offinancialintermedia- hpaUily in their human resources? sis on developing the private sector. tion or their possible support role for pri- 8 Policy Research Working Paper Series vatesectorfinancing(cofinancing,guaran- about the costs of parastatals' stocking stabilityshouldbepursued inconcertwith tees, privatization,andhow togetcomfort- operations in attempts to stabilize jute financial reform. able adherence to private-to-private prices and incomes. claims). Official creditorsmay have trouble Aldyama and Varangis examine the Development economists have long ar- defining theirroles when they don'thave a causes and consequences of these fluctua- gued that modem financial markets are clear ideaofthe differences between alter- tions and analyze policies that might re- important to growth and that financial nativefinancingandtraditionalfinancing, duce them. They find that price fluctua- repressionisaseriousobstacletaprogress don't know when one or the other is called tions for rawjute reduce farmers! welfare inmany developing countries.Butthe lib- for, or the implicit seniority status of dif- only slightly because farmers activities eralization of financial markets has been ferent claims. are typically diversified and jute's share disappointing in many countries - at Research in these three areas would in total income is small. times appearing to produce chaos rather help improve official creditors' policy ad- Although stocking operations by the than growth, and forcing many countries- vice, their efficiency as intermediators, parastatals contribute to stability in to retreat from deregulation. Now that and any activitiesassociated with private- prices and real income, they have been economic stagnation seems to persist in to-private lending. The World Bank and extremely costly and have crowded out many developing countries, many other creditor institutions are often in- private stocking. Akiyana and Varangis policymakers face a dilemma: Should they' volved in policy advice on domestic re- contend that if the parastatals had re- cling torepressedfinancial markets or try forms often aimed largely at attracting fi-ained from ad hoc stocking and if the the road to reform once again? foreign finance - either by developing private sector had stocked efficiently,jute Gertler and Rose consider the relation- appropriate instruments or by providing prices and incomes would have been just ship between finance and growth and the enough comfort so that countries can ad- as stable - and at no cost. appropriate role of government policy. here to performance requirements on They argue that the Bangladeshi jute Many economists have stressedhow prob- projects. They cannot afford to duplicate market should be free of government in- lems ofasymmetric information and can- systems that already exist and need to tervention and that Bangladesh should tractenforcementimpedethefunctioning take into account specific situations in establish a market-based credit system offinancial markets in developing coun- developing countries, that allows efficient stockholdingbehav- tries. Gertler and Rose flesh these theo- This paper-aproductofthe Debt and ior by the private sector. ries out to make them relevant to International Pinance Division, Interna- Akiyama and Varangis also found that policymakers. tional Economics Department - is part improvingtheflowofmarketinformation Theyexplainthatinformation gaps and of a larger effort in the department to to farmers and greater price responsive- enforcement frictions introduce a pre- analyze alternative forms of financial ness by jute mills to raw jute purchases mium in the cost of external funds. Fac- flows todevelopingcountriesto determine would significantly improve the stability tors such as the borrower's financial ways of enhancingthe quantity and qual- of raw jute prices and incomes. Having health, the efficiency offinancialinterme- ity of external resources in support of de- more information available would also diation, and the ease of enforcing private velopment. Copies are available free from make private stocking operations more financial contracts govern the size of this the World Bank, 1818 H Street NW, efficient. premium. How financial factors contrib- Washington, DC 20433. Please contact This paper- a product of the Interna- ute to development may be understood Rose Vo, room S8-042, extension 33722(37 tional Trade Division, International Eco- along these lines. As for financial struc- pages). nomics Department -is part ofa larger ture, financial contracts and institutions effortin the departmentto address issues ought ideally to be designed to minimize of price and income stabilization in pri- this premium. 813. Price Stabilization for Raw mary commodities. Copies are available What are the practical implications for Jute in Bangladesh free from the World Bank, 1818 H Street policymakers? Thelong-term answersareL NW, Washington, DC 20433. Please con- easiest. A largely decentralized capital TakanasaAkiyamaandPanosVarangis tact DawnGustafson, Toom S7-044, exten- market is optimal. Incentive problems (December 1991) sion 33714 (49 pages). may inhibit the functioning of financial markets, but the most direct way for the The costs ofthepresentsyster ofprice sta- governmentto mitigate them is to provide bilization of raw jute by Bangladesh's 814. Finance, Growth, and Public anefficientsystemforenforingcontracts. public sector do not yield the expectedben- Policy Publicly managing credit flows is likely efits. Price stabiliation could be better only to make investments more efficient, handled by the private sector. In any case, Mark Getler and Andrew Rose by creating incentive problems. To the ex- the loss of welfare to jute growers from (December 1991) tent that some sectors merit public assis- price fluctuations is smalL tance, tax credits or subsidies in conjunc- A thriving financial market depends not tion with the private allocation ofcreditis Fluctuating prices for rawjute have been only on a prudent regulatory regime but preferable to directly regulating credit viewed as contributing to economic prob- also on having enough creditworthy bor- flows.Thegovernmentshouldrefrainfrom lems in the jute subsector. Price fluctua- rowers. Policies in the real sector-mac- active involvement in the credit business, tionswere thoughttoreduce thejutefarim- roeconozi-e, public finance, and trade po- excepttoactaslenderoflastreortintimes ers' welfare and there has been concern cies -that directly stimulategrowthand of widespread financial crisis. PoHty Reseawrch Working Paper Series 9 Liberalization of financial markets a poor climate for growth. Well-specified nors. This process of assistance could in- alone is nota panacea. Financial andreal propertyrights and enforceable contracts advertently undercut the historical pro- development must be ajoint product. Lib- are clearly economic development issues cess of rulers first becoming accountable eralization can enhance growth but sue- and should be recognized as such. The to elites for the use of their tar revenues. cessful liberalization requires a viable contentand distribution ofpropertyrights * Donors must become aware of the borrowing class; governments that slow critically affect how broad-based develop- possible effects of large sums of external liberalization when borrower net worth is ment will be. assistance. They must push the new con- under pressure and accelerateitwhen the * Lack of accountability - combined cern for "local ownership" toward a deep real economy is thriving are likely to ex- withopaqueandhighlydiscretionaryrega- commitment to develop economic policies perience more successful financial re- latory procedures - can provide great op- together, even if the process is slow and forms. portunities for economic corruption and frustrating. This should encourage the . Thispaper-aproductofthePFinancial waste. The suppression of political open- development of accountability as a mat- Sector Development Department - is ings may ultimately affect stability, dis- ter primarily between governments and part of a larger effort in the department rupting production and commerce. The citizens. Onlyovertime cansocietiespush to study the impact of financial reform. failure to encourage grassroots participa- their governments to deliver the account- ' This research, "The Impact of Financial tion reveals itself in comparatively ability, openness, and predictability that Reform (RPO 676-13), was funded by the unsustainable projects. sustainable development requires. World Bank's Research Support Budget * Research tryingto correlateeconomic This paperisaproductofthe Policyand Copies are available free from the World performance with governance variables Review Department. Copies are available Bank, 1818HStreetNW,Washington, DC inevitably involves a short time frame. free from the World Bank, 1818 H Street 20433. Please contact Wilai TherecenteconomieperformanceofChile, NW, Washington, DC 20433. Please con- Pitayatonakarn, room N9-003, extension Taiwan (China), and South Korea oc- tact Zeny Kranzer, room N9-051, exten- 37666 (48 pages). curred with little political openness, and sion 37494 (48 pages). their market systems seemed to work without pluralistic political systems. 815. Governance and Economy: Butinthepastfewyearsall three have 816. Economic Consequences A Review made significanttransitions towardmore of Gernan Reunification: open, competitive, participatory political 12 Months After the Big Bang Deborah Erautigrz systems, which suggests that sustaining (December 1991) (as opposed to establishing) market-based GerhardPol growth may require the development of (Deember 1991 An exploration ofthe links between devel- political representation. With renewed opmentandgovernance-thatis, between interest in open political systems, we can Did the"big bangapproach work or would development and accountability (includ- expect a new generation of research on gradual change have been more appropri- ing institutionalpluralism andparticipa- these variables. ate? Which measures have worked and dan); openness (including problems such * Donors who wish to make "gover- which have not? as corruption that result at least partly nance" the temporary trend of the 1990s from lack ofopeaness);and predictabWXty, must understand that, as Zafar Ahmed Pohl discusses how East Germany is far- or the rule of law. putit,"Onecwnnotmakeatreegrowfaster ing 12 months after big bang unification by pulling it from outside; it has to grow with West Germany. Were there better Brautigam reviewed the literature on from its roots? It takes generations, per- alternative courses of action on key eco- political science, development manage- haps centuries, to build effective bureau- nomic issues? Among Pohis conclusions: ment, and institutional economics to give cracies. It takes not only skills but volition, * The "bigbang" approachhas worked. Bank staffa clearer understanding ofthe which comes from effective social pressure In Germany's special situation, more links between development an. gover- on the state. Donors must ask howbestto gradual approaches would not have nance - specifically accountability (in- nurture a social desire for accountability worked because itwas politicallyunthink- -cluding institutional pluralism anc par- and the rule of law. able to restrict east-west migration. ticipation); openness (including problems * Effective property rights and ac- * The 1:1 conversionofGDRimarksinto such as corruption that result at least countability result from a long-term dia- Deutschemarks was essential to keep partly from lack ofopenness) and predict- logue between governments and their migration within reasonable bounds. Us- ability, or the rule of law. private sector, not between governments ing a lower exchange rate (such as 2:1) She fcund some support for a positive and donors. In Europe, public accountabil- would have implied a gross salary differ- link between economic performance and ity developed through a state-society ence between west and east Germany of these variables of governance (although struggleabout the collection anduseoftax 6:1 and a net (after-tax) difference of4:1. some correlations appear stronger than revenues. Inmanyofthe world's develop- With those ratios, migration would have others). Among her findings and conclu- ingcountries, taxrevenues are dispropor- been heavy, creatingabrain drain on east sions: tionatelylowasaproportionofGNP, even Germany and a housing shortage in west * Arbitrary law enforcement and fail- with low levels of per capita GNP. Thus, Germany. ure to uphold the constitution - the law much of the dialogue about accountabil- * The 1:1 currency conversionis not to -leadto unpredictability,instability, and ity shifts to one between states and do- blame for the present high wages in east 10 Polcy ResearCh Working Paper Sedes Germany (about 50 percent of west ting investments going. More could per- (Some expect to continue doing business Germany's); rather, the 1991 collective hapshavebeen done togetinfrastructure there; others want to cut theirlosses and bargaining agreements set the pace. The investments going, which would have exit.) What about a bank's fiduciary re- high wages are only sustainable with improved employment earlier on. sponsibility to its depositors and massive financial assistance. This paper - a product of the Geneva shareholds? * More gradual unification would not Office - is part of a larger effort in the * What about other creditors of the have been an advantage; lower wages Bank to analyze the changes in the for- country, such as holders of its sovereign would have been desirable only if migra- merly centrally planned economies. Cop- bonds, or other governments or multilat- tion couldhave been held in check. But the ies are available freefrom the World Bank, eral agencies? Will or should commercial decay of the GDR state and institutions 1818 H Street NW, Washington, DC banks be the only ones to offer relief by was so advanced that wage restraint 20433, or from the Geneva Office. Please taking losses? would have been impossible. contactAngelica Bretana, room N11-029, * Whatis the country's proposed strat- - * Unification has meantimportingthe extension 37176 (47 pages). egy for seeldng future financingfrom pri- Pederal Republic's entire economic and vate sources, directorforeign investment, legal system to east Germany - and this and international capital markets? How complex system has not been ideal for 817. How Does Brady-Type will a debt reduction opeation affect the solving the problems of a sudden transi- Commercial Debt Restructuring countrysaccesstocommercialandprivate tion from a command to a market Work? sector finance in the future? economy. Some temporary exemptions * How much support can be expected and transitional measures were intro- MohuaMukheijee from multilateral and bilateral instita- duced from the start and others were (December 1991) tions to finance a debt reduction opera- added later, as some provisions proved tion?Mukherjeesummarizmsbroadguide- unworkable (particularly the preference What happcns when, in response to a lines used by the IBRD and IMP. given to reprivatization, or restitution, county's request, creditors agree to nego- This paperis aproductof theFinancial which was softened in 1991). Similar le- date to reduce the burden ofoutstanding AdvisaryServicesGroup,Cofinancingand gal and logistical problems have been commercial debt? FinancialAdvisoryServicesDepartment. encountered with such major public in- Copies are available free from the World vestmentprojects as highways, rail links, The Brady Plan is a pragmatic approach Bank, 1818HStreetNWWashington,DC and airports. But the advantages of im- to debt restructuring that combines the 20433. Please contact Kamar Yousus, porting a proven legal system far outweigh relatively recent feature of debt and debt room 39-055, extension 33102 (22pages). the inevitable transition costs. service reduction and the support of offi- * Some transition measures - espe- cial creditors. The underlying premise of cially labor market adjustment measures those adopting the Brady Plan is that the 818. Do Rules Control Power? and incentives to attract private invest- existing stock of debt can never be fully GATT Articles and Arrangements ment - were insufficient or had to be ex- serviced, even though the country has in the Uruguay Round tended. Some economists have arguedthat embarked on a far-reaching adjustment general employment subsidies would have program. J.Michael Finger and Sumana Dhar been better than partial unemployment To date, only a handful of countries (January 1992) benefits. But Pohl argues that general (Costa Rica, Mexico, Uruguay, and Ven- employment subsidies would have been ezuela) have successfilly concluded their Do rules control power? Or apply power? applied indiscriminately and would have debt reduction negotiations through a Has the elaboration and application of perpetuatedoldinefficientstructures. The Brady Plan with commercial creditors. GATTrules been an exercise in the appff- investment incentives are far more effec- Others, such as the Philippines, have en- cation or the control of economic and po- tiveincreatinghigh-productivityjobs rap- gaged in Brady-type debt reduction for litial power? idly. In the interim, targeted employment partoftheiroutstandingcommercial debt. programs are auseful transitionmeasure. Mukhejee explains what happens Many complain - and offer evidence - * Investmentsubsidieshavebeencriti- when, in response to a country's request, thatinrecentyears the GATTsystemhas cized on the grounds that they tend to the creditors agree t negotiate to reduce become more power-oriented, less stable, distort allocation decisions and lead to theburdenofoutstandingcommercal debt. andlessequitableAconcerntoreverse this uneconomically capital-intensive invest- She discusses the following questions: drift was one of the motives that brought ments. Although possible in theory, Pohl * What factors influence the extent of the international community to agree to finds this argument doubtful in practice. debt relief that a commercial bank can undertake the UruguayRound.Rules con- Investment costs per job are not particu- offer? trol power, assumed the signers of the larly high in manufacturing, and the de- * What is a good deal for the country? Punte del Este declaration, so elaborating sign of the assistance program excludes What is the preferred mi; (for the coun- andextendingGATTruleswould move the support of inefficient investments. try) between debt reduction and debt re- international community toward a fairer, * Were government spending and pri- scheduling? What considerations should more stable international trading system. vate incentives geared to productive the country take into account? Finger and Dhar contend that the op- rather than social purposes? In the first * What is a good deal for the banks? posite is true. Particulazly in the 1980s, year of the union probably not - mostly How do banks ofvarious nations reconcile the elaboration and application of GATT because of administrative friction in get- their different interests in the country? rules has been an exercise in the applica- Policy Research Working Paper Series 11 tion of economic and political power, not many new measures - to document the Heady and Mitra analyze the tax system in its control. GATT rules, in theory, are relationship between the financial system in China, where reforms designed tomove there to limit national trade restrictions. and long-run growth in a cross section of the economic system toward a market Finger and Dhar contend that in fact countries between 1960 and 1989. economy have been occurring for more things work the other way around: na- They consider various measures of the than a decade. tional practice comes first, and determines size of the financial system, the impor- Heady and Mitra characterize the com- what the GATT rules mean. Gatt's rules tance of different financial institutions, prehensivechangesin the taxsystem that donotputlimitsonnational practices,but the financial system's allocation ofcredit, could be undertaken in the presence of provide international sanction for these the financial system's efficiency, and the systemwide reform, especially of prices practices. Such rules are not part of the degree of financial repression. and enterprises, as well as of more mod- solution but are part of the problem. They use graphs, correlations, and re- erate reforms that must suffice in the - Theirsis a situation-specific argument, gressions to gauge the robustness of the absence of reforms elsewhere in the eco- say Finger and Dhar, not a generic one. partial correlationbetween growth andthe nomic system. In connection with tax re- Their target is not 'rules," nor is it financialindicators.Theyalsoexaminetwo form per se, they emphasize two impor- "GATT.7 Rather, it is the GATT rules. "channelt3hroughwhichfinancialindica- tant conclusions This paper - a product of the Trade tors may be linked to growth: the share of * Itis possible to simplify significantly Policy Division, Policy Research Depart- GDP allocated to investment and the effi- the rate structure for indirect taxesin the ment - is part of a larger effort in the ciency with which resources are used. presence of price controls, but a unified department to understand the economics They find that many of the financial rate for value-added tax is undesirable of the emergence of "fairness' as a stan- system indicators are significantly corre- without full decontrol of prices. dardforregulatinginternationaltrade,its lated with growth through both invest- * The state's role as owner of enter- implicationsforthe continued opennessof ment and efficiency. Moreover, many of prisesmusthetreatedseparatelyfromits the international trading system, and its these partial correlations remain strong role as tax collector.All enterprises should continued functioning as an important after controlling for initial conditions, paystatutoryproflitstaxes.Negotiation(of vehicle for development. This research dummy variables for Africa and Latin the kind that characterizes the contract was funded by the Bank's Research Sup- America, and measures of monetary, fis- responsibility system) shouldbe confined port Budget,RegulationsAgainstUnfair cal, and trade performance. to the payments to government from af- Imports-EffectsonDevelopingCountries King and Levine's analysis suggests ter-tax profits. Those payments could be (RPO 675-52). The paper was presented thatitisempiricallyimportanttoidentify set to balance incentives io enterprises at the Conference on Analytical and Ne- which financial intermediaries are doing with the need for the state to earn a re- gotiating Issues in the Global Trading theintermediationandtowhom the finan- turn on assets historically provided free System, held October 31-November 1, cal system isallocatingereditratherthan to those enterprises. 1991, atthe UniversityofMichiganatAnn simply using proxies for the overall size The mode of analysis that Heady and Arbor. Copies of this paper are available of the financial system, as has been com- Mitradevelopinthispapercenbeapplied free from the World Bank, 1818 H Street mon in past studies. to a wider range of economies - whether NW, Washington, DC 20433. Please con- This paper-aproduct ofthe Financial emerging from a socialist past or not - tactNellie Artis,room N10-013, extension Sector Development Department - is that are progressing at va*ing speeds in 38010 ( 51 pages). part of a larger effort in the department the interlinked areas of taxreform, price to study the relationship between finan- reform, and enterprise reform. cial and economic development- This re- This paper-a product ofthe Country 819. Financial Indicators search wasfundedbytheBanlksResearch Operations Division, Country L!part- and Growth in a Cross Section Support Budget, 'How Do National Poli- ment I, Asia Regional Office -is kart of of Countries cies AffectLong-Run Growth?"(RPO 676- a larger Bank study on revenue mobiliza- 66). Copies ofthis paperare available free tion in China. Copies are available free Robert G. King and Ross Levine from the World Bank, 1818 H Street NW, from the World Bank, 1818 H Street NW, (January 1992) Washington, DC 20433. Please contact Washington, DC 20433. Please contact Wilai Pitaystonakarn, room N9-003, ex- Dakshi Sebastian, room D9-073, exten- Financial indicators may be linked to tension 37666 (50 pages). sion 80423 (33 pages). growth through two Ichannels0inparicu- lar: the share of GDP allocated to invest- ment and the efficiency with which re- 820. Taxation in Decentralizing 821. Wages and Unemployment sourc are used. It is empirically impor- Socialist Economies: In Poland: Recent Developments tant to identify which financial interme- The Case of China and Policy Issues diaries are doing the intermediation and to whom thefimancial system is allocating Christopher J. Heady and Pradeep K. Mitra Fabrizio Coricelli and Ann Revenga credit ratherthan simply usingproier for (January 1992) (January1992) the overall size of the financial system, as has been common in past studies. The nature and pace oftaxreforrminuChina Unemployment has irreased dmmath- depends on progress in price and enter- callywithstabilization, maidybecauseof tingand Levine use existing measures of prisereform, highlighting the need to view ageneralized contraction in output, rather the financial system - and construct the problem in a systemwide perspective. thana sectoralrestructuringora massive 12 Policy Research Working Paper Series sheddingoflabor.Realwagesfellsharply of this paper are available free from the does not affect the qualitative results. and the wage policy has become a delicate World Bank, 1818 HStreetNW, Washing- Only the size of the optimum scheme to political issue. Oneprescriptionforreduc- ton, DC 20433. Please contact PRDTM, be used under various circumstances ing the drawbacks in current wage policy room N11-021, extension 39175 ( 45 would change. is to replace that policy with ageneralized pages). This paper - a joint product of the agreementen the wagepath with aynchra- Country Operations 2 Division, Country nized six-month contracts. Such an agree- Department II and the Infrastructure and ment might be seen as a cunsensual agree- 822. Paternalism Energy Division, Technical Department, ment-a "social pact"-rather than as a and the Alleviation of Poverty Latin America and the Caribbean Re- punitive tax. gional Office-is partofalargereffortin Nancy Jesurn-Clements the Bank to understand the effectiveness Coricelli and Revenga review recent de- (January 1992) of different poverty alleviation schemes. velopments in wages, employment, and Copies of the paper are available free from unemployment in Poland and discuss Part ofthe reason for using pricesubsidies the World Bank, 1818 H Street NW, some of the main risks Poland faces in to redistribute income to the poor, rather Washington, DC 20433. Please contact* sustaining its stabilization effort They than the more efficient direct cash trans- PresiaBetancourt,rooml8-131,extension find that- fers, is to produce "happ ier" taxpayers. 37703 (40 pages). * Unemployment has increased dra- matically with stabilization, but this in- Typically the tools available for redistri- crease cannotbesaidtoreflectwidespread bution are price subsidies (in their ex- 823. How Private Enterprise economic adjustment and restructuring treme form, in-kind transfers) and direct Organized Agricultural Markets throughout the Polish economy. Contrary cash transfers. Conventional economic In Kenya to predictions made prior to the January theory indicates that the efficiencyloss is 1990 program, employment has declined minimized if cash transfers are used in- Steven K Jaffee nearly uniformly across all sectors, mainly stead of price subsidies. Butin almost all (January 1991) as a resultofa generalized contraction in economies, including advanced econo- output, rather than as aresult of sectoral mies, price subsidies are implemented - Does the liberalimt ion ofAfrican markets restructuring or massive shedding of la- and cash transfers, the more efficient al- increase competition in aprimte market? bor. ternative, are seldom used. Kenya's experience with horticultural ex- * Wages showedasignificantdegree of Jesurun-Clements argues that taxpay- ports calls into question the assumption downward flexibility - in real terms - ers enjoy the poorer citizen's specific con- that liberalizing Africa's markets wiU at the beginning of the year, when firms sumption package (food, housing, educa- bring about competitiv4 decentralized faced a severe supply shock coupled with tion) more than improving the poorer citi- private market structures - or that Afri- very tight credit But from March on, zens general economic welfare. Her objec- cans will benefit from trade when it does wages increased faster than prices, prob- tive is to identify the conditions under expand. ably contributing to the persistence of which price subsidies represent a more inflation, efficient way of alleviating poverty than Does liberalization of agricultural mar- The wage policy still in force in Poland cash payments, given taxpayers paternal- kets and an expanded role for the private at the end of 1991 maintains a few unde- istic preferences. sector result in a competitive market sirable features. The monthly indexation Sheconcludes thatwhenthe taxpayers' structure in Africa? Jaffee empirically andthe possibility ofcarryingforwardthe prevalent behavior is paternalism, and investigates the organization and devel- unused margins are among the policy's taxpayers have more weightin society, the opment of a dynamic African export-ori- main drawbacks; another is the link be- option for redistribution would be to tar- ented sector - Kenya's horticultural ex- tween wages and profitability. get price subsidies to the poor. This brings ports - in which the private sector has The current wage policy could be re- about a greater improvement in overall long had a dominant role placed by a generalized agreement on the social welfare and "happier" taxpayers Jaffeehighlights the sector'simpressive . wage path, with synchronized six-month than any other policy. With this solution, patternofgrowthoverthe pasttwo decades contracts. The wage path should be re- the poor are somewhat better off, even and examines the (ownership) character- lated to expected inflation and though they would rather receive cash istics of participating private firms, the economywide productivity. This scheme transfers, which would represent the competitive pattern among those firms, would also have the advantage of being same financial cost to the economy. and the institutional meansby which they based on a consensual agreement - a When the rich are typically altruistic, procure raw materials for processing and "social pact"-instead of being perceived there is no distortion in the price system. export. as being imposed as a punitive tax. The preferences of each individual are He finds that despite the Kenyan This paper - a product of the Transi- preserved and the best policy for the governments direct investments in pro- tion and Macro-Ajustment Division, economy as a whole and for each indi- cessing and trading activities and its p- Policy Research Department- is part of vidual agency is undoubtedly the use of plication ofregulations and targeted sup- a larger effort in the department to ana- cash transfers. port measures to strengthen the role of lyze macroeconomic developments and Increasing the number of goods, or al- KenyanAficansintheharticulturaltrade, policies in transitional economies. Copies lowing the rich to enjoy subsidized prices, most of this trade remains controlled by Policy Research Working Paper Serles 13 foreign-owned companies or members of 824. Back-of-the-Envelope 825. The Empty Opportunity: Local Kenya's small minority Asian and Euro- Estimates of Environmental Control of Secondary Schools pean communities. Damage Costs In Mexico and Student Achievement Various foreign and local investments in the Philippines have incorporated Kenyan Africans (as Sergio Margulis shareholders, employees, or suppliers of (January 1991) Marlaine E. Lockheed and Qinghua Zhao raw materials), or have stimulated the (January 1991) suppliers toinvestinhorticulturalproduc- Deueloping countries cannot afford an in- tion or trade - but the basic patterns of depth study ofevery environmental issue. Decentralization alone does not produce ownership and control pose potential po- Poligymakers must begivenrough, "back- local control oftchools. Schools mustalso litical problems, as the sector is now the of-the-enuelopestinates ofthe economic be given resources, motivated students, fastest-growing component of Kenyan costs of various environmental problems educated and experienced teachers, and agriculture and trade. Concerns are grow- if they are to rank the issues and act. Here control over teachers and school manage- ing about who is benefiting from this ex- is one such estimate -for Mexico. ment. .panLng trade. Much of Kenya's horticultural trade is For developing countries, budget con- LockheedandZhaouseamultilevelmodel based on contracted or vertically inte- straints help set the agenda on mitigat- to examine: grated supply arrangements for raw ma- ing environmental damage, one of the * Diferences in achievement andatti- terials, rather than open market ties be- indelible marks of our era. And political tdes among grade 9 mathematics and tween producers and processorfexport- considerations often dictate the measures science students in 213 national govern- ers. Open market procurement of raw taken -There are no firm analytical formu- ment, private, and local schools in the materials would probably entail high las to help even environmentally con- Philippines. transaction costs and risk, but theimpor- scious policymakersrank needs andrem- * Differences among these types of tance of integrated, contract-based links edies. schools in social composition, available between producers and marketers calls AdevelopingcountrysuchasMexico- resources, classroom orderliness, aca- into question the often-expressedassump- thefocus ofthis paper-cannot afford an demic emphasis, and school decision- tion that liberalizingAfrica'smarketswill in-depth study of every environmental making. produce competitive, decentralized pri- issue. Policymakers need to be provided * Possible reasons for differences in vate market structures. with rough, tback-of-the-envelope" esti- achievement. Various forms of centralized private mates of the economic costs of various Theyfoundtbat-holdingeonstantfor control may indeed be preferable to cen- environmental problems. This allows age, gender, and socioeconomic status - tralized public control, but Kenya's expe- them to rank the issues and act. students attending the three types of rience with horticultural exports suggests In this paper Margulis applied existing schools differed significantly. that when an African country such as methods to estimate the costs stemming Students in local schools 2cored lower Kenya privatizes agricultural processing from differentenvironmental problemsin in achievement (1.25 points lower in sci- and (export) marketing the government Mexico. Although the examples are from ence and 1.61 pointslower in mathemat- must find a better way to monitor and Mexico, the method can be useful in other ics) and had less positive attitudes than control dominant firms, to get companies developing countries as well. studentsingovernmentchools.Students to involve smallholder farmers in raw Margulis showshowcreative use ofU.S. in priva-e schools outperformed students material procurement operations, and to and other data can help provide simple ingovernment schools (0.88 pointshigher improve the farmers' bargaining position estimates ofthe likely costsofsoil erosion, in mathematics). These differences were with centralized contracting firms. air pollution, mining of underground wa- attributable largely to the effects of stn- * This paper - a product of the Agricul- ters, and estimates ofthe health effects of dent selection. tural Policies Division, Agriculture and water and solid waste pollution, lack of Lockheed and Zhaofound that policies Rural DevelopmentDepartment-is part sanitation, and the ingestion of food con- for centrally planned decentralization do of a larger effort in the department to taminated by polluted irrigation. The as- not necessarily change what goes on in assess the division of responsibilities be- sumptionsunderlyingallcalculationsare schools. Local schools were not managed tween the public sector and the private conservative. Some environmental dam- as private schools. Local schools were sectorin the provision ofagricultural ser- age issues, such as loss of biodiversity, given an empty opportunity: there was vices and in agricultural marketingactivi- were too complex to permit quantification. nothing for local control to control. Local ties. Copies are available free from the This paper - a product of the Agricul- schoolshadfewresources-fewerofthem World Bank, 1818 H Street NW, Washing- ture Operations Division, Country De- had laboratories and their teachers were ton, DC 20433. Please contact Cicely partment II, Latin America and the Car- less educated and experienced than those Spooner, room N8-039, extension 32116 ibbean Regional Office -is partofalarger in private schools. (44 pages). effort in the Bank to define a strategy for By contrast, managers of private the environmentin Mexico. Copiesofthis schools had significant resources over paper are available free from the World which to exercise control. Teachers were Bank, 1818HStreetNW,Washington,DC better educated and experienced, and 20433. Please contact Sandra Vallimont, planned their instruction. Students were room 18-155, extension 37791(29 pages). motivatedandcompletedtheirhomework 14 Polley Research Working Paper Serles and assignments. And managers of pri- employs a large part of the urban labor multilateral trade negotiations as the vate schools exercised significant control force, and if demand for the goods pro- Tokyo Round. In Brazil and Mexico, an over teaching and school management. duced in the informal sector is price-in- FTA would liberalize important trade This paper - a prodnet of the Educa- elastic. barriersaffectingtheirexports.ButEran tion and Social Policy Department - is Fiszbein's model, however, does not af- and Yeats estimate that overall, full PTA part of a larger effort in the department fect the case for cuts in minimum wages preferences would raise Latin American to understand the education sector, with on the groundsofefficiency. Reducingthe exports only 8 or 9 percent particular reference to improving school minimum wage does increase jobs and Estimates made with a partial equilib- effectiveness. Copies are available free output in the formal sector. rium trade projection model suggest that from the World Bank, 1818 H StreetNW, This paper - a product of the Popula- a U.S. FTA with Mexico would greatly in- Washington, DC 20433. Please contact tion and Human Resources Operations fluenceMexicostradewithothercountuies, CynthiaCristobal,roomS6-035,extension Division, Country Department 1, Latin even if those countries also have an FTA 33640 (37 pages). America and the Caribbean Regional Of- with the United States. An exclusive FTA fice-was partofFiszbein'sPh.D. disser- between Mexico and the United States tation at the University of California at would cause Mexico's exports to increase 826. Do Workers in the Informal Berkeley. Copies are available free from about $1.6 billion annuallyand would dis- Sector Benefit from Cuts the World Bank, 1818 H Street NW, place about $28 million in exports from In the Minimum Wage? Washington, DC 20433. Please contact other Latin American countries (and al- Patricia Trapani, room 17-183, extension most half a billion dollars of trade with ArielFisibein 31947 (46 pages). countriesin therestofthe worldwouldbe (January 1992) diverted).Thenumber andcountrycompo- sitionafFTAstheUnitedStatesnegotiates The paper analyzes the effict a change in 827. Free Trade Agreements with Latin Americawillgreatlyeffecthow the minimum wage has on the earnings of with the United States: much these agreements are worth workers in the informal sector who are What's In it for Latin America? PotentialtradegainsfromLatinAmen- supposedly not covered by minimum wage can FTAs with the United States will be legislation. The standard view is that re- RefkErzan and AlexanderYeata considerably reduced unless arallel ac- ducing the minimum wage, which in- (January 1992) tion is taken to remove or reduce US. creases employment in the formal sector, nontariff barriers. Nontariff barriers are reduces the effective supply of labor to the Fept for Brazil and Mexico, most Latin particularly importantfor countries such informal sector, increasing the wage in the Americancountriesstandf ogain less from as Uruguay, which have a heavy concen- informal sector. free trade agreements (FTAs) with the tration of textile and clothing exports. United States than the United States Erzan and Yeats estimate that the value But Fiszbein argues that the effect of the stands to gain from FTAs with them The ofan ETAin such acase mightbe reduced minimum wage on earnings in the infor- main incentive for the Latin American by as much as a half without liberaliza- mal sector does not depend exclusively on countries to form FTAs with the United tion of nontariff barriers. its effect on labor mobility between the States may be to attract investment or to Still, even apreferential elimination of formal and informal sector. Demand for halt the spread of new trade restrictions. U.S. nontariff barriers would not induce goodsalsolinks the two sectors-andthis Latin American countries do probably adramatic short-runjump in trade, except demand is seldom factored into theoreti- standtogains-gnifcant long-term eport in Brazil and Mexico.The main incentive cal discussions. benefits from reduced trade barriers for the Latin American countries to form Based on a general equilibrium ap- among themselves. FTAs with the United States may be to proach, Fiszbein builds a dual economy attract investment (an issue this study model in which the two sectors are linked Unlike earlier analysts, whobave focused does not address) or possibly to halt the not only throughthelabor marketbutalso on U.S. objectives; Erzan and Yeats focus spread of new trade restrictions. This ig- through the goods market. In this frame- here on what 11 Latin American countries nores the probably large long-term ben- work, reducing the minimum wage affects (Argentina, Bolivia, Brazil, Chile, Colom- efitstobegainedin the export sectorfrom informal sector earnings both through hia, Ecuador, Mexico, Paraguay, Peru, reduced trade barriers among the Latin changesinlaborprodactivityandcbanges Uruguay, and Venezuela) stand to gain American countries. in relative prices. Once these two factors from a preferential removal of U.S. trade ErzanandYeats do notformally project are considered, aminimum wage cutcould barriers -thatis,from the development the potential FTA-induced expansion of resultinreducinginformal sectorwages, of a free trade area (FTA) arrangement. US. exports, but do make some detailed even if formal sector employment in- (For lack of data, they do not address the comparisons of the levels of tariff and creases. consequences of an ETA among Latin nontariffprotectioninthe U.S. andLatin If workers in the formal sector are the America countries.) American markets. Those comparisons main buyers ofthe goods produced in the They find that the United States islim- suggest that the US. trade gains - par- informal sector, and theirincome elastic- itedinitsabilitytoextend significantFTA ticularly for highly protected transport ity of demandis relatively large, workers preferences tomostLatin American coun- and machinery products - are likely to in the informal sector could be hurt by a tries because of the existing Generalized be considerably greater than those for cut in the minimum wage. They could System of Preferences and the cuts in Latin America in the U.S. market. Their similarly be hurt if the informal sector import duties negotiatedin such previous analysis also accents the potential dan- Policy Research Working Paper Serles 15 gers associated with independent negotia- andlabor markets that affect the efficient markets, Chuppe and Atlin conclude that tion of FTAs. Agreements that extend use of resources in skills development. securities markets can facilitate the effi- preferences to U.S. products below tariffs Structural adjustment programs that cient allocation of an economy's resources paidby other countiiesin the region would address these distortions expand incen- and can fester competition in thefinancial have a serious negative impact on trade tives for private training and for more sector by providing an alternative to gov- among Latin American countries. efficient use of public resources in skills ernment-directedfundingorasupplement Finally, Erzan and Yeats note that a development. to private finding through the banking successful conclusion of the Uruguay This paper - a product of the Educa- systems.Forsecuritiesmarketstoallocate Round could greatly affect their projec- tion and Social Policy Department - is resources to their most productive uses, tions. If the Round results in sizable cuts part of a larger effort in the department they conclude, regulation should be con- in MFN and applied tariffs, the potential to improve policies for the financing and fined to that needed to correct the market .FTA-induced expansion of Latin Ameri- provision of vocational education and failures that arise in unregulatedmarkets. can exports would be lower than their training. Copies ofthis paperare available This has several important implications- current estimates. But any such multilat- free from the World Bank, 1818 H Street * Itis more desirable to allow the mar- erally negotiated reductions would have NW, Washington, DC 20433. Please con- ket to set prices than to have direct gov- 'the general effect of creating trade in this tact Cynthia Cristobal, room 86-035, ex- ernment intervention in the pricing and and other regions. tension 33640 (29 pages). selection of issues. But market-based This paper - a product of the Interna- prices depend on investors having access tional Trade Division, International Eco- to reliable financial information, which nomics Department -is part of a larger 829. Regulation of Securities means standardizedaccountingrules and effort in the department to analyze and Markets: Some Recent Trends clear cisclosure requirements mustbe in predict structural changesin trade and to and Their implications placeas amarketmoves from government identifyfactorsaffecting developingcoun- for Emerging Markets control to market-based pricing. Market tries' exports. Copies of the paper are trading systems must be supervised to available free from the World Bank, 1818 Terry M. Chuppe andlEchael Atkln prevent market manipulations and in- H Street NW, Washington, DC 20433. (January 1992) sidertradingbasedonprivilegedinforma- Please contact Jean Jacobson, room S7- tion. Governments are better employed 035, extension 33710 ( 66 pages). The trend toward the liberalization off- educating investors about the risks and nancial markets is part ofageneral recog- rewards of owningmarketable securities nition that free markets normaly work than in trying to determine the prices of 828. How the Macroeconomic better than government contrmlk Regula- those securities. Environment Affects Human tory systems should be developed in light * Restrictions on entry into the finan- Resource Development of the market failures that make them cial services sector are appropriate to the necessary and should provide the least extent that they are concerned with capi- Arvil Van Adams, Robert Goldfarb, possible opportunity for rent extraction by tal adequacy and measurable competence and Terence Kelly any single interest group. - the goal being to correct possible mar- (January 1992) ket failures. In recent years there has been a trend * Restricting foreign ownership of An outward orientation of the macroeco- toward liberalizing financial markets in shares is not justified by economic theo- nomic environment encourages more effi- developed and emerging securities mar- ries of regulation. Markets can develop cient development of human resources. kets. In the United States, the Securities more easily if foreign institutions are al- Structural adjustment programs that ad- Act Amendments of 1975 emphasized lowed to invest at the same time that do- dress distortions in domestic capital and competition in the provision of financial mestic institutions are encouraged to de- labor markets expand incentives for pri- services by deregulatingcommissionrates velop. The Korean market has developed vate training and the more efficient use of on stock transactions and byfosteringthe despite an interventionist regime in public resources in skills development. development of a national market system charge of stock market development, but in securities.London'sso-cailed"bigbang' there is no evidence that entry barriers Do inward-focused development strate- series of major reforms in 1986 deregu- faced by new providers of financial ser- gies reduce competitionin factormarkets lated commission rates, put a new trad- vices have done more than increase the and incentives for more efficient skills ing system on the stock exchange, and profits of existing providers. development? Do outward-focused devel- allowed foreign financial service firms to * Developing countries eager for their opment strategies improve them? participate more in the U.I's domestic developing markets to be a link to the Adams, Goldfarb, and Kelly compared securities market. Changes in the UXK. world capital market cannot afford to ig- vocational educationandtrainingsystems were far-reaching in a short period, so nore the trend toward an international in six developing countries in the 1980s. Chuppe and Atkin could examine their harmonizing of regulatory structures. They found that an outward orientation effects on the market - particularly on There hasbeen atendencyinrecentyears encourages more efficient developmentof competition. Theyfoundthatthebig bang to strengthen government oversight of human resources. made London more competitive as a glo- markets, with an appropriate delegation Protectionist trade regimes that shelter bal financial center. of regulatory responsibility to stock ex- producers from global competition pro- After examining trends in U.S., U.IX, changes or other self-regulating organiza- duce price distortions in domestic capital Japanese, Korean, and several emerging tions. 16 Policy ResearCh Working Paper Series * In countries moving from centrally failed in the long run to distinguish itself The first issue is the extent to which planned to market economies, the basic in terms of economic growth. policy-induced distortions influence the building blocks for a securities markets Elbadawi and Mjd usn a modified-con- structure of incentives for agriculture must be established, along with appropri- trol-group approach to compare changes (with direct distortions inducedby policies ate regulatory safeguards- Private prop- in macroeconomic indicators in the CFA aimed directly at agriculture distin- erty rights must be defined, adequate ac- countries with those in countries else- guishedfromindirectpoliciesaimedatthe counting systems established, and special- where in Sub-Saharan Africa and similar economy's macroeconomic management). ized institutions develoAd to act as bro- low-income developing countries. They The second issue is how these distor- ker, dealer, and investment banker. control for initial conditions, changing tions affect agriculture's growth, given This paper - a product of the Econom- exogenous internal and world environ- other growth fundamentals. ics Department of the International Fi- ment, and policy stance. Preliminary analysisofevidencein Sub- nance Corporation -is part of a planned Their approach allows for a formal test- Saharan Africa links the observed de- * research series on the performance of capi- ing of whether zone membership is a ran- cinee in agriculture andthe general wors- tal markets and their role in providing risk dom choice. The implication of random- ening of economic conditions to economic capital to the corporate sector in India and ness(thatthere isnoselectionbias)isthat distortions. A more rigorous analysis, the Republic of Korea. The research is the CFA-zone economies wouldhave per- using data from the Sudan -an African funded by the World Bank's Research formed the same as the rest of Sub-Sa- country with a sizable agricultural Support Budget, OStock Market Develop- haran Africa, for example, if there had economy - strongly supports the predic- ment and Corporate Finance" (RPO 675- been no zone. Their results show the as- tions of Easterly's endogenous growth 84). Copies of this paper are available free sumption of randomness to be valid only model (1990), which posits the deleterious from the World Bank, 1818 H Street NW, for GDP growth and inflation. For other effects ofeconomic distortions on growth. Washington, DC 20433. Please contact indicators (the ratios of savings, invest- This paper - a product of the Transi- Faye Harbottle, room K5-167, extension ment, and exports to GDP), the decision tion and Macro-Adjustment Division, 39616 (40 pages). toparticipatein the zone isassumedtobe Policy Research Department-is partof endogenous and is related to the expecta- alarger effort in the department to study tion of improved economic performance. the linkages between agriculture and 830. Fixed Parity of the Exchange Therefore,in estimating the zone's effects macroeconomic policy in Sub-Saharan Rate and Economic Performance on those three indicators, Elbadawi and Africa. Copies of the paper are available in the CFA Zone: A Comparative Majd corrected for the ensuing "sample free from the World Bank, 1818 H Street Study selectivity" bias by estimating the status NW, Washington, DC 20433. Please con- indicator (participation versus tactAnnaMaranon,roomN11-042,exten- Ibrahim Elbadawi and Nader Majd nonparticipation) with a probit model. sian 39074 (66 pages). (January 1992) This paper - a product of the Trand- tion and Macro-Adjustment Division, Economic performance in the CPA (frane) Policy Research Department -is part of 832. SUstainability and the zone was weakerthan in non-CFAcountries alarger effort in the department to study Economics of Assuring Assets for in the late 1980s for exports, investment, macroeconomicadjustmentandeconomic Future Generations savings, and output growth. The CFAfared performance in the CPA zone. Copies are betteronlyin inflation.Andin the long run, available free from the World Bank, 1818 Richard B. Norgaard while it performed better for exports, sav- H Street NW, Washington, DC 20433. (January 1992) ings, and investment, it failed todistinguish Please contact Anna Maranon, room Nil- itselfin terms ofeconomic growth. 042, extension 39074 (46 pages). Economists can participate more effee- tivelyindecisionmakingaboutfuturegen- Elbadawi and Majd compare economic erations' rights to natural and produced performance in the CFA(franc) zone with 831. Real Overvaluation, Terms assets if they use economic analysis to the economic performance in similar coun- of Trade Shocks, and the Cost to comp&ement other types ofanalysis rather tries outside the CPA zone in recentyears. Agriculture In Sub-Saharan Africa than assume that economic reasoning is a The results of their model estimates sieve through which otherforms ofreason- indicate that the competitive position for Ibrahim A. Elbadawi ing must pass- Emphasis shouldbeplaced CPA members was weaker in the second (January 1992) on how markets would work efficiently if halfof the 1980s than in the first half and they were striving to meet cwrent prefer- weaker than in non-CPA countries - in The observed decli ne ofagriculture and the ences where one ofthose preferences is the terms ofoutput growth as well as the per- general worsening ofeconomic conditions collective desire to maintain sufficient formance of exports, investment, and say- in Sub-Saharan Africa are linked to eco- natual and human-produced assets, in- ings. The exception was domestic infla- nomic distortions, which limit growth. cluding knowledge, to sustain welfare in tion: the CFA fared better on that front. the next generation- Resultsfaralonger-term comparison (of Startingfrom the premise thatagriculture the 1970s and the 1980s) are somewhat shouldbe pivotal in the structural trans- Norgaardarguesthatthe discourse onthe mixed. The CFA zone performed better formation and economic development of sustainability of development is about than the others in exports, domestic say- Sub-Saharan Africa, Elbadawi addresses assuring the rights of future generations ings and investment, and inflation-but two related issues. to sufficient natural and produced assets Policy Research Working Paper Series 17 through formal and informal institutions. Economists' traditional emphasis on (the Pact) shows that the right combina- The theoretical models in resource and efficiency, which takes the existing distri- tion of orthodox and "heterodox" policies environmental economics have not ex- bution of assets as a given, has limited (for example, income policies) can meet, plored how different distributions ofrights their ability to perceive and respond to the and has met, both objectives. across generations affect the efficient al- challenge of sustainability, contends Oks shows that although many ortho- location of resources and environmental Norgaard. Accupting the distribution of dox adjustments - especially of fiscal services. Both in theory and practice, income also justifies the use of data gen- policy and domestic debt management- economists have effectively assumed that erated by markets, thereby giving eco- were begun before the Pact, considerable current generations hold all rights and nomic reasoningempirical grounding and further adjusting was needed before it should efficiently exploit them. scaling, could succeed. To make the stabilization Through the use ofgeneral equilibrium Economists can participate more effee- credible required significantly tighter fis- * overlapping generation models developed tively in the diverse social decisionmaking cal policy and a lengthening of the with Richard Howarth, Norgaard demon- areas in which intergenerational equity maturities of domestic debt between 1988 strates how assuring the rights of future decisions are being made if they use eco- and 1990. generations - or otherwise caring for nomicanalysis to complement other types A key factor behind high real interest them through asset transfers - affects of analysis rather than assume that eco- rates during the recent Mexican stabili- the efficient allocation ofresourcesandthe nomic reasoning is a sieve through which zation plan was the initially low credibil- price paths of resources over time. other forms of reasoning must pass. ity of the fixed - and later the In Norgaard's general equilibrium mod- For the operations ofdevelopmentagen- preannounced - exchange rate. While it els, the rate of interest is endogenous, cies, addressing issues of sustainability is difficult to assess what establishes cred- taking on different values with different would shift the emphasis from project ibility, we can hypothesize about the fac- distributions of rights or levels of caring analysis toward country and policy analy- tors that may hamper it. Crucial among and showingan intertemporal path rather sis and toward increased country dia- them is the consistency of the macroeco- than aconstantrate. He thus supportsthe logue. For projects, emphasis should be nomic policy framework, where fiscal position that it is inappropriate to lower placed notonlyon analyzing efficiencybut policy plays a key role. Domestic debt the rate of interest in favor of future gen- on analyzing how projects affect the for- managementalsomattersastheprobabil- erations but shows that when the rights mation, maintenance, and transfer of as- ity of a successful run on the peso in- of future generations are protected, the sets to future generations. A more global creases with the amount of government rate of interest is lower. It is the protec- view of the issues should incorporate liabilities that could, in a given period, be tion ofthe rights of future generations that knowledge from the natural sciences and exchanged for foreign reserves. For ex- assures that a lower rate of interest does more information than is generally pro- ample, if the average maturity of domes- notresultin excessive transformations of vided by markets. tic debt is low, as it was in Mexico at the natural environments because of the in- This paper is a product of the Office of beginning of the stabilization plan, this creased availability ofcapital for develop- the Regional Vice President, Asia Re- probability is high- and thus also shows ment gional Office. Copies ofthe paperare avail- up in high interest premia between peso- Economists may not have formally ad- able free from the World Bank, 1818 H denominated and dollar-denominated dressed the rights of future generations Street NW, Washington, DC 20433. debt. because they have tended to assume that Please contact Jae Shin Yang, room E10- The Pact succeeded in stabilizingprices technology will offset resource scarcity. 031, extension 81418 (74 pages). without a recession, but a few loose ends Technological optimism may or may not remain: be appropriate: itis certainly contested in * The sharp decline in private savings the discourse on sustainability, but it is 833. Stabilization and Giowth which has not been fully offset by higher not inherent to economic rearoning. Recovery In Mexico: Lessons public saving, causes many to question the There has been an implicit assumption and DilemmaS sustainability of the recent economic re- that the institutional mechanisms affect- covery. In particular, it makes Mexico ing the maintenance of transfer of assets Daniel P. Ok more vulnerable to volatile private capi- -to future generations are working opti- (January 1992) tal flows. mally and a-e unaffected by the general * The continued real appreciation of development process or particular devel- The right combination of orthodox an 3 the peso risks bringing a slowdown or re- opment decisions. Analyses to date have heterodox policies can bring inflation cession over the medium term- onlyaddressedmarket distortionsandthe down and induce sustained economic re- In the short term, Mexico may not have internalization ofexternalities. New tech- covery in Mexico - and has done so. But other options than further tightening its nologies have increased people's ability to a few loose ends remain: a sharp decline fiscal and monetary policies. Over the use resources and degrade ecosystems. in private savings and the continuing ap- medium term, however, areal peso depre- Development entails changingcommunity preciation of the peso. ciation appears necessary so that extra relations and enteringnational andinter- output from new investment can be ab- national markets. There have only been a Before 1988, "orthodoz policies (fiscal sorbed. few analyses of whether institutions, to discipline and tightmoney) failed tobring This paper is a product of Country Do- protect the rights of future generations, inflation down and induce a sustained partmentI, Country OperationsDivision have evolvedin consonance with new tech- economic recovery. The Mexican stabili- 1, Latin America and the Caribbean Re- nologies and social organizations- zation plan announced in December l987 gional Office. Copies are available free 18 Policy Resewrch Working Paper Series from the World Bank, 181B 11 Street NW, debt-creating, interest-sensitive flows to ated with the fund, frictions in the Washington, DC 20433. Please contact developing countries, in terms of long- economy, or the borrowing constraint is Lily Franchini, room 18-165, extension term sustainable growth. relaxed. 38835 (23 pages). This paper - a product of the Interna- This paper-a product of the Debt and tional Economic Analysis and Prospects International Finance Division, Interns- Division, International Economics De- tional Economics Department -is part 834. Scenarios for Growth partment-was preparedas background ofalarger effort in the department tocon- In the 1990s to the report, "Global Economic Prospects tribute to a Bankwide work program on and the Developing Countries,"published issues related to developing country man- Shahrokh Fardoust and Jian-Ping Zhow in May 1991. Copies of this paper are agement of external risk, including cur- (January 1992) available free from the World Bank, 1818 rency sndexchangetrawriskmanagement H Street NW, Washington, DC 20433. currency reserve management, and com- The long-term economic prospects for de- Please contactJacquelyn Queen, room S8- modity price risk management Copies of veloping countries will be affected by 035, extension 33740 ( 39 pages). thepaperareavailablefreefromthe WrTld changes in the international economic Bank, 1818HStreetNW,Washington,DC environment but depend ultimatelyon the 20433. Please contact Rose Vo, room 88- success or failure oftheir domestic policies. 835. Commodity Stabilization 072, extension 33722 (36 pages). Funds Using two macroeconomic models (the Banks GEMWCFM 2nd the International Patricia Arrau and Stiju Claessens 836. Sources of Income Inequality Monexuary Funds MULTIMOD) and re- (January 1992) In Rural Pakistan: sults from the OECD's INTERLINK A Decomposition Analysis model, Pardoust and Zhou simulate glo- The optimal rule for deposits in and with- bal outcomes in the 1990s under several drawals from a commodity stabilzation Richardl. Adams, Jr. and Harold Alderman scenarios, allowing for the impact of: fund keep the fund small -less than one (January 19992) * Changes in industrial countries' fi- month's exports. For the windfilgain oil nancial and macroeconomic conditions. exporters received asaresult ofthePersian Thatsomepeopleownmoreland thanoth- * Changesintheinternationaloil mar- Gulferisis - about four months ofaver- ers is not the ma?n source ofagricultural Icet. ageexports-theoptionaldepletionperiod income inequalv in ruralPakistan. That * Changesin developing countries' do- is about four years. In the long run, the some people receive higher profits and re- mestic policies under varying assump- exporter's fiund should be small, sgnifl- turns to laboron theircultivation than do tions about the world economy and trad- candy less than one month of oil exports. others is. Reducing inequality might re- ing environment. quireproviding more training in manage- They find thatanincrease in the growth Commodity stabilization funds are hard- ria and technical skills. rate in industrial countries has an unam- currency savings to protect against a fall biguouslypositiveeffectanthe growthrate in income from commodity exports in the Usingpanel data from a three-year study in developing countries, but that the mag- presence ofborrowing constraints. of 727 bouseholds, Adams and Alderman nitude oftheimpactdependslargelyon the Arrau and Claessens develop the opti- identify the sourcesof income inequality level ofrealinternationalinterestrates.To mal rules for deposits in and withdraw- in rural Pakistan. an extent, low real interest rates together als from suchafundby usingabenchmark First, theydecompose total rural income with continuing financial flows to the de- model of precautionary savings with l- among five sources agricultural, live- velopingcountriescouldcushion the nega- quidity constraints. stock, rental, nonfarm, and transfer in- tive impact on developing countries of the They show that the optimal stabilization come. This decomposition shows that ag- . recession in industrial countries, fund is small. For the Chilean Copper Sta- ricultural income contributes most to in- The authors simulations reinforce the bilization Fund, they show that the actual equality in total rural income. argument that developing countries' do- accumulation of foreign assets has been Next, they decompose the sources of mestic policies play a crucial role in deter- much larger than the benchmark model inequality in agricultural income. This mining long-run growth, inflation, and requires. Overlongperiods, the copperfund leads to the surprisingfinding that ineq- interest rates. They find, for example, that should contain less than one month's ex- uitable ownership ofland is not the main if external conditions remain unchanged, ports. source of inequality in agricultural in- reasonable improvements in domestic They also use the model to find the op- come. Income from returns to labor and policies (specified in the paper) can in- timal depletion of the windfall gain oil crop profits contribute most to this area crease developing countries' average exporters received as a result of the Per- of inequality. growth by about 1.5 percentage points a sianGulfcrisis-amountingtoaboutfour One way to reduce rural income in- year. monthsof average exports. Theyfindthat equality might be to find more ways to The simulation results show that as such a windfall gain should be depleted in narrow the disparities between abilities, world oil prices become more volatile, so about four years. In the long run, an oil perhapsbyteachingmore managerial and do world inflation, interest, and GDP exporter shouldkeep a small fund, signifl- technical skills to agriculturists. growth rates. The results also show the cantly less than one month of oil exports. According to Adams and Alderman, superiority of non-debt-creating flows (for But higher-than-predicted funds can be policymakersconcernedaboutinequality example, foreign direct investment) to justified if there are externalities associ- in rural Pakistan would also be well ad- Policy Research Working Paper SerIes 19 vised to pay more attention to livestock. developmenL Copies of the paper are are greater than incentives for import Income from livestock apparently de- available free from the World Bank, 1818 substitution. The two may be related but creases the inequalities in income. H Street NW, Washington, DC 20433. a heavily interventionist policy could be This paper - a product of the Agricul- Please contact SelinaKhan, room S6-228, outwardly oriented. tural Policies Division, Agriculture and extension 33651(29 pages). And a country could impose trade poli- Rural DevelopmentDepartment-ispart cies that raise the average incentive to of a larger effort in the department to export, while increasing the dispersion of monitor the impactofagricultural policies 838. Measuring Trade Policy incentives within the export and import on poverty. Copies of this paper are avail- Intervention: A Cross-Country sectors - so that when such a country able free from the World Bank, 1818 H Index of Relative Price Dispersion liberalizes,trademightreturntoitsorigi- Street NW, Washington, DC 20433- nal pattern but with incentives inwardly Please contact Cicely Spooner, room N8- Brian J. Aitken oriented. 039, extension 32116 (34 pages). (January 1992) The index of relative price dispersion that Aitken develops has the advantage Not only is it hazardous to characterize an thatitis objective, measures intervention 837. Manpower Planning inward-oriented counry as intervention- inbothexportsandimports,iscomparable In a Market Economy with Labor ist and an outward-oriented country as across countries, and is independent of Market Signals libertL but the charmeterizaton is simply fluctuations in exchange rates caused by wrong for developing countries. Whether macroeconomic mismanagement. Unlike Arvil Van Adams, John Middleton, acountry intervenes does not tellthe whole average tariffs and measures ofnontariff and Adrian Ziderman story about its trade policy, and misses an barriersandpricelevels, the relative price (January 1992) essential aspect of intervention which dispersion index measures incentive dis- goods are fauored by subsidies and which tortions within categories of goods. As countries mouefrom centrally planned are protected by tariffs The Learner index looks directly at the to market economies, manpower planners effectsaftradepoicyintervention,butthe mustabar.donoldtechniquesforfarecast- In the debate about the relationship be- theoretical assumptions required to cal- ing manpower requirements and learn to tween trade policy and growth, various culate the pattern oftrade in the absence analyze signals from the labor market. measuresfortradeinterventionhavebeen of distortion are questionable. Such as- used. Aitken presents a new measure sumptions are unnecessary when calcu- The movement from centrally planned to based on a country's relative price struc- lating relative price dispersion, as world market economies will not eliminate the ture and the structure of relative world prices are directly observable. need for manpower planning. Rather, it prices. This measure, he argues, conforms This paper - a product of the Transi- will substantially change the roles man- more closely than existingmeasurestothe tion and Macro-Adjustment Division, power planners play and the techniques concept of trade intervention. Policy Research Department-is part of they use. The relationship between "opennessr a larger effort in the department to esti- Manpower planners mustbecome ana- and trade liberalization is more compli- matepolicymxeasuresrelevantforgrowth. lysts of the labor market- In a market cated than is often believed. Whether a The research was funded by the Bank's economy, they will be asked for informa- countryintervenes doesnottell the whole Research Support Budget, "How Do Na- tion: story about its trade policy, and misses an tional Policies Affect Long-Run Growth?' * To guide private decisions about essential aspect of intervention: which (RPO 676-66). Copies of the paper are training. goods are favored by subsidies and which available free from the WorldBank, 1818 * Toimprovethemanagementoftrain- are protected by tariffs. Indonesia and H Street NW, Washington, DC 20433. ing systems. Peru, for example, have comparable mea- PleasecontactRebeccaMartin,roomNil- -* To identify impediments to competi- sures ofintervention, but the relative price 053, extension 39065 (48 pages). tive labor markets. ofequipmentisveryhighinPeruandvery * To help rationalize public invest- low in Indonesia; consumer nondurables mentsin education and training- appear to flow freely in Latin America, 839. Regional Integration under Adams, Middleton, andZidermanintro- while prices for these goods in Japan and VERs: When Trade Diversion duce techniques for manpower planning Koreaareinexplicablyhigh.Understand- is Unambiguously Beneficial that acknowledge the dynamic nature of ing differences in the growth experience market economies. Theyreject the idea of ofthese countries clearly requires a more David G. Tarr forecasting manpowerrequirements, pro- subtle view oftrade policythan "outward' (January 1992) posing instead to use signals from the la- and 'inward! orientation, and a more in- bormarketpickedupbymonitoringmove- formed understanding of the nature of The creation of a North American free ments in wages and employment and intervention. trwde area and other trading blocs is likely evaluating training programs. The debate has been confused by the to resultintrade diversion in sectors where This paper - a product of the Educa- failure to distinguishbetween tradeinter- protection is exercised through voluntary tion and Social Policy Department - is vention and outward arientation. Trade eport restraints (VERs). Such tndediuer- part of a larger effort in the department intervention implies policies that distort sionwill benefittheinporting country but to study the operation of labor markets the flow or pattern of trade; outward ori- will hurt exporting countries outside the and their impact on human resources entation impliesincentives to export that trading bloc 20 Policy Research Working Paper Series Tarrargues that trade diversion basedon They conclude that some countries suc- guidance can be given to other countries, tariff preferences can be welfare-reducing cessfully absorbed the external shock of more analysis is needed on how changes because there is a tradeoff between im- the 1980s by: in marriage behavior were brought about proved resource allocation and a loss in * Minimizing the effects of the exter- in Tunisia. The cross-sectional analysis terms of trade - where the latter loss nal shockby combining external and do- usedinthispapercouldnotaddressissues equals the losttariffrevenueoftheimport- mestic debt strategies. of what determined the age of marriage. ing country. * Adjusting their fiscal deficits. Asecond majorfactorin fertility decline With trade diversion based on rent- * Experiencing a positive external in Tunisia was the increased use of con- transferring quotas such as voluntary shock. traception. The main focus of this paper export restraints (VERs), however, there * Postering growth by stimulating ex- is what determines the practice ofcontra- is no such tradeoff. On the contrary, not port growth and developing domestic fi- ception. The general increase in the use only does the importing country improve nancial markets. ofcontraception was the result ofa strong itsresourceallocationbutitalso improves No single country fully implemented family planning program as well as in- its terms of trade. So for the importing this strategy, those most successful in creases in education over time. The fam- country, trade diversion under VERs is doing so were Morocco, Portugal, and ilyplanningprograninTunisiais consid- unambiguously beneficial. Turkey. ered one of the best in the world. * For exporting countries outside the re- Their experience contrasts with that of There has been a substantial program gional trading bloc, however, there is an some Latin American countries that ex- to improve the access of the rural, poor, unambiguous loss. They continue to sell perienced a similar external shock but and least educated population groups to the same VER-constrained quantityin the failed to undertake fiscal adjustment and family planning. Although in the last 10 importingcountrybutatareducedprice. financed most of their deficit through years contraceptive use increased the Therefore they unambignously lose on money finance - thus experiencing high most among the least educated women, their trade in VER-constrained products inflation levels and overburdening their thesegroupsarestillservedlesswellthan from the creation of a regional trading private sector. In some respects, Yugosla- themoreprivileged.Weknowtbisbecause bloc. via had the same experience. the uneducated women have one child This paper - a product of the Trade This paper - a product of the Private more, on average, than they say they Policy Division, Policy Research Depart- Sector Development and Finance Group, want. ment - is part of a larger effort in the Technical Department, Europe and Cen- Other countries studying their own de- department to assess the effects of re- tral Asia and Middle East and North Af- mographic transition should study the gional trade integration. The research was rica Regions -is part of ECA/MNAs re- history of the fertility decline in Tunisia. funded by the Bank's Research Support gional study on external debt and infla- Cross-sectional analysis of what deter- Budget, "The Impact of EC 1992 and Re- tion- Copies of the paperare availablefree mines contraceptive use and fertility as gional Integration on SelectedMediterra- from the World Bank, 1818 H StreetNW, carried out in this paper can be used to nean Countries" (RPO 675-64). Copies of Washington, DC 20433. Please contact guide Tunisia itself on where it might this paper are available free from the Luz Hovsepian, room H9-065, extension most profitcbly expand its activities to World Bank, 1818 H StreetNW, Washing- 37297 (68 pages). increase contraceptive use and thus fer- ton, DC 20433. Please contact Dawn tility decline. Ballantyne, room N10-023, extension The results in this paper show the cen- 37947 (7 pages). 841. How Access to Contraception tralroleofmortalitydeclineandaccessto Affects Fertility and Contraceptive contraception in this process. Health fa- Use In Tunisia cilities, especially clinics, and good water 840. PublIc Sector Debt, Fiscal are important in reducing mortality, Deficits, and Economic Susan Cochrane and David K. Guilkey whichin turn increases the motivation to Adjustment: A Comparative Study (January 1992) restrict fertility and the likelihood that of Six EMENA Countries people will act on that motivation. What were the important factors in The effects lag, however. Access to Alfredo E. Thorne and Azita Dastgheib Tunisia'sfertilitydec in?BWettereducatfion health facilities at age 20 matters more. (January 1992) for worn eand more access lofamilyplan- than current access in affecting motiva- ning and contraception and to all the tion.Thus, along-term program tofurther Why did some highly indebted Latin things that contribute to mortality declne reduce mortality is important. Hospitals American countries experience high infla- - including health care facilities (espe- and doctors in rural areas appear to play tion as a result ofthe external shck ofthe cially clinics) and good water. less clear a role than clinics, but further 1980s, while other countries managed to analysis of what determines mortality- absorb the shock and resume growth? To a great extent, fertility decline in Tu- especially in rural areas - would be nisia can be explained by the rise in the neededtodesignaproperhealth strategy. Thorne and Dastgheib analyzed the expe- age at which women marry, probably be- The structural model Cochrane and riene of six countries in the EMENA re- cause they are better educated and be- Guilkey use is designed to distinguish gion (Algeria, Morocco, Pakistan, Portu- cause social legislation has given them exagenous from endogenous variables - gal, Turkey, and Yugoslavia), and com- more rights. This legislation has ranged to separate such community variables as pared it with the experiences of Latin from the abolition of polygamy to in- access to family planning from the chan- American countries. creased rights in the work force. Before nels through which they operate. One of Policy Research Working Paper SeIes 21 the most important findings is the impor- lending, so policymakers in South Asia developing countries tends to reinforce a tance of access to family planning and should pursue policies and nondistortion- classical theme ofdevelopment economics: health facilities to the motivation to re- ary incentive systems conducive to the the importance of human capital and i- duce fertility and to act on that motiva- infusion offoreign direct investment flows. nancial markets. tion by using contraception. Many people Husain and Jun's major findings are This paper - a product of the Country in the field have dismissed the measures consistent with the Bank's emphasis on an Operations Division, Eastern Africa De- of motivation used in this study, but the increasinglyimportant role for the private partment, Africa Regional Office and ini- authors found them particularly impor- sector - and direct investment flows - tiated while the author was in Division II, tant. in development. A focus on foreign direct Country Policy, Industry and Finance, This paper - a product of the Popula- investment is appropriate, given current Operations Evaluation Department - is tion, Health, and Nutrition Department constraintsonexternalfinancing,particu- part of a review of cross-country experi- - is part of a larger effort in the depart- larly through traditional bank credits. ence with long-term growth. Copies are ment to study ways to improve family This paper -a product of the Debt and available free from the World Bank, 1818 planning. This research wasfundedby the International Finance Division, Interna- H Street NW, Washington, DC 20433. Banks Research Support Budget, "Im- tional Economics Department - is part Please contactAfsarNokhostin,roomJ10U pediments to Contraceptive Use and Fer- of a larger effort in the department to 281, extension 34150 (30 pages). tility Decline" (RPO 675-72). Copies are analyze the trends and determinants of available free from the World Bank, 1818 capital flows to developingcountries. Cop- H Street NW, Washington, DC 20433. ies ofthepaperareavailablefreefrom the 844. Heterogeneity, Distribution, Please contact Otilia Nadora, room 811- World Bank, 1818 HStreetNW, Washing- and Cooperation In Common 219, extension 31091(58 pages). ton, DC 20433. Please contact Rose Vo, Property Resource Management room 88-042, extension 33722(50 pages). Ravi Kanbur 842. Capital Flows to South Asian (January 1992) and ASEAH Countries: Trends, 843. How Financial Markets Affect Determinants, and Policy Long-Run Growth: The more heterogeneous agents are along Implications A Cross-Country Study relevant dimensions, the less lkely coop- erativeagreementsaretocomeabout And Ishrat Husain and KwangW. Jun Ujaz Ghani existing agreements are more likely to (January 1992) (January 1992) break domas agroup becomes more het- ergeneous. Foreign direct investment has been more Acountrywitha moredevelopedfinancial influential than other types of resource system tends to grow fister because it can Kanbur considers the role of'grouphetero- flows in shaping economic growth in make more efficient use ofresources.Policy geneityinthesuccessorfailureofcommon ASEAN countries. South Asian reform that fosters ftnancial development property resource management He ar- policymakers can also facilitate the inf u- also fosters a better growth rate for real guesthatcooperativeagreementsareless sion of foreign direct investment flows if GD. likely to come about when agents am theypursuepolicies and nondistortionary highly heterogeneous along relevant di- incentive systems similar to those of Empirical studies on new growth theory mensions-andexistingagreements are ASEAN countries. have tended to ignore financial policy's more likely to break down as a group be- role in development. Ghani provides evi- comes more heterogeneous. Husain and Jun compare the experiences dence that the initial level of financial Kanbur crystallizes his argument in of selected Asian countries in attracting developmentis positively associated with simple numerical examples and illus- different forms of external financing and a counrys later GDP growth rate, after tratesbyreferencetocase studiesoncom- examine how that financing has contrib- controlling for the effect of the starting monpropertyresourcemanagement-in uted to growth. They carry out the analy- value of human capital and the invest- particular, cases involving fisheries and - sis for two subgroups- South Asian and ment rate. irrigation systems. More work is needed ASEAN countries-with distinctly differ- A country that starts with a more de- to substantiate Kanbur's argument, but ent dominant forms of capital flows. veloped financial system tends to grow his analysissofar supports the argument After reviewing recent trends in finan- faster because it can make more efficient that equity and efficiency complement cial flows to individual countries, Husain use of resources. It can do so through sev- rather than oppose each other. and Jun perform a statistical analysis of eral channels, includingbetterevaluation This paper-aproductofthe Research the effects of foreign capital flows on the andmonitoringoffirms,lowertransaction Advisory Staff, Office cf the Vice Presi- macroeconomic performance ofdeveloping costs for financial intermediation, and dent, Development Economics - is a countries in the region. They find that externalities generatedfrominformation background paper for the WorldDevelop- foreign directinvestment has been amore collected and processed in financial mar- ment Report 1992 on environment. Cop- significant positive factorthan othertypes kets. ies areavailablefreefrom the World Bank, ofresource flowsin shapingthe economic Policy reform that fosters financial de- 1818 H Street NW, Washington; DC growth ofASEAN countries. Substantial velopment also has a significant positive 20433. Please contactthe World Develop- increases in ODA flows are unlikely, and effect on the growth rate ofreal GDP. The ment Report office, room 1-101, exten- so is the resumption of significant bank empirical evidence Ghani presents for 50 sion 31393 (25 pages). 22 Policy Research Working Paper Series 845. Inflation Stabilization This paper - a product of the Country Traditionally, program design decisions In Turkey: An Application Operations Division, Country Depart- havebeenbasedonassumptionsaboutthe of the RMSM-X Model ment I, Europe and Central Asia Region potential impactofalternativestrategies, - is part of a larger effort in the Region with little explicit consideration of their Luc Everaert to enhance itsmacroeconomicmonitoring costs. The workshop aimed to lay the (January 1992) capabilities. Copies ofthe paper areavail- groundwork for incorporating cost data able free from the World Bank, 1818 H into the program design. But lack of Adding estimated behavioralequations to Street NW, Washington, DC 20433. knowledge on the effectiveness of inter- the standard RMSM-X model allows it to Please contact Suzanne Zamorn, room H5- ventions is nearly as great an obstacle to simulate the short-run consequences of 105, extension 36071 (51 pages). sound program design. Amuch improved inflation stabilization. information base in both areas is urgently needed. The model Everaert presents is an exten- 846. Incorporating Cost Cost-effectiveness information is also sion of the simple RMSM-X model devel- and Cost-Effectiveness Analysis essential to ensure that additional re- oped to improve the Country Operations into the Development of Safe sourcesare allocated to Safe Motherhood Division's macroeconomic monitoring and Motherhood Programs by illustrating that a relatively small in-. modelingcapabilities.Addingeconometri- vestment can bring about significant re- cally estimated behavioral equations and Larry Forgy, Diana K Measham, ductionsinmaternalmortalityorimprove the use oflaggedrelationships makes the and Anne G. Tinker other key indicators. Safe Motherhood model fit for short-run simulations while January 192) competes with other better established maintaining an essentially recursive sectoral interests, including Child Sur- structure andthuskeepingcomputational A relatively small investment can reduce vival, which regularly uses cost-effective- costs at a minimum. maternal mortality and morbidity. To ness figures as advocacy and fundraising First, Everaert reviews the theoretical achieve the greatest impact on maternal tools. framework of an inflation stabilization health, resources must be allocated This paper - a product of the Popula- program. Inthe absence ofpricerigidities, soundly within and to Safe Motherhood tion, Health, and Nutrition Department a reduction in inflation simply implies programs. - synthesizes the results of a workshop finding a replacement for revenue lost on the costs and cost-effectiveness of Safe from a decline in the inflation rate. In Little information is available on the ac- Motherhoodprograms.The workshop was reality, backward-looking nominal con- tual costs of implementing Safe Mother- held at the World Bank, April 8-9, 1991. tracts and credibility problems induce hoodprograms, oranhow these costs vary Copiesofthe paper areavailable free from short-run costs, making a fall in the eco- in different settings. Nor is there a con- the World Bank, 1818 H Street NW, nomic growth rate an inevitable part of sensus on the precise goal, content, and Washington, DC 20433. Please contact inflation stabilization. The theoretical structureofSafeMotherhoodprograms- Otilia Nadora, room S11-219, extension framework yields the specificationofafew due largely to a paucity ofinformation on 31091 (37 pages). key behavioral equations to be imple- the relative effectiveness of individual mented in the model. health interventions; ofdifferentlevelsof Next, Everaert shows in detail how this the health system; and of non-health sec- 847. Coping with the Legacies theoretical framework is implemented in torinterventions. Itis difficultto measure of Subsidized Mortgage Credit the RMSM-Xmodel by specifyingdemand the impact of interventions on mortality, In Hungary and supplysides ofall markets An econo- and debate continues on the appropriate- metricallyestimatedshort-run price equa- ness of various intermediate or process Silvin B. Sagari and lic Chiquier tion plays a key role. indicatorsasproxiesformaternal outcome (Jaaay 1992) Everaeres simulation results show that measures. evenifacredibleprogramisimplemented, Participants at a recent World Bank Likemanysocialstcountriesintransition, at least two years of negative per capita workshop on SafeMotherhoodagreedthat Hungary must find a way to reduce the growthar' neededtolbringinflation down it is essential to develop a better under- fiscal burden implicit in the subsidized, from its currentlevels tobelow 10 percent standing of the cost-effectiveness of Safe housing loan portfoo inherited from the a year. The accompanying fiscal effort is Motherhood interventions to design pro- pre-1989 regime The paper discuses dif- great: the equivalent of a 40 percent in- grams and allocate the limited resources ferent ways of dealing with this portfibUo crease in direct tax revenues if no other available in a way that maximizes their during the transition toward a more effi- expenditure or revenue measures are impact on maternal health status. cient and equitable system. taken. Scenarios that do not incorporate At its simplest, a costing methodology strong fiscal action do not succeed in per- would provide guidelines for estimating Sagari and Chiquier examine alternatives manently lowering inflation and lead to the costs of prospective programs, once for dealing with the initial conditions of lower per capita GDP at the end of the designed. When combined with informa- housing finance facing countries making decade than does the scenario of fiscal tion on effectiveness, it could be used to the transition to a market economy and stabilization. Inflation in the Turkish con- give planners an indication of the poten- moving toward a more efficient and equi- text is costly because it reduces not only tial results achievable through a variety table system. thelevelofproductiveinvestmentbutalso of program options subject to the re- The authors focus on the problem of its efficiency. sources at their disposal. restructuring the stock of housing loans Policy Research Working Paper Series 23 that exist at the time a new regime is clined. In 1973, the EC shifted from being returningtohistoricalyields wouldreduce implemented. Almost without exception a net importer to being a net exporter. wheat production and exports substan- the stock of housing loans is yielding Developing countries, on the whole, are tially more than coarse grains. heavily subsidized rates, and its market heavy grain importers. Under scenario 1, developing countries' valueissignificantlybelow itsbook value. The EC's Project 1992 will abolish in- netimportcostsforgrainsfallslightlyand Hungary makes an interesting case ternal trade barriers to facilitate the importsrise,in response tolowerprices.By study. The mortgage portfolio inherited movement ofgoods, persons, services, and 2000, the cost of grain imports for all de- from pastregimes-and the nature of the capital between member countries. One veloping countries falls US$153 (constant measures adopted to deal with the fiscal aspect of the program is elimination of 1985 dollars); Asian and Middle Eastern and institutional problems resultingfrom border taxes and subsidies (called MCAs) developing countries save the most.Under the old regimes-makes especially clear on agricultural commodities. Coupled scenario 2 the return to historical yie. ds the perverse implications of housing fi- with internal pressures toreduceagricul- increases developing countries' cost for nance systems based on across-the-board tural budget expenditures, the EC-1992 3rain imparts by an estimated US$906 subsidized interest rates. program has affected agricultural policy million (constant 1985 dollars). Sagari and Chiquier propose a general by weakening the role of the price inter- Exchange rate variations in member approach to finding options to reduce the vention system. An example was the 1988 countries have also affected the level of fiscal burden implicit in the subsidized adoption of a common agricultural policy protection of EC agriculture. Under cur- housing loan portfolio inherited from the (CAP) reform package called'stabilizers7 rent macroeconomic policies, large price pre-1989 regime. They identify mecha- to limit market price supports. cuts would be necessary to bring produc- nisms to reduce the interest subsidy em- Using an econometric model, Ingco and tion in line with demand. Such price cuts bodied in thatportfolio as well as mecha- Mitchell show the stabilizers and the are not politically feasible, so policies de- nisms to spread the associated losses elimination of the MCAs to have alimited signed to remove land and farmers from among thosebenefitingfrom the subsidies effect on world grain prices and trade. The grain production are likely to be more as well as among other parties. Clearly stabilizers depress the ECUintervention important. But land set-aside schemes any "residuaP subsidy must be absorbed price, but their effect on production is will not significantly affect production by the government and ultimately by the minimal as cutsin nominal ECUinterven- without much higher compensation pay- populationin the form ofincreased taxa- tion prices are partly offset by adiust- ments than are now contemplated. tion or decreased availability of public ments in green exchange rates when This paper-a product of the Interna- services. MCAs are eliminated. In general, the new tional Trade Division, International Eco- The problemis complexandno obvious, arrangements to remove MCAs involve nomics Department-is part ofa larger easily implementable solutions emerge. revaluingthegreenratesincountrieswith effort in the department to understand But delaying action could hardly improve positive MCAs and devaluing them in how developing countries are affected by the situation. countries with negative MCAs. The effect policy reformsin the industrial countries. This paper is a product of the Financial wouldbe agradual increase in grain prices Copies ofthis paper are avallable free from Sector Development Department. Copies in France, Greece, Ireland, Italy, and the the World Bank, 1818 H Street NW, are available free from the World Bank, United Kingdom -more so than in coun- Washington, DC 20433. Please contact 1818 H Street NW, Washington, DC tries with strong currencies, such as Ger- Pauline Kolila, room 87-040, extension 20433. Please contact Melakou Guirbo, many and the Netherlands. 33716 (37 pages). room J9-235, extension 35015 (26 pages). Baseline projections indicate that total EC10 grain production will continue in- creasing as average yields increase 2 per- 849. Financial Structures 848. How EC 1992 and Reforms cent to 2.5 percent a year. Eliminating and Economic Development - of the Common Agricultural Policy MCAs andcontinuing stabilizers (scenario Would Affect Developing 1) would slightly increase grain produc- Rosa levine Countries' Grain Trade tion above baseline as member countries' (February 1992) exchange rate policies adjust Total EC10 * Merlinda. Ingco and Donald 0. MtchelI grain production will increase 2 percent a This paper constructs a model that cap- (Februazy 1992) yearoverbaselinein 1995-2000,butelimi- tures the two-way nature of the relation- nating the CAP and returning to a pre- ship between financial and economic de- How stabilizers, price cuts, and the elimi- CAP growth path for yields (scenario 2) velopment - and allows societies at dif- nation ofborder taxes and subsidies w.uld would produce a decline in grain produc- farent leuels ofeconomic deveopment and affect EC grain production and develop- tion-with total EC1O wheat production with diffe:rent policies to choose different ing countries'grain trade 27 percent below baseline in 2000. financial services. Under scenario 1, eliminating MCAs The European Community (EC) is a ma- causes a slight decline in world wheat and Levine constructs a model that captures jor grain producer, accounting for about coarse grain prices. By 2000, real wheat the two-way nature of the relationship 12percentofworldproduction in 1989-90. prices fall 1 percent and corn prices 0.62 between financial and economic develop- EC grain exports (mainly lower-quality percent below baseline. Under scenario 2, meat - and allows societies at different feed wheat) increased significantly over prices rise substantially. Wheat prices levels of economic development and with the last three decades, and grain imports increase (by 6.49 percent) more than differentpolicies tochoosedifferentfinan- (mainly higher-quality bread wheat) de- coarse grain prices (2.18 percent) because cial services. 24 Polcy Research Working Paper Sedes In this model, various types offinancial shift the balance ofgouernment spending on the sustainability of trade reform in contracts and institutions arise in re- toward nontradabls. As a result, the real structural adjustment loans (RPO 675- sponse to the economic environment. In- exchange rate tends toappreciate-which 32). The paper was presented at Bank centivesforfinancial structures toemerge could undermine theeffectivenessofsimul- seminars held in August and October are generated by liquidity and productiv- taneous trade liberalization. 1991. Copies of the paper are available ity risk, the costs ofgatheringinformation free from the World Bank, 1818 H Street and mobilizing resources, and the costs of Matin examines the effect of fiscal ad- NW, Washington, DC 20433. Please con- financial transactions. The emergence justment on the real exchange rate. He tact Dawn Ballantyne, room N10-023, and development of financial arrange- argues that the direction and extent of extension 37947 (42 pages). ments in response to the economic envi- thateffect depend on the way fiscal adjust- ronment can alter investment decisions ment is carried out. If a fiscal deficit is and per capita growth rates - while the reduced mainly by reducing total govern- 851. Sources of World Bank level ofper capita income helps determine ment spending, the effect on the real ex- Estimates of Current Mortality the types offinancial services a particular change rate depends on whether the ad- Rates society chooses to develop and use. justmentisachieved through proportion- Levine not only reconciles more empiri- ate cuts in both capital and current spend- Eduard Bos, My T.Vu, cal regularities than past theoretical stud- ing or through disproportionately greater and Patience W. Stephens ies have done, but highlights the role of cuts in capital spending.A disproportion- (February L992) public policies on financial activities. ately high cut in capital spending affects Policy has important implications for the the composition of government spending Sources of heinfant mortality rate andlFe rate ofeconomic growth, the level offinan- between tradables and nantradables. expectancy at birth for each of the 186 cial development, and the types of insti- Matin extends the dependent-economy countries for which the Population and tutions providing financial services. model of the real exchange rate, incorpo- Human Resources Department of the Levine's model also predicts that per rating both the level and composition of WorldBank makes demographicestimates capitagrowthratesshouldberelatedtothe governmentspending. He then estimates and projections. types offinancial services provided by the the model for Bangladesh, a country that financial sector. Thus, the most common reduced total governmentspendingin the Bos,Vu,andStephens discuss thesources empirical measure of financial develop- face of growing current expenditures. of estimates of the infant mortality rate ment - the overall size of the financial Bangladesh's fiscal adjustment involved andlife expectancyatbirthforeachofthe system - may not appropriately capture an unsustainably large decline in capital 186 countries for which the Population fundamental features offinancial develop- spending as a share of total spending andHumanResourcesDepartmentofthe ment. Econometric estimates ofthe model for World Bank makes demographic esti- This paper -a product ofthe Financial Bangladesh show that the propensity to mates and projections. Sector Development Department - is spend on nontradables is greater for gov- The intention is to -ve some back- part of a larger effort in the department ernmentspending than for private spend- ground on the derivation ofmortality es- to study the relationship between finan- ing and greater for the governments cur- timates and projections usedin the Bank's cial and economic development. This re- rent spending than for its capital spend- demographic estimates and projections, so search was funded by the Bank's Research ing. This result is highly robust across people who use the data knowhow recent Support Budget, "How Do National Poli- different measures of the real exchange and reliable they may be. cies Affect Long-Run Growth?"(RPO 676- rate and acoss different methods of esti- Bos, Vu, and Stephens discuss mortal- 66). Copies ofthe paper are available free mation. Thus as Bangladesh's fiscal ad- ity projection methodology and list the from the World Bank, 1818 H Street NW, justment shifted government spending sources and assumptions used in con- Washington, DC 20433. Please contact toward nontradables, the real exchange structing estimates for individual coun- Wilai Pitayatonakarn, room N9-003, ex- rate tended to appreciate. tries. They alsoplantoissue acompanion tension 37666 (39 pages). Matin emphasizes twoimportantimpli- paperonthe sources offertility estimates. cations of such fiscal adjustment for de- The first section of the paper provides veloping countries like Bangladesh: an overview of the sources of data, dis- 850. Fiscal Adjustment * When fiscal adjustment involves cussestheirnature,andexplainsthepro- and the Real Exchange Rate: unsustainably heavy cuts in capital jectionmethodologyusedtoarriveatcur- The Case of Bangladesh spending (a trend that is now being re- rent estimates. versedin Bangladesh), appreciation ofthe In the secondsection, the authors docu- Kazi M Mati real exchange rate misaligns that rate, mentmortality data sourcesforeachcoun- (February 1992) causing a misallocation of resources. try, organized by region. * When disproportionate cuts in capi- This paper - a product of the Popula- How cuts in government spending affect tal spending occur at the same time as tion, Health, and Nutrition Department thereal exchangerate depends on whether trade liberalization, appreciation of the - is part of a larger effortin the depart- a gouernment achieves fiscal adjustment real exchange rate undermines the effec- ment to construct and document indica- through proportionate cuts in capital and tiveness of trade liberalization. tors of human resources development. current spending or through dispropor- This paper - a product of the Trade Copiesofthepaperareavailablefreefrom tionate cuts in capital spending. Dispro- Policy Division, Policy Research Depart- the World Bank, 1818 H Street NW, portionate cuts in capital spending may ment-ispartofalargerresearchproject Washington, DC 20433. Please contact Policy Research Working Paper SerIes 25 Otilia Nadora, room S11-219, extension tives that encourage providers to behave ofthe banking system fal). But in devel- 31091 (23 pages). in a manner consistent with social goals. oping economies, banksmay possess lim- This is achieved most easily with direct ited information about only a few large insurance, where the goals of the insurer firms, and the potential for destroying 852. How Health Insurance Affects and the provider are identical, but third- much information capital is great. Partly the Delivery of Health Care party payers can also take an active role. for this reason, some countries - espe- In Developing Countries Problems promoting efficient and equi- cially very poor ones with undiversified table delivery ofhealth services are mag- financial systems -have difficulty with Joseph Kutzin and Howard Barnum nified when an insurer serves merely as a financial reform. (February 1992) financial conduit forreimbursing provid- Caprio argues that policy advisors ers. Goals of efficiency and equity can be shouldbecircnmspectinforecastingrapid The goal ofdelivering health services effi- moreeffectivelypromotedbys.ninsurance post-ajustmentrecovery, and structural Iiently and equitably can be more effec- institution that actively organizes con- adjustment and financial reform pro- tively promoted by an insurance institu- saumers! entry into the health system and grams should consider the extenttowhich tion that actiuely organizes consumers' removes the financial incentives that en- bank relationships are going to be dis- entry into the health systern and removes courage providers to increase the volume rupted, either by failing banks or by the the financial incentives that encourage and cost of services. destruction of information. providers to increase the olume and cost This paper - a product of the Popula- The accepted wisdom is that financial of services. tion, Health, and Nutrition Department reform should not precede teal" sectr - is part of a larger effort in the depart- adjustment, or banks will get in trouble To alleviate financial crises, many devel- ment to develop efficient and equitable by lending at disequilibrium prices. But oping countries are considering health health sectorpricingand insurance strat- postponingallfinancialrefbrmuntilstruc- insurance as an option for increasing egies. Copies of the paper are available tural adjustment is complete is equally available resources in the ,walth sector. free from the World Bank, 1818 H Street dangerous: unless the financial sector is Butbesidesaffectingrevenues,insurance NW, Washington, DC 20433. Please con- prepared, investors will not have enough also affects how efficiently and equitably tact OtiliaNadora, room 811-219, exten- capital to invest, even given credible pro- health services are delivered. sion 31091(20 pages). grams. To understand bow insurance affects One potential form ofpreparation is an the deliveryofhealth services, Kutzin and extension service for the financial sector, Barnum studied systemsin Brazil, China, 853. Policy Uncertainty, to give firms accounting training and to Korea, and Zaire. They loolcedat the fol- Information Asymmetries, help auditing firms get started. Partial lowing characteristics of insurance pro- and Financial Intermediation guarantees to younger firms in, say, the grams the system forreimbursingprovid- export sector (after devaluation) might ers, the services covered, the insurer'srole, Gerard Caprio help of[setsomeoftheriskassociated with the extent to which beneficiaries help (February 1992) lending to new clients. The period of un- cover costs, and the proportion ofthe popu- certainty should persistfor only alimited lation covered by insurance. Policy advisors should be circumspect in time -at most, two to three years after Kutzin and Barnum use the following forecasting rapid post-adjustment recow- structural adjustment; a asunset" period indicators for efficiency and equity in the ery, andstructuraladjustmentandfinan- shouldbefirmlyimposedonanyoubsidies. deliveryofhealth services:costescalation, cialreformprgram should consider the Alternatively, governments could give resource allocation, the use of specific extent to which bank relationships will be an investment tax credit on information medical technologies, and equityofaccess disrupte, either by failing banks or by the capital. Because infarmationis dificultto to services, destruction of information. measure, the credit would be equal to - They conclude that insurers must take some small proportion of loans made. In anactiverolein establishinginstitutional Financial reform is often accompaniedby effect, this would amount to the govern- mechanisms (such as contractual obliga- other changes, including structural ad- menttemporarilybuyingdowntheratefor tions) that encourage health service pro- justment; the success of the combined beneficiaries. Even after such ataxeredit viders to make efficient and equitable experiment depends on the extent and program expires, bank spreads could be decisions aboutresourceallocation.Incen- efficiency of subsequent investments. expected to be sizable, since lending to tives to providers are important because Entrepreneurs' judgments about invest- newer firms is more costly than lending they determine the supply ofservices and ingin a post-reform world (often affected to a few large enterprises. But as these can also tremendously affect demand. bythecostsofentryandexitandtheprob- new firms grow, spreads should decline. As examples from Brazil, China, and ability that areform will be reversed) are The best candidates for reform - in Korea show, providers can increase the important but so are banks consider- bothrealandfinmancialsectors-arecoun- use of curative services so much that ations ofthe sunk costs ofinvestments in tries with more diversified banking sys- health care costs escalate rapidly, re- both physical capital and information tems. These are more likelyin well-diver- source allocation in the sectoris distorted, development. sifled economies, with norecent history of medical technologies are inappropriately In industrial economies in normal severe financial repression. Countries used, andaccess to services is inequitable. times, information costs are low, banks that have tightly limited residents' abil- To correct these distortions, a public in- have ampleinformation, and information ity to hold foreign assets may face a port- surance institution should create incen- is rarely destroyed (as when a large part folio adjustment as they ease capital con- 26 Policy Research Working Paper Series trols under reform, since they are in effect Akiyama uses a model to calculate the citrant debtors; debt relief and the 'debt introducinganotherpotentiallylower-risk optimal tax and to evaluate the effect of Laffer curve"; the role of official lenders; asset. Countries that have had relatively the tax and otherfactors on welfare. Simu- and debt buybacln. open capital markets will be better off lation results show that the optimal level since they do nothave pent-up demand for of the export tax depends on how farmers The troublesome debts of mar - develop- such assets. and government form their expectations ing countries have spawned much litera- Well-capitalized banking systems will of future prices. He found that the tax is ture on why countries borrow, on what naturally tendtofare better underreform, indeterminate when the government does debt contributes to growth, on why coun- even though ample financial capital may not know how farmers form their expec- tries repay, and on how to deal with exist- not lead banks to lend aggressively in the tations and when farmers' expectations ing debt. Eaton provides an analytical face of greater uncertainty (such as sub- are independent of recent prices or taxes. primer on the following aspects of sover- stantially reducedinformation). Clear sig- The government can only impose an "es- eign debt: nals fromreforming governmentson where timated"optimal taxbecause the taxto be * The basic accounting concepts asso- policies areheadedwillhelpbothentrepre- imposed depends on the government's ciated with debt and some data, partica- neurs and their financiers. Without these expectations of world prices. Whether the larly about the net resource transfers as- signals, banks will not be sure where to tax is optimal or not depends on whether sociated with external borrowing. concentrate their investmentin gathering the government'sexpectations aremetby * The mechanics of debt and growth information, and periods of loan retrench- reality. To impose arealistic tax, the gov- impliedin the Harrod-Domarand two-gap ment are more likely to be prolonged. ernment needs to know the farmers' ex- growth models. Eaton points outhow this This paper-a product ofthe Financial pectations and the prospects for world analysis canyield misleading conclusions Sector Development Department - is prices of a particular perennial. about the sustainability of debt and the part of a larger effort in the department Aiyama's numerical example shows determinants of solvency. to study the process of financial reform. that national welfare is notvery sensitive * Debt as a component of an optimis- This research was funded by the Banks to the tax rate. But the tax does signifi- ing model of borrowing in a competitive Research SupportBudget, "The Impactof cantly affect the distribution of benefits loan market, when the borrower faces an Financial Reform (RPO 676-13). Copies between farmers and government- and intertemporal budget constraint of the paper are available free from the significantlyaffectslong-term production. * Debt as a component of recent mod- World Bank, 1818 H Street NW, Washing- The numerical example also shows quan- els ofendogenous growth. Eaton concludes ton, DC 20433. Please contact Wilai titatively how much interest rates, ex- that what debt contributes to growth de- Pitayetonakarn, room N9-003, extension changerates, andmarketingand produc- pends greatly on the source of growth. 37666 (26 pages). tion costs affect welfare and, in the long * Problems arisingfromsovereignrisk, run, the perennial subsector including problems of liquidity, enforce- Aldyama concludes that in imposing an ment, and revenue-raising to finance re- 854. Is There a Case for an Optimal export tax on perennials, a government payment (and the attendant problem of Export Tax on Perennial Crops? should give less consideration to the ta)es capital flight). optimality andimore to how the tax aflfects * Incentives to repay. Maintaining ac- TakamasaAldysma welfare distributionandlong-termproduc- cess to credit markets can by itself be a (February 1992) tion. reason to repay enough to sustain sub- This paper - a product of the Interna- stantial debt levels. In imposing an export tax on perennial tional Trade Division, International Eco- * Options available toacreditor whose crops, a gouernment should give less con- nomics Department - is part of a larger debtor is unwilling to meet current debt- siderationto thetax's optimality and more effort in the department to analyze and service obligations. to how the tax affects the perennial's long- evaluate trade policiesin developingcoun- * Debtbuybacks.Eaton concludes that term production and the distribution of tries. Copies ofthe paperareavailable free in the absence of any efficiency cost im- welfare. from the World Bank, 1818 HStreetNW, posedbyoutstandingdebt(so thattheonly Washington, DC, 20433. Please contact implications of the form and extent ofre- The idea of an optimal export tax on a Grace Ilogon, room 87-033, extension paymentareforthedistributionaofsrplus - commodity is based on the assumption 33732(39 pages). betweenborrowerandlender),howmuch that by imposing a tax, a country can abuyback benefits the borrower depends improve its welfare (the sum of producer on how much buying back debt reduces surplus and government revenues) when 855. Sovereign Debt: A Primer what is available for repayment later. itfacesa downward-slopingdemand curve Eaton also concludes that if there are for the commodity. The ideais thought to Jonathan Eaton efficiency losses associated with debt (a be particularly relevant to producers with (February 1992) "debt overhang"), debt forgiveness can large world market shares for primary benefitboth adebtornationandits credi- commodities for which the price-elasticity Asurvey ofanalyses offlarrod-Domar and tors. Contrary to claims in the literature, of demand is low. An export tax is consid- two-gap models of debt and growth; opti- this outcome does not require that a re- ered necessary because the scattered mizing models of borrowing; solvency. duction in the face value of debt raise its farmers' expected marginal revenue is debt, and endogenous growth; sovereign market value (a "debt Laffer curve"), and higher than the marginal revenue of the risk; incentives to repay; the role of sanc- the debtor benefits even though the buy- country as a whole. tions and reputation in dealing with recal- back raises the market price of the debt. Policy Research Working Paper Series 27 The efficiency argument for buybacks is improve efficiency and reduce poverty. ciency and profitability, it is difficult to inconsistent with the case for lengthening Other policy-based factors that can af- assess industry perfrmanea the debt's maturity. feet women's participation in the work This paper- a product oftheDebt and force include the availability of family The U.S.life insuranceindustrycomprises International Finance Division, Interna- planning servicesandchild-care facilities. more than 1,200 active companies with an tional Economics Department - is part Women's participation in the labor force impressive record of innovation. Annual of a larger effort in the department to can also be affected by improving family premiums for life insurance and annuity understand the relationship of external law and tax regulations that create hard- products amount to about 5 percent of borrowing to economic development. Cop- ships for women, especially in the Carib- GNP and total assets to 26 percent of ies of the paper are available free from the bean, where internal and overseas migra- GNP. World Bank, 1818 H StreetNW, Washing- tion are common (women as urban domes- Life insurance companies are major ton, DC 20433. Please contact Rose Vo, tic servants and men as industrial work- participantsinUS.capitalmarkets.They room S8-042, extension 33722(83 pages). ers abroad), where visiting partnerships investin all types ofbonds, mortgage loans are common, and where women are often and mortgage-backed securities, and cor- thrown into a vicious cycle of poverty and porate equities. Theyhold aboutone-third * 856. Latin American Women's an inability to work. of all corporate bonds and about 15 per- Earnings and Participation Psacharopoulos and Tzannatos found cent ofmortgage-backed securities. Con- In the Labor Force that the same marginal investment (one servative policies and regulations keep additional year ofeducation) yieldshigher their holdings in corporate equities down George Psachampoulas and Zafiris Tzannatos returns for women than for men; and that to only 3 percent of all corporate equities (February 1992) the most cost-effective approach is to - and to about 9 percent of their total emphasize increased primary education assets (compared with 38 percent for cor- Despite worsened economic conditions for poorly educated women rather than porate bonds and 13 percent for govern- since the 1970s, womren's participation in more public tertiary education for more ment bonds)- thelaborforcehasir reasedsignificantly advantaged women. Indescribingthecharacteristicsofprod- sincethe 1950s-possibly because women In all of the countries studied, women acts that life insurance companies offer, have benefited disproportionately from are rewarded less than men and gender Wright highlights how fiscal incentives expansion ofthe public sector. Soundpub- differencesinhuman capital endowments promote long-term financial savings. He lic policy on education, fimily planning, account for an average of about a third of notes that although federal tax laws are childcare and taxes - as well as public the observed difference in earnings - complex, their guiding principle is to fa- efforts to increase women's job opportuni- primafacie evidence of discrimination. On vor insurance protection and saving for ties - is most likely to improue womenIs the other hand, women appear to be re- retirement, while discouraging the abuse (and hence children's) welfare. warded more proportionate to their h- of tax privileges for short-term invest- man capital endowments than men are ment. Using historical census data and the lat- This maybe because they benefit dispro- Insurance regulation is fragmented esthouseholdsurveys,Psacharopoulosand portionately from expansion of the public among state authorities, but coordinated Tzannatos investigate changes in female sector. throughtheNationalAssociatianofInsur- employmentin Latin America, the factors This paper - a product of the Human ance Commissioners (NAIC). New York that determine women's participation in Resources Division, Latin America Tech- state rules are influential because compa- the labor force, and the reasons for the gap nical Department - is a summary of a nies based elsewhere that want to operate between men's and women's earnings. larger LAC study funded largely by the in New York must comply with New York Psacharopoulos and Trannatos find, to Norwegian Trust Pund. Copies ofthe pa- rules. their surprise, that despite worsened per are available free from the World Regulation emphasizes prudence and - economic conditions since the 1970s, Bank, 1818 HStreetNW, Washington, DC solvency-There are nominimumrequire- women's participation in the labor force 20433. Please contactlilianaLongo, room mentsforinvestingin government bonds has increased significantly since the 813-055, extension 37786(38 pages). or"bigh-pririty'sectors,buttightmaxi- 1950s. One explanation may be that mum limits are often imposed on differ- women - especially educated urban entassets, especiallyholdingsofcorparate women, mostofwhom probablycomefrom 857. The Life insurance Industry equities, and on agents commissions. In themiddleandupperclasses-benefited In the United States: An Analysis recent years, regulations have empha- disproportionately from expansion of the of Economic and Regulatory sized the 'prudent mar rule and have public sector. The factors that have most issues relied on solvency monitoring - includ- affected women's decisions to join the ing the use of valuation reserves for in- work forcehave been (after controllingfor Kenneth M. Wright vestment assets - to ensure insurance age) education and family conditions (February 1992) companies' safety. (whether the woman is married, is ahead Wright underscores the lack ofsatisfac- of household, or has children). Creating In the complex, highly developed U. life tory measures ofefficiency andprofitabil- opportunities for women's education and insumnceindustry, regulation emphasizes ity, which is explained by the long-term employment when such factors are absent prudenceandAolvency anddoesnotinhibit nature of the contracts, differencesin the because of market failures (of which dis- competition and innovation. But because use ofmortalitytablesanddiscountrates, crimination may be only one cause) will there are no satisfactory measures ofeffi- and differences in the valuation of assets 28 Policy Research Woting Paper Series and the treatment of unrealized capital The structure ofa country's financial 859. Macroeconomic Management gains. This hampers an objective assess- system depends greatly on the organiza- and the Black Market for Foreign ment of the industrys performance and tion of the country's pension system. Exchange In Sudan raises problems for insurance taxation. * Contractual savings do not increase Wright also reviews some public policy the rate of saving but shift the composi- Ibrahim A. Elbadawi issues that affect life insurance compa- tion of total savings toward long-term fi- (February 1992) nies, including nontaxation of the compa- nancial assets. nies' investment income, life insurer sol- * The role of contractual savingsinsti- High exchange rate premiums make con- vency, state versus federal regulation, tutionsin securities markets reflects his- trolling inflation more difficult and hurt guarantee funds and moral hazard issues, torical traditions and differences in regu- both official exports and tax revenue from investment regulation and safety, ac- lation. Despite their great potential, they foreign trade. A high premium also accel- counting standards for asset valuation, are important players in the equity mar- erates capital flight. and links between banks and insurance kets of only a few-mostly Anglo-Ameri- companies. can - countries. And they have played Elbadawi uses a simple general equilib- Thispaper-aproductoftheFinancial only a limited part in stimulating the rium model to derive a forward-looldng Sector Development Department - is growth of emerging securities markets, linear solution for the premium on the part of a larger ef fart in the department even in countries such as Chile, Korea, black market for foreign exchange in Sn- to study policies that promote financial Malaysia, and Singapore, where contrac- dan. sector development. Copies of the paper tual savings institutions have accumu- His solution accounts for the long-run are available free from the World Bank, lated substantial long-term financial re- fundamentals of the premium that oper- 1818 H Street NW, Washington, DC sources. ate through the current account balance. 20433. Please contact Wilai * Investment regulations must aim at Ital soaccounts for the short-run determi- Pitayatonakarn, room N9-003, extension ensuring the safety and profitability of nants of the asset market Estimates 37666 (47 pages). contractual savings. Encouraginginvest- based on Sudanese data broadly corrobo- ment prudence and developing effective rate the model's predictions. supervision should be basic objectives of Elbadawi's thesis is that successful ex- 858. Contractual Savings public policy, change rate unification and subsequent and Emerging Securities Markets * Contractualsavingsinstitutionscan integration of the parallel market into haveagreatimpactonsecuritiesmarkets. Sudasregulareconomywill require deep Diruitri Vittas They can completely transform the fune- fiscal reform and liberalization of trade (February 992) tioningofsecuritiesmarkets,facilitate the and exchange rate policies tailored to the privatization process, promote the disper- pace of macroeconomic reform. Contractual savings institutions - pen- sionofcorporate ownership, andimprove His results show that controllinginfla- sion funds and life insurance companies corporate efficiency. tion becomes more difficult under high- -aregrowing in several developing coun- Pension funds and life insurance com- premium regimes and that higher premi- tries. Their contribution in the 1980s to the panies are growing in several developing ums hurt official exports and taxrevenue impressiveperformanceofemergingstock countries. Their contribution to the per- from foreign trade- Ahigh premium also markets has been limited. But the increas- formance of emerging stock markets has tends to accelerate capital flight. ing emphasis on financial liberali;ation been limited because investment regula- This paper - a product of the Transi- anddevelopmentoftheprivatesectorsug- tions have favored government bonds- tion and Macro-Adjustment Division, gests that their role and impact will in- Their potential impact on equity markets Policy Research Department -is part of crease substantially. has remained largely unrealized, but the alargerdepartmentalresearchprojecton growing emphasis onfinancialliberaliza- the macroeconomic implications of mul- Contractual savings institutions - pen- tion and development of the private see- tiple exchange markets in developing0 sion funds and life insurance companies tor suggest that theirrole andimpact will countries. Copies of the paper are avail- - have long been important institutions increase substantially. able free from the World Bank, 1818 H in several developingcountries.But, with This paper -aproduct oftheFinancial Street NW, Washington, DC 20433. (88. notable exceptions, they have been weak Sector Development Department - was pages). Please contact Anna Maranon, and underdeveloped. Some of this is at- prepared for inclusion in a book on the room N11-042, extension 39074. tributable tolowlevels ofincome in devel- world's emerging stockmarkets, editedby oping countries and some ofitto the nega- Antoine Van Agtmael. Copies of the pa- tive impact ofrepressive regulations and per are available free from the World 80. The Restrictiveness the existence ofpay-as-you-go sodal secu- Bank, 1818 IStreetNW,Washington,DC of the Multi-Fibre Arrangement rity systems. 20433. Please contact Wilai on Eastern European Trade Vittas briefly reviews the size of con- Pitayatonakarn, room N9-00, extension tractual savings institutions in selected 37666 (20 pages). Refik Erzan and ChristopherHolmes developed and developing countries and (Februmy 1992) assesses their role in the development of the financial sector - especially in the Eastern European textile and clothing development of securities markets. He exports havetfacedrestrictioeMFA quotas stresses five points: in theEurpean Communityand excessive Policy Research Working Paper Series 29 tariffu in the United States. Eastern Eu- 861. Private Saving in Mexico, clineinprivatesavingappearslesimpor- ropeanexports in this sector seem to be too 1980-90 tant than it did before. diversified and capital-intensive. This * Most variations in private saving situation should improve withpreferential Patricio Arran and Daniel Oks between 1980 and 1990 are ascribable to treatment in OECD markets or the relax- (February 1992) fluctuationsin disposableincome.Dispos- ation of MFA quotas. able income fluctuated considerablymore By conventional measures, private saving than did private consumption. Erzan and Holmes found that the Multi- dechnedsharplyinMexicin 1987-90. The * The sharp drop in private saving in Pibre Arrangement (MFA) restrained the picture changes when data are corrected. 1990 was prompted primarilybyadecline trade of Eastern European countries as The smaller declineinprivate saving that in disposable income and, less so, by fast- much as it restrained the trade of other results is due mostly to a reduction in pri- growing consumption. suppliers, such as the East Asians. In the vate interest income from domestic and * Only a quarter oftheincrease incon- TJnited States, the MFA quotas were foreign assets. sumption in 1988-90 was attributable to rarely an effective restraint; there, the increased consumption of durables - high non-MFN (most-favored nation) tar- Between 1987 and 1990, Mexico's current whichgrewalmostthreetimes faster than aiffs were considerably more important accountandtradebalancedeterioratedby consumption ofotheritemsbutrepresents barriers than the MFA quotas. more than US$10 billion. Higher invest- only a small share (about 11 percent) of Historically, Eastern Europe has not ment accounts only partly for this deterio- total consumption. been favorably treated in terms of quota ration; norcanit be attributed to the pub- * Fluctuations in the real exchange growth in the EC and U.S. markets - liEc sector. By conventional (unadjusted) rate played an important role in the evo- often quite the contrary.ButEC and U.S. measures of private saving - the total lution of public saving because that ex- treatment of these countries has already investment not financed by public or for- change rate influences the real interest changed since their reform and can be eign savings-private saving did decline service on foreign debt Real peso devalu- expected to become even more favorable. sharply between 1987 and 1990. ations in 1982 and 1985-86 hurt public Eastern Europe's exports oftextiles and But that diagnosis does not hold true finances and real peso appreciation later clothing have tended to be more capital- when private, public, and foreign savings helped them. Strong real peso apprecia- intensive and less specialized than those are corrected (as they are here) to account tionin 1988 and, toalesserextentin 1990 of other major suppliers, including Asia's for shiftsin partfolio compositionfromfor- reduced real income from private foreign newly industrialized economies. Erzan eign to domestic assets, for the effects of assets, reducing private saving in those and Holmes argue that Eastern Europe's inflation on foreign and domestic interest years. expansion of relatively labor-intensive income (the inflation tax), for fluctuations This paper-ajaintproductofthe Debt products has probably been inhibited by in the real exchange rate, and for other andInternational FinanceDivision, Inter- quotas and by the weak adjustment factors. national Economics Department, and mechanisms inherent in a centrally Arran and Oks providemoreinformation Country Operations Division, Country planned economic system. about the components of private saving Departmaentl,LatinAmericaand the Car- If so, given market reforms in Eastern than most studies do, addressing such ibbean - is part of a larger effort in the Europe, exports oflabor-intensive textiles questionsas thefollowing-Isconsumption Banktoidentifyexternalandinternalfac- and clothing should expand more than moreimpartanttban disposableincomein tors that affectsavings andinvestmentin proportionately and the degree ofspecial- explaining changes in private saving? developing countries. Copies of the paper ization should increase ifthe MPAis abol- What components ofconsumption and dis- are available free from the World Bank, ished or its grip on Eastern Europe's ex- posable income matter the most? If for 1818HStreetNW,Washington,DC2048. ports is relaxed in the EC. example, the bulk of consumption growth Please contact Rose Vo, room 88-042, ex- Putting aside questions of the composi- is accountedforby durable consumption in tension 33722 (47 pages). tion ofexports, Erzan and Holmes expect the wake of trade liberalization, the mea- considerable expansion of textile and sureddeclineinprivatesavingneednotbe clothing exports because they make up a cause for concern as it would be for a once- 862. Higher Education in Egypt )arge part of labor-intensive manufae- and-for-all stock adjustment in durable tures, where Eastern Europe's compara- goods. On the other hand, if the main fac- Alan Richards tive advantage lies in the near future. tor behind the recent decline in private (Febrary 1992) This paper - a product of the Interna- saving is disposable income (rather than tional Trade Division, International Eco- consumption), itisuseful toidentify which Education inEgypt must increasepeople's nomics Department - is part of a larger component of disposable income accounts ability to respond quickly and effectively effort in the department to assess the im- for the dedine. If, for example, the decline to changing technological and market op- pact of the Multi-Fibre Arrangement an in disposable income stems from a reduc- portunities. Egypt is therefare stabilizing developing countries and to evaluate the tion in the domestic public debt service, university enronllent, boosting non-uni- effects ofchangesinEastern Europe. Cop- there maybe less cause for concern than if versity technical institutes, andpromoting ies of the paper are available free from the it stems from non-interest income. interdisciplinary prqgrams that stres World Bank, 1818 H Street NW, Washing- The following are among the conclu- problemsolm iqg and applied work ton,DC20433.PleasecontactGramEogon, sions of Arrau and Oks: room S7-033, extension 33732 (33 pages). * When conventional measures ofpri- Egypt's policy on higher education, vate saving are corrected, the recent de- Richardsargues,muettakeaccountofthe 30 Policy Research Working Paper Series realities of declining government budgets 863. Intergovernmental FISCal best meets this latter objective. A re- and employment and increasing reliance Relations In China formed system must also underpin price on the private sector, which must become and enterprise reform - and should be more competitive internationally. Educa- Roy Bahl and Christine Wallich designed so as not to require major tion in Egypt must increase Egyptians' (February 1992) recalibration or adjustments while such ability to cope with economic disequilibria: reforms are taking place. to respond quickly and effectively to chang- Is there a 'best"way to divide fiscal respon- Bahl and Wallich also conclude that ing technological and market opportuni- sibilities between China's central and lo- reform of the relationship of central and ties. cal gouernments in China's three-tiered local governments should be supple- The Government ofEgypt's strategy for fiscal system? mented by an improved system of finane- achievingthis goal is to stabilize the num- ing local capital expenditures through ber of university students and raise the The choice ofthe 'right"fiscal relationship borrowing, a system of benefit charges, quality of instruction. This fundamentally between central, provincial, and local gov- and improved financial planning and tat sound strategy, pursued since the mid- ernments depends on how a government administration. 1980s, has required considerable courage weighs the benefits of decentralized eco- This paper - a product of the Public of policynakers. nomic development policies against the Economics Division, Policy Research De; Policymakers are struggling to correct costs ofhavingless effective central fiscal partment-is part of a larger effort in the a longtime, inequitable misallocation of management. department to explore intergovernmental educational resources - including an Three strong forces justify more fiscal fiscal relations in developingand formerly overenrolleduniversity system combined centralization in China'shighly decentral- socialist economies. Copies are available with a persistently high rate ofilliteracy. ized fiscal system at the present time: free from the World Bank, 1818 H Street The Nasser regime greatly expanded * Bouts of inflation and recurrent fis- NW, Washington, DC 20433. Please con- higher education and guaranteed jobs to cal deficits can be seen as calling for more tact CarlinaJones, Toom N10-063, exten- university graduates. As aresultofrapidly central control over the budget. sion 37699 (February 1992, 58 pages). growingemollmentin the l970sand1980s, * Reform of an economic system relies the quality of education deteriorated seri- heavily on the use of tax policy as an al- ously. Classesare too bigandresources are locativeinstrumenttoinfluence economic 864. Privatizatlon of Natural scarce for anything but professorial sala- decisions. Local control of the implemen- Monopoly Public Enterprises: ries (which remain low), so learning tation of the tax system can and probably The Regulation Issue amounts to little more than memorization has compromised some objectives of the and repetition. The system does not foster central government's tax policy. Gaining Ralph Bradburd the developmentofsynthesizing, problem- tighter control over the revenue system (April 1992) solving, or creative thinking abilities. And will probably require reducingifnotelimi- with tertiary institutions overenrolled, natinglocal government discretion in pro- On balance, it is not obvious that develop- academic success requires theuseoftutors, viding special tax concessions. ing countries will obtain any significant whosefees arebeyondthereachofstudents * If the center wants to move ahead improvements inallocative ef]iincyfrorm of modest means. with price reform and to encourage enter- regulating natural monopolies after pri- The Government is trying to improve prise reform, it needs a more centrally uadation. This suggests thatgreater con- conditionsby stabilizinguniversityenroll- controlledrevenue sharing or assignment siderationmustbegiventootherobjectiues ments, expanding the role of two- and four- system that reduces the dislocatingeffects ofregulation including distributional cori- year technical institutes, increasing the of such reforms. cerns and the creation ofconfidence in the use ofpedagogical materials in university Centralizing the fiscal system neverthe- stability of the environment far business. instruction, and promoting several inno- less reduces the potential forvestingmore vative interdisciplinary programs that budgetary decisionmakingpowersinlocal Many developing countries are consider' stress problem-solving and applied work. governments and can erode local and pro- ing the privatization of public enterprise The job guarantee has effectively been vincial governments' incentives for rais- natural monopolies - monopolies in suspended since the early 1980s, but stu- ing revenues, another goal of system re- charge of electricity, natural gas, water dents have responded slowly to changing form. Moreover, there are major problems and sewer, and telephone services. signals from the labor market, because withintroducingfiscal centralization ina If there is not already an apparatus for being a university graduate is socially country with a heterogeneous population regulating private monopolies, these prestigious and presumed to increase of 1 billion and relatively little tradition countries face a difficult choice: whether one's chances of marrying well. of central government fiscal administra- to continue lettinginefficient public enter- This paper - a product of the Educa- tion. prises operate, to create a regulatory ap- tion and Social Policy Department - is Bahl and Wallich conclude that a re- paratus, or to replace public monopolies part of a larger effort in the department formed system of intergovernmental fi- with unregulated private monopolies- to build a knowledge base on higher edu- nance must meet the center's needs for Improving allocative efficiency, though cation issues and reforms. Copies of the stabilization and the provinces! needs for not the only objective ofregulation, is car- paper are available free from the World revenue and equalized spending capacity. tainly animportant one, and one that has Bank, 1818 H StreetNW, Washington, DC They argue that such equalization should received a great deal of attention from 20433. Please contact Cynthia Cristobal, be based on objective indicators of need economists. In theory, regulating private room S6-035, extension 33640 (40 pages) and that a formula-based grant system natural monopoliescanimproveallocative Polcy Research Working Paper Series 31 efficiency. In practice, sometimes it does, 865. Food Security and Health 866. Regulatory and Institutional and sometimes it does not. So Bradburd Security: Explaining the Levels Impacts of Securities Market tried :D answer two questions: of Nutrition In Pakistan Computerization * Howgreat would the efficiencylosses be, if any, if a public natural monopoly Harold Alderman and Marita Garcia Robert Pardy were privatized and allowed to function as (February 1992) (Febmuary 1992) an unregulated entity? * How much could performance be ex- Nutrition depends on good health, includ- A guide to regulatory best practice in the pected to improve if the privatized natu- ing reduced infection, as well as on ad- computerization of securities markets. ral monopoly operated as a regulated equate food supplies. Giuing mothers a firm? primary education may be a more impor- Advances in information technology have * Bradburd argues that the deadweight tantfactorin nutrition than raising house- brought new ways of structuring, operat- losses from monopoly pricing by unregn- hold food intake. ing, and supervising securities markets. lated privatized natural monopolies are The Bank's policy advice in institutional likely to be modest and may well be out- Most influential studies of malnutrition reform ofsecurities markets shouldreflect weighed by improvements in technical and public policy have focused on energy awareness of the opportunities and prob- efficiency. He also argues that regulation availability and consumption, tending to lems this presents. is not costless and may well foster static equate hunger with malnutrition. But As a guide to best practice, Pardy pro- and dynamic efficiencylossesgreaterthan recent studies have explored how other vides basic operational and policy tools the deadweight monopoly losses it is in- factors - notably infection and levels of that take account of the importance of tended to prevent. maternal education - affect nutrition. . information technology in two securities ButBradburdalso notes thatreduction Alderman and Garcia's study of nutri- marketfunction-tradingandclearance ofallocativeinefficiencyis only one ofsev- tion levelsin Pakistan shows that raising and settlement. eralobjectivesafregulation. Irthecase for householdfoodconsumption,forexample, Pardy suggests that information tech- regulation on efficiency grounds is weak, has less impact on nutritional levels than nology systems - even though they may then much greater attention mustbe paid raising a mother's education does. They not differ greatly from manual systemsin to how these other objectives can best be found that educating mothers to at least their performance of securities market achieved. the primarylevel tends to reduce the level functions -pose new technical problems Historically, achieving distributional of child stunting (along-term indicator of for market supervisors and can affect the equity has been an important objective of child nutrition) 16.5 percent, or roughly rights and obligations of market partici- regulation. We have very little systematic 10 times the impact achieved by increas- pants. knowledge about the actual distributional ing per capita income 10 percent. (The He provides policy principles that take consequencesofprivatizationandderegu- impact of education is not immediately these factors into account, to guide the lation, so more research is needed- realized- the diffusion ofknowledge about planning, evaluation, and supervision of Another objective of regulation can be good hygiene and child care associated tradingandclearanceandsettlementsys- to help create confidence in the stability with learning has a cumulative effect.) tems that include aninformationtechnol- of the environment in which business ac- Alderman and Garcia found that in ogy component tivities take place. If enterprises are pri- Pakistan,foodsecurityaloneisnotenough Pardy explains how the processes and vatized and unregulated in an environ- to improve children's nutritional status. functions of a securities market can be ment in which property rights are not There may be welfare justifications for performed in avariety of ways, including secure, management is likely to take an various food policies, but in rural Paki- hybrid and tandem systems, using both extremely short-run view of profit mai- stan, especially, itis equally important to manual and information technology ap- jaization. The implicit "take the money improve health and reduce infection. proaches. Information technology, espe- and run" policies will yield all the unde- This paper - a product of the Agricul- cially in hybrid and tandem systems, has sirable deadweightlossesofmonopolyand tural Policies Division, Agriculture and already spread far in emerging markets none of the benefit of efficiency and im- RuralDevelopmentDepartment-ispart anditsspreadislikelytoaccelerateinthe Proved service. of a larger effort in the department to 1990s. This paper - a product of the Finance study the impacts offoodsecurity policies. He gives examples from emergingmar- and Private Sector DevelopmentDivision, Copies ofthe paper are available free from kets (some of which have world-class sys- Policy Research Department-is part of the World Bank, 1818 H Street NW, tems) and from developed markets (in a larger effort in the department to ana- Washington, DC 20433. Please contact some of which the systems are not as ad- lyze the relations between privatization Cicely Spooner, room N8-039, extension vanced). and regulation. Copies of the paper are 30464 (48 pages). Highly sophisticated information tech- available free from the World Bank, 1818 nology systems are not always necessary H Street NW, Washington, DC 20433. or desirable, but the well-planned use of Please contact Daniele Evans, room N9- information technology can improve a 057, extension 37496 (44 pages). securitymazke's efficiency, fairness, and stability. Clarity of objectives, good plan- ning, and a clear grasp of operational implications are important in effectively evaluatingproposals for developing son- 32 PolIcy Research Working Paper Series rities markets with an information tech- They also provide adetailedassessment 868. Mortality Reductions nology component. of the structure and performance of the from Measles and Tetanus This paper -a product ofthePFinancial system, its impact on financial sector de- Immunization: A Review Sector Development Department - is velopment, and the role ofregulation and of the Evidence part of a larger effort in the department supervision. to explore ways to promote the develop- Vittas and Iglesias emphasize the Michael Koenig ment of sound securities markets. Copies draconian rules that have been imposed (March 1991) are available free from the World Bank, to protect the interests of pension fund 1818 H Street NW, Washington, DC members.Theseinclude such rules as "one Tetanus and measles account for more 20433. Please contact FSD, room N6-037, account per worker" and 'one pension than 25 million cdildhood deaths anna- extension 37664 (69 pages.) fund per APP," as well as tight limits on ally-andimmunizationprcgrams could investment assets. The main objective of significantly reduce those numbers With - investment rules has been to ensure that tetanus uaccinations, two doses may be 867. The Rationale pension funds are invested safely and necessary. and Performance of Personal profitably. As the system has matured, Pension Plans in Chile some rules have been relaxed. The rules In recent years, tetanus and measles are have also provided for effective supervi- estimated to account for more than 2.5 Dimitri Vittas and Augusto Iglesias sion and for information disclosure both million childhood deaths annually; (February 1992) to the authorities and to members. measles alone may account for more than Pension funds have proved major 2 million such deaths. Koenig reviews The Chilean personal pension plans intro- sources of long-term finance and have empirical evidence on the most effective duced in 1981 represent a successful re- made a significant contribution to the and feasible strategies for measles and form ofa financially insolventpublicpen- privatization ofpublic utilities. But their tetanus vaccination programs. siaon system. They show that radical pen- role in encouraging a dispersion of corpo- Koenig found that tetanus and measles sion reform is feasible and can overcome rate ownership has been more limited immunization programs could signifi- adverse initial conditions suchas highfis- because of the reluctance of corporations cantly reduce deaths among children up cal costs oftransition, the absence of well- to abide by the strict governancerales that to the age of4in many developing settings. developed financial markets, and weak aim to protect the interests of pension Vaccinations had a pronounced effect in regulation and supervision, funds as minority shareholders. reducing childhood deaths from measles The Chilean experience shows that -with benefits sustained over time, and Many developing countries, especially in there is a positive dynamic interaction with the greatestbenefits accruing to the Latin America and Eastern Europe, have between pension funds and securities most disadvantaged children. He found unfunded pay-as-you-go public pension markets solongasastrongregulatory and little supportfor the existence ofareplace- systems that face growing financial pres- supervisory mechanism is in place. Ithas ment mortality effect. sres. These emanate from a weak link also shown that itis feasible to finance the Studies on maternal immunization between contributions and benefits, from costs of transition from an unfunded to a against tetanus showedagreatreduction widespread evasion, and from an aging funded system. in the number of neonatal deaths, but population. But the prospects of personal pension considerable uncertainty about the num- Proposalsfmrradical pension reformrxe plans in different countries must be as- ber of doses needed and how long the im- often inhibited by concerns about the fis- sessed case-by-case to ensure that their munity lasted. Recent evidence suggests cal cost of transition from an unfunded to introduction does not undermine pro- that giving the mother two doses of teta- a funded system, the absence of well-de- grams ofmacroeconomic stabilization and nus toxoidmayconfer significantlevels of velopedfinancial systems, andweakregu- isaccompaniedbyextensiveregulatoryre- protection against neonatal death from. lation and supervision. form. tetanus for 15 years or more. Evidence on Chile successfully reformed its public This paper-aproduct ofthe Financial the impact of a single dose is less conclu- pension system in 1981 whenitintroduced Sector Development Department - is sive. agovernmentmandatedandregulated,but part of a larger effort in the department This paper - a product of the Popula- privately managed system. Based on indi- to study contractual savings institutions. tion, Health, and Nutrition Department vidual capitalization accounts operatedby Copies are available free from the World -is part of a larger effort in the depart- specializedfinancialinstitutions-known Bank, 1818HStreet;NW,Washington,DC ment to assess disease control priorities as Administradoras de Fondos de 20433- Please contact Wilai in developing countries. Copies of the pa- Pensiones or APPs - the system has pro- Pitayatonakarn, room N9-003, extension per are available free from the World vided considerable scope for competition 37666 (38 pages). Bank, 1818HStreetNW,Washington,DC and efficiency within a well-regulated en- 20433. PleasecontactOtiliaNadora, room vironment. S11-219, extension 31091 (35 pages). Vittas and Iglesias analyze the rationale of the Chilean pension system and exam- me in detail the rules and provisions re- garding coverage, contribution rates, pen- sionbenefits, and investment regulations. Policy Research Working Paper SerIes 33 869. Financing Local Government if the grant is fixed to some national tax should be. It might also help explain why in Hungary source and distributed in accord with a growth rates differ among countries. known formula so they are not totally at Richard Bird and Christine Wallich the mercy ofa discretionary central policy. Policy formulation in most countries is (March 1992) They make a case for at least limited complicated by the role of the external conditionality -for requiring that grant economic environment, especially during Further reform of Hungary's new system funds should be spent, for example, on a periods of great external shocks. for financing local government should special priority area such as education or McCarthy and Dhareshwar examine how strengthen local own-source revenues and health, or by requiring that local govern- individual countries were affectedby, and should revise the normativegrant, simpli- ments receiving such grants should pro- responded to, external shocks. They apply fying it and making allowances for local vide basic services at a minimum level of an enhanced version of an earlier meth- governments' revenue-raising capacity. quality. And they insist on the importance odology for estimating the effect of three of changing the formula for distribution kinds of shoc- terms of trade, variations Hungary has undertaken bold, far-rang- of the normative grant - adding a third in global demand, and changes in the in- ing reform of its system offinancinglocal elementtothoseofpercapitaequalization terest rate. They discuss the magnitude government. This reform, in the context and need: that some explicit allowance be of these shocks and country responses to of national fiscal reform, implies signift- made for the revenue-raising capacity of them in Brazil, Ireland, and Korea and cant shifts in the spendingresponsibilities local governments. present numerical results for some other and revenue authorities of local govern- The options they recommendhave three countries. mentsas well asintheirpoliticalrelations important effects. First, to varying de- McCarthy and Dhareshwar find that with the central government. grees, grant funds will be shifted from the magnitude ofexternal shocks may be The new system oflocal governmenthas high-tax capacity to low-tax capacity re- greater than previously recognized. For both political and economic merit: it in- cipients. Second, all recipients, whatever large industrial OECD countries, such as volves Hungarians with their local govern- their tax capacity, will be stimulated to tax Germany, it is not unusual for external ments in a positive way and can make that capacityat theassumedratebecause shocks to equal 2 percent of GDP in any government more efficient by subjecting if they do not do so the grant they receive one year. And such shocks range as high it to the scrutiny of local officials and vot- will be reduced precisely by the amount as 10 percent ormore in some developing ers. But because the system is new, there they fall below the assumed rate. And fi- countries, particularly those that depend are still lessons to be learned and some nally, any recipient that levies higher heavilyonalargetradeshareincommodi- serious decisions to be made. taxes than assumed by the tax capacity ties.The size and componentsofthe shock The new system of local government element gets tokeep all the extrarevenues depend on such factors as the country's financetries both tofreelocal authorities -thatis,isnot"taxedbyhavingitsgrant openness to trade, the composition of its from the heavy hand ofcentral control (by reduced. (In other words, the marginal tax imports and exports, and its level of ex- ending central control overlocal spending, rate is zero.) ternal debt. whether from central or local revenues) This paper - a product of the Public The authors also found that countries and to make them more responsible (by Economics Division, Policy Research De- differed greatly in their responses to ex- providingnew sources oflocallycontrolled partment-is part ofalargereffortinthe ternal shocks. Some rely on additional revenues). But new local taxes are so in- department to deepen analysis of local external financing, some place more em- adequate that this well-intentioned ex- government finance and phasis an export promotion, and others periment could end in disaster. Some re- intergovernmental relations. Copiesofthe favor import substitution. Among indus- gions may fail to provide adequate basic paper are available free from the World trial OECD countries, for example, Ger- services (especially to the poor).Some may Bank, 1818 H Street NW, Washington, DC many addressed unfavorable external make increased demands on an already 20433. Please contact CarlinaJones, room shocks by combining a pro-export bias ard-pressed central government. And lo- N10-063, extension 37754 (87 pcges). with tightening of domestic demand; its cal governments mightfeel increased pres- balance of payments soon began to im- sure to exploit enterprise and housing prove. The United States, on the other ownership and to engage in unwise entre- 870. Economic Shocks hand, allowed its export share to deterio- preneurial activities to raise revenues. and the Global Environment rate and relied more on external financ- Bird and Wallich outline changes made ing- with unfavorable consequences for in the system oflocal finance, assess their F. Desmond McCarthy its current account implications, and identify areas that need and Ashok Dhareshwar Among developing countries, easy ac- furtherreform.They describe theso-called (March 1992) cess to external financing often provided normative grant from the central to local an easy short-term option for governments, for example, as being Countries tendto react as thoughfavorable policymakers - especially in countries largely discretionary, completely uncon- external shocks are permanent and unfa. with a strong anti-export bias where po- :tional, and calculated according to a vorable external shocks are temporary. litical expediency precluded any signifi- Estribution frrmula geared to both This tendency-together with the magni- cant curtailment of domestic spending. A equalization' and "need.* tude and diversity in effect of external policy of leaning an external financing Bird and Wallich argue that local gov- shocks-cmplicatesaoaemptstogetprices often created external balance problems -nments can budget with more certainty right and to determine what right prices in the medium term. 34 PolIcy Research WorkIng Paper Series McCarthy and Dhareshwar conclude health spending. In the education sector, 872. Romania's Evolving Legal that the magnitude and composition of subsidiestoprimaryandtoalesserextent Framework for Private Sector external shocks should be part of any lower secondaiyeducationaremostlikely Development explanation of why growth rates differ toreachpoorerhouseholdsandraisetheir among countries. Some countries tend to living stan0ards. Education is a poten- Cheryl W. Gray, Rebecca J. Hanson. view favorable shocks as permanent and tiallyimportantconduitforreachingrela- and Peter G. Ianachkov unfavorable shocks as temporary. This tively isolated rural households. (March 1992) asymmetry ofresponse, together with the In the late 1980s, enrollments remained magnitude of the shocks, complicates at- higher for urban than for rural areas, for Romania started almost from scratch in tempts to get the prices right -and even male than for female children, and for the 1990 to build a legal framework for a to determine what the right price is. Outer Islands than for Java. But rates of market economy and has made substan- In formulating economic policy, improvement in enrollments during the tial progress. To bring that framework to* McCarthy and Dhareshwar argue, last decade have been higher for rural, life, institutions must enforce the laws and policymakers must adequately consider female, and poorer children than for their be able to resolve any disputes that arise, external shocks, because of their major urban, male, andrichercounterparts.The the public must accept that the laws are impact on economies. They do not answer results indicate that rising living stan- binding, and the laws must be filled in the question:Which policyinstramentsare dards played a part in raising enrollment with detailed regulations and individual the correct response in which situations? (especially for boys and in higher educa- case practice This takes time But they do offer insights that may be of tion). Bet other factors were substantially use to policymakers facing these issues. more important - notably public policy As the economies of Central and Eastern This paper - a product of the Interna- aimed at increasing the number of pri- Europe move from central planning and tional Economic Analysis and Prospects mary schools and teachers and at lower- state ownership to market-driven devel- Division, International Economics De- ing the costs of having children attend opment ofprivate sector activity, they are partment-is part ofalargereffortin the elementary school. Education subsidies undertakingcomprehensive change in the department toanalyze global linkages.An effectively reach the poorfor two reasons: "rulesofthe game-thelegal framework earlier version of this paper was presented poor families have more children, and for economic activity. at the Global Economic Prospects Semi- richer families self-select their children At a minimum, markets require a sys- nar Series at the World Bank in Novem- into private schools. tem of property rights and rules for ex- ber 1991. Copiesofthe paper areavailable In the health sector, subsidies to basic changing those rights. In practice, prop- free from the World Bank, 1818 H Street primary health care provide the best av- erty rights in most countries are defined NW, Washington, DC 20433. Please con- enue for reaching the poor, but they are by the constitution and by-laws regulat- tact Mila Divino, room S8-037, extension far from ideal as an instrument for doing ing the ownership and use of real, per- 33739 (55 pages). so. Although primary health care centers sonal, and intangible property, as well as were more widely used in rural areas and shares in going concerns. Company, for- by poorer groups in 1987 than they were eign investment and bankruptcy laws, 871. The Distribution in 1978,rich and poor now appear equally among others, govern entry into and exit of the Benefits from Social likely to seek treatment in these facilities. from productive activities. General rules Services In Indonesia, 1978-87 So, publiesubsidies toprimaryhealth care ofmarketexchangeare laid outin contract centers are not as pro-poor as is generally and competition law, while more specific Dominique van de Walle believed, although they are more so in rules of market exchange in particular (March 1992) urban than in rural areas. Making them sectors may be governedbymore detailed more pro-pGcr would require price dis- sector-specific laws and regulations. Changes in the patterns of use and in the crimination, and itis unclearhowfeasible Gray, Hanson, and Ianachkov analyze. incidence of subsidies in the health and that is in rural areas. the evolving legal framework for private educationsectors since the late 1970s have This paper - a product of the Public sector development in Romania. The Ro- been markedlypm-poor. Ia the late 1980s, Economics Division, Policy Research De- manian government has worked inten- public spending in education was gener- partment-is partofalarger effortin the sively in the last two years to create ale- ally well-targeted; health sector subsidies department to understand and improve gal framework for a market economy. were not the relationship between public expendi- Many gaps remain in current laws, and tures and poverty alleviation. Itisa prod- problems still exist,but the efforthasbeen Indonesia has made great progress in the uct of research project "MThe Analysis of impressive given the starting point. In past 15 years in giving the poor more ac- Public Expenditures Incidence: Under- some Central and Eastern European cess to privately provided goods such as standing and Characterizing Incidence at countries (including Hungary and Po- food, clothing, and housing. Van de Walle One Point in Time and Over Time" (RPO land), private property and private mar- analyzes how much progress has been 676-42) funded by the Bank's Research kets were suppressed but not extin- made in improving their access to two Support Budget. Copies of the paper are guished during 40 ye.rs ofsocialism. But publicly provided social services, educa- available free from the World Bank, 1818 Romaniastartedvirtuallyfromscratchin tion End health care. H Street NW, Washington, DC 20433. 1990 to build a market economy and the She finds that given existing patterns Please contact Carlina Jones, room N10- legal framework required for it. It has of use, education spending is more effi- 063, extension 37754 (67 pages). adopted not only a new constitution but cient at directly reaching the poor than is also extensive new legislation covering "1iocy Research Working Paper Serles 35 and intellectual property, companies, structure when the domestic price ofcapi- even damaging - if India does not first - fhreigninvestment.Ithas revived the tal goods differs substantially from the reduce protection on capital goods. When e-War civil code as a basis for contract internationalprice Inparticular, reform- warranted, thenominal protection rate for -, and is moving to modernize its bank- ing India's trade policies and reducing its capital goods should be slashedto the low- .-tcy code. The only area surveyed in protection rates would be meaningless - est possible level above the shadow pre- 1Lkh little legal reform has occurred is even damaging - if India does not first mium for foreign exchange. ! monopoly law. reduce its highprotectionon capital goods. This paper -a product of the Industry ChallengesTemaininbothlawandprac- and Finance Operations Division, Coun- The broad principles of private own- A striking feature of India's protective try Department IV(India), Asia Regional 'iv, free market exchange, and equal structure has been high tariffs and pro- Office-is derived from Policy Research .Atment of public and private firms are tection on capital goods, which limit indus- Working Paper 433 (August 1990), which _1 recognized and have been largely trial competitiveness andexport potential, was part of a larger effort in the depart- Mdeved, atleastonpaper.Butatendency and distort industrial incentives as indi- ment to undertake a comprehensive re- -zd centralized, bureaucratic control cated in 'effective protection rates' view of India's trade regime and policies sins - for example, in excessive re- (EPRs). and to make recommendations for liber- --ements for approval and uneconomic The distortionsintroduced by high capi- alization ofits trade policies. Copies ofthe its on certain activities. Moreover, tal and investment costs resulting from paper are available free from the World lementation will clearly take a long high levels ofprotection were correctedin Bank, 1818HStreetNW, Washington,DC a - probably considerably longer than India's analysis by introducingthe notion 20433. Please contact Francois Ettori, `ieotherreformingcountries-because of "corrected effective protection rate? rooml H4-085, extension 32340 (24pages). -eislittleornoinstitutionalframework (CEPRs). In theory, EPRs computed on enforcement and dispute resolution. the basis of value added net of deprecia- By themselves, laws are merely paper tion could be made immune from capital 874. The Trade Restrictiveness -galframeworkcomestolifeonlywhen cost distortions, provided that deprecia- Index: An Application to Mexican d and administrative institutions can tion allowances arecomputedon economi- Agriculture 5rce the laws and readily resolve the cally meaningful grounds and that EPRs mntes theyinevitably spur-and when based on net value added are available. James E. Anderson and Geoffrey Bannister public accepts that the laws are bind- Butin India asin many developing coun- (March 192) Moreover, thelawsarebynature only tries, available EPRs are based on gross neworks. Their content must be filled value added. The need to account for the Applyinga new trade restrictivness inde= with detailed regulations and indi- substantial capital cost distortions led to to policy reform in Mexican agriculture zal case practice. Developingabodyof the use of a substitute tool, the CEPR. shows substantial trade liberalization lation and case practice takes time. The paper provides a brief refresher, between 1987 and 1989, attributable rowing concepts from industrial mar- and geometrical interpretations, on the mainly to changes in maie policy. economies-helpedbylegal exchange definition ofEPRanditslimitedinterpre- grams and legal technical assistance tation as a measure of the scope for inef- To measure domestic distortions in agri- a abroad - could speed the process. ficiencyorextraprofitresultingfrom pro- culture, analysts have used producer and This paper-aproductofthe Transition tection. It introduces the notions and for- consumer subsidy equivalents CPSEs and 1Macro-Adjustment Division, Policy mulae for the CEPR and the "net effective CSEs), as well as the familiar trade- earchlej0artment, andthe Europe and protection rate"(NEPR). The relevance of weighted averages of tariffs and tariff tral Asia Division, Legal Department these notions and their magnitude are equivalents of quotas. All these indices is part of a larger effort in the Bank to testedonasampleof 60 industrial projects lack a theoretical foundation. 'erstand the process of legal reform in in India. Anderson and Bannister apply a new - sitional economies. Copies are avail- The paper confirms the finding in a concept, the trade restrictiveness index, free from the World Bank, 1818 H previousBank review ofIndia'sindustrial to an evaluation of Mexican agricultural etNW, Washington, DC 20433. Please sectorthateffective protective rates aver- reform. They assess a significant reform .act Angelica Bretana, room N11-029, aged about 40 percent in the sector, with episode to demonstrate the feasibility of nsion 37176 ( 27 pages). large variations between the industrial the method and its advantages over stan- subsectors and within each subsector. dard techniques. Using NEPRs, the paper shows that on Anderson and Bannister set out the 3. Measure and Interpretation average the amount ofeffective protection theoretical structure ofindex numbers for Effective Protection available from India's protective structure distorted trading economies in earlier :he Presence of High Capital is just enough to compensate for the high papers. They develop an indexnumberfor sts: Evidence from India cost ofinvestment that results from heavy trade distortions:theuniform tariff which protection of capital goods. Most projects is equivalent in trade restrictiveness to ucois M. Ettori have, in effect, negative NEPRs, so they the actual differentiated structure oftar- rch 1992) are ata disadvantage comparedto foreign iffs and quotas. To extend the index to competitors. domestic distortions, they draw on the traditional measure of effective pro- Finally, the paper argues that reform- well-known equivalence between a tariff an based ongftfs value added does not ing India's trade policies and reducingits and an equal level ofproducer subsidy and yrefiect the incentives ofthe protection protection rates would be meaningless - consumer tax (when imported and domes- Policy Research Warking Paper Series tically produced goods are perfect mubsti- The implications ofthe consistentindex Instead, they have merely channeled gov- tutes). of the change in consumer policy are dia- ernment-supplied funds to rural borrow- The trade restrictiveness index for do- metrically opposed to the implications of ers. Making external funds continuously mestic distortions is defined as the uni- the CSE over the five-year period. Using available at below-market interest rates form tariffequivalent ofthe consumption the trade restrictiveness index thus has notobligedrural financialinstitutions and production distortions. It is, in turn, makes a great practical and a theoretical to operate under constraints of financial a combination of two subindices: the con- difference. viability. That - together with the lack sistent producer subsidy equivalent This paper - a product of the Interna- ofcompetition andlimited accountability (CPSE) and the consistent consumer sub- tional Trade Division, International Eco- -has led to bad loans, inefficient opera- sidyequivalent(CCSE).Theseare defined nomics Department - is part of a larger tions, patronage, and irregularities. as the uniform subsidy rates that am effort in the department to contribute to Arrangements such as lending groups equivalent in trade restrictiveness to the the analysis of trade policies. It is funded and credit cooperatives could reduce both actual differentiated subsidy or tax struc- by the Bank's Research Support Budget, transaction costs and the risks involved in ture. They are counterparts to the PSE ".he Cost-of-Protection Index,*RPO 676- lendingto smallfarmers.Successful group andCSE.The difference between the con- 49. Copies of the paper are available free lending programs have shown the impor- sistent and conventional subindices is in from the World Bank, 1818 H Street NW, tance of such factors ashomogeneous bar- the method of aggregation. Consistent Washington, DC 20433. Please contact rowing groups that are jointly liable and aggregation is based on the use of 'mar- Grace ogon, room S7-033, extension themselves assume some ofthemanagerial ginal welfare weights7 as opposed to pro- 33732 (51 pages). and supervisory responsibilities. Factors duction and consumption share weights. attributed to the success ofcreditcoopera- In Mexico, from 1985 to 1989, the tar- tivesincludebottom-upinstitutional devel- get producer and consumer price policies 875. Rural Finance In Developing opment, extensive training at all levels, for major crops reveal many simultaneous Countries reliance on mobilized savings and equity increases and decreases in implicit subsi- contributions rather than external funds, dies or taxes. The trade restrictiveness JacobYaron prudentexpansionofcooperativeactivities, indexprovidesaconsistentaggregationof Oarch 1992) strict monitoring and auditing, and ad- these policies. From 1985 to 1987, domes- equate incentives to staff and clients. tic policy on the whole was equivalent to Targeted adit without institution-build- For a rural financial institution to be- anincreaseintraderestrictiveness. In the izginrurfnancialinadtutionsisalmost come viable, state or donorsupportshould next two years, trade loosened- always a rcipe forprolonged dependence focus oninstitution-buildingand develop- The net effect of policies in tradable on donor or state funds and bailouts. ment.Targetedereditwithoutinstitution- agricultural goods over the five-year pe- buildingis almost always a recipe for pro- riod is a sgnificant reduction in trade The establishment offormal agricultural longed dependence ondonoror statefunds restrictiveness. Restoring the trade re- credit systems in most developing coun- andballouts.Attentiontoinstitution-build- strictiveness to its 1985 level requires a tries inrecent decadeshasbeenmotivated ing often makes the difference between a uniform31-percenttradetaxsurchargeon by the beliefthatwidespread shortages of rural financial institution that canbe self- 1989 prices. Moreover, therestrictiveness short- and long-term finance have ar- sustaining after a few years of support impliedbythe 1989 levels, compared with rested agricultural growth and develop- duringits startup period and one thatcon- free trade, was equivalent to a 17 percent ment. The lack ofaffordable formal credit tinues to depend on public support. advalorem trade tax Thus, the liberaliza- has been blamed for delaying, if not pre- This paper -a product of the Agricul- tion of the 1985-89 period carried Mexi- venting, the timely adoption of new pro- tural Policies Division, Agriculture and can agriculture more thanlhalfwaytofree ductiontechnologyandintensive nonlabor Rural DevelopmentDepartment-is part trade. inputs. of a larger effort in the department to One virtueof theindexisthat the sources Commerciallendinginstitutionsgener- define appropriate modes of Bank activi- of liberalizationcanbe detailed. Iberaliza- ally focus on large-scale farmers and ig- ties in the area of rural finance. Copies of tion is attributable mainly to changes in nore small-scale farmers because of the the paper are available free from the, maize policy, despite substantial changes significant cost of processing and servic- World Bank, 1818 HStreetNW, Washing- in other producerandconsumnerprice poli- ing unsecured small loans and the preva- ton, DC 20433. Please contact Cicely cies.Reducingthesubsidyforfertilizeruse lent belief that small entrepreneurs rep- Spooner, room N8-039, extension 32116, was relatively unimportant. resent a greater risk than large ones. The or through electronic mail (25 pages). ThestandardPSE and CSEindexmeth- shortage of strong formal credit markets ods are not directly comparable to the has caused informal creditinstitutions to traderestrictivenessiudex,astheydonot flourish in many developing countries. 876. Old Debts and New aggregate consumerandproducerdistor- These informal institutions disburse Beginnings: A Policy Choice In tions. The PSE and CSE indices are, how- funds rapidly, and the transaction costs Transitional Socialist Economies ever, comparable to the consistent for borrowers are low. subindices CPSE and CCSE. The rates of Many specialized agricultural credit Ross Levine and David Scott change of these two types of indices are institutions have suffered from design Oarch 1992) only weakly positively associated, differ in deficiencies. Theyoften were not expected sign in a quarter ofthe cases, andin most to function as true financial intermediar- Should enterprises that receiued bank cases differ widely in magnitude. ies that mobilize deposits to make loans, loans undersocialism retain those liabili- Policy Research Wor*Ing Paper Serles 37 ties whenthegouernmentprivatizes them? This paper-aproduct oftheFinancial enterprises toimprove efficiency and that Or should the government take responsi- Sector Development Department - is permit the owners ofindividual factors to bility for the debts offormerly state-owned part of a larger effort in the department seek the highest returns. enterprises? to study financial reform in transitional Using panel data for 226 industrial Governments should seriously consider socialist economies. Copies of the paper enterprises, Jefferson andXu report evi- assuming these enterprise debts bcauseof are available free from the World Bank, dence that returns on investments in Ia- thepotentiallygreatgains inefficiency that 1818 H Street NW, Washington, DC bor capital, and materials became more will result and the relatively low fiscal 20433. Please contact Wilai equal between 1980 and 1989. Such a costs. Pitayatonakarn, room N9-003, extension pattern ofconvergence canbe the product 37666 (27 pages). of difierentfactors, but the consistency of Levine and Scott examine the decision the pattern -even among large and me- Policymakers in transitional socialist dium-size enterprises attheheartofstate economies must make: how to define the 877. Assessing Gains in Efficient planning - suggests that greater expo- asset and liability structure of state- Production Among China's sure tomarkets and stronger profit-seek- owned enterprises and banks as they are Industrial Enterprses ingbehavior are motivating gains in pro- privatized ductive efficiency. They conclude that the many loans is- Gy H. Jefferson and Wenyi Xu This paper-aproduct of the Socialist sued by state-owned banks to state-owned (farch 1992) Economies Reform Unit, Policy Research enterprises under socialism are impeding Department -is an output of ajoint re- the transition to thriving market econo- China's program ofgradual and partial search project on 'Industrial Reform and mies. The heavy stock of debts is slowing reform has substantially improved eco- Productivity in Chinese Enterprises" theprivtizationofenterprisesandbanks, nomic perfrmance. Despite lingering (RPO 675-38), undertaken by the World hindering the efficient operation offirms market rigidities, bargaining patronage Bank, Brandeis University, and the Uni- a the financial sector, encouraging ad softbudgetconstraints,andatherphenom- versityofPittaburgh,in collaboration with :governmentintervention, andreduc- ena that shield state-owned industrial the Institute of Economics (CASS), the government credibility. enterprises from external pressur, indus- Economic Management Research Insti- In practice, governments often assume trial managers are economizing more on tute (System Reform Commission), the :zierprise debts to banks on a case-by- labo, capital, and materials. Rural Economic Research Center (Minis- :e basis so they can sell enterprises to try of Agriculture) and the Institute of private sector. Levine andScottargue A central objective of economic reform is Quantitative and Technical Economics Ata more comprehensive, explicitappli- to reduce the productive inefficiency - (CASS). ion ofsuchapolicywouldimprove effi- bothtechnicalandallocative-thatarose The project-whichis part ofa larger acy by depoliticizing and speeding up under regimes in which markets and investigation of the relationship between privatization process, improving the material incentives played a limited role. industrial reform and productivity in for- -hilityandprofitbilityofnewlyprivat- Jefferson and Xa formulate an approach merly socialist econamies under the direc- d enterprises, increase government for measuring gains in productive eff- tion of L J. Singh, principal economist in dibility, and improving the efficiency ciency. the Transition and Macro-Adjustment he financial sector. Applying that approach to Chinese in- Division - is supported with funds pro- Transitional socialist economies have dustry, they evaluate the progress be- vided by the World Bank, the Henry Luce yet privatized major banks. Levine tween 1980 and 1989 among China's large Foundation, and the National Science -- Scott explain that privatizing banks andmedium-size state-ownedenterprises Foundation. Copiesofthe paper are avail- Il tend tomakefinancial intermediation in equalizing factor productivity across able free from the World Bank, 1818 H re efficient and speed up the economic enterprises. In the early stages ofreform, Street NW, Washington, DC 20433. nsition. They contend that govern- returns on factor investments varied Please contact Angelica Bretana, room nts are unlikely to succeed in privatiz- greatly. Estimated to returns on invest- N11-029, extension 37176 (21 pages). ; major banks unless the government ments in equipment in 120 state-owned imes responsibility for a significant steel enterprises varied from a low of 6 t of bank claims on enterprises. They percent in 1985 to a high of 162 percent, 878. Adjustment and Private nze that the operation and restructur- for example. Total factor productivity in Investmient In Kenya of state-owned banks will also be im- the most efficient mill was 37 times ved ifthe government assumes enter- greater than in the least efficient mill. KaziL Matin and Bernard Wasaw se debts. The differences were partly the result (March 1992) They find thatthe fiscal implications of ofcentral planning -including adminis- governmentexplicitlyassuming enter- tered prices, restrictions on the flow of Renya's failure to implement adjustment se debts to state-ownedbanksarelikely resources from low-return to high-return policies after the collapse ofthe coffee boom e small. Governments should seriously activities, and the lack of market disci- and the breakup of the EastAfrican cm- mider assuming enterprise debts to pline, which protects the least efficient mon market reduced private investment ta-owned banks as they privatize en- enterprises from bankruptcy. One objec- sharply in the 1980s. Eff]cient fiscal ad- prises because ofthe potentially great tive of economic return is to create the justment and mor liberal imports will be nsin efficiency that will ensue and the conditions - the profit-seeking motive critical to increasing private investnent * atively low fiscal costs- and marketmechanisms-thatmotivate 38 Policy Research WorkIng Paper Series Matin and Wasow use an eclectic version This paper - a product of the Trade port, Water, and Urban Development ofthebasicaccelerator model toassess the Policy Division, Policy Research Depart- Department, andtheAgricultural Policies determinants of private investment and ment - is part of a research project Division, Agriculture and Rural Develop- to analyze how adjustment policies (or funded by the Bank's Research Support -ment Department - is part of a larger their absence) affect those determinants. Budget, "Sustainability ofTrade Reforms effort to define a Bank water resources Their model emphasizes the effect of re- in Structural Adjustment Loans,' (RPO management policy. Copies of the paper source constraints on private investment 675-32). Copies of the paper are available are available free from the World Bank, behavior, including that arisingfrom for- free from the World Bank, 1818 H Street 1818 H Street NW, Washington, DC eign exchange rationing. NW, Washington, DC 20433. Please con- 20433. Please contact Mari Dhokia, room Econometric estimation of the invest- tact Dawn Ballantyne, room N10-023, 512-005, extension 33970 (18 pages). ment model with Kenyan data for 1968- extension 37947 (45 pages). 88 suggests thatKenya'sfailure toimple- ment adjustment policies after the col- 880. Exchange Rate Policy, the lapse of the coffee boom and the breakup 879. Comprehensive Water Real Exchange Rate, and Inflation: of the East African common market re- Resources Management: Lessons fron Latin America duced private investment sharply in the A Concept Paper 1980s. Declining real credit to private MiguelA.Xiguel sector, falling stocks of public infrastruc- Peter Rogers (April1992) ture capital, and lower availability of im- (March 1992) ports were the main causes of reduced Attempts to achieve real depreciation private investrnent Issues thatshould be cowered intheformu- through continuous devaluation or by Matin and Wasow argue that inad- lation of comprehensive water resources accelerating the rate ofcrwl-when not equate fiscal adjustment was a key fail- management policies. supported by changes in other policies ure of policy. With direct competition be- and in the underlying conditions - usu- tween public and private sectors for lim- The worldis entering a period of intense ally end up increasing inflation, yet re- ited financial resources, fiscal deficits pre- competition for limited supplies of water main ineffective in changing the real ex- emptedfundsandrestrictedprivateinves- for alternative uses - in agriculture, in change rate. tareaccesstothem.In addition,when cuts urban and industrial supplies, for recre- ingovernmentspendingwereundertaken ationbywildlife,forbuman consumption, Exchange rate policyis usually drivenby to contain deflicit, theyfell disproportion- and to maintain environmental quality. two different, often conflicting, objectives: ately on capital expenditure, especially Manifestations ofthis competition and to support a competitive real exchange that on physical infrastructure. And lib- our current ability to deal with it can be rate and to serve as a nominal anchor for eralization offoreign exchange rationing, observed in many parts of the world. A low inflation. impeded by the exogenous fall in export large irrigation project in India does not A competitive real exchange rate is receipts, could not be implemented be- operate because water has been diverted pursued to support expansion of the ex- cause of inadequate fiscal adjustment. to the rapidly growing city of Pane. In portable andimport-competingsectors- Thus insufficient and uncertain access to China, industries are reducing their pro- and to ensure a strong balance of pay- imports was a major factor behind the duction because of water shortages, even ments position. Using the exchange rate decline in private investment. though they are surrounded by paddy as a nominal anchor for low inflation is Though real depreciation is found to fields. In California, selenium salts importantto the extent thatlowinflation have a direct negative impact on invest- leached by irrigation are killing wildlife. and macroeconomic stability create a fa- ment, the authors use simulations to show Bank irrigation projects in Algeria are vorable environment for long-term that it has a positive indirect effect on now competing with Bank urban water growth. private investment in the medium term supply projects for the same water-and Kiguel focuses on whether exchange because such depreciation relaxes thefor- many proposed irrigation projects and rate policy can affect the real exchange eign exchange constraint on imports. most hydro project proposals are on hold rate in the longer run, and he examines . Matin and Wasow conclude that efli- because of environmental concerns. the trade-offs that typicallyarise between cientfiscal adjustment and liberalization Until recently, the approaches taken to real depreciation and inflation. of imports will be critical for the recovery water planning managementby planners Heargues thatexchangerate policyhas of private investment in Kenya. Efficient in the developingcountriesandbyanalysts only a limited ability to achieve durable fiscal adjustment should reduce fiscal atthefundingagencieswere,byandlarge, real depreciation. Devaluation can be ef- deficits so that expenditure cuts are struc- appropriate and adequate to the task at fectivein the shortrun (because prices and turedto protect and even expand ependi- hand.Theincreasedcompetitionforwater, wages do not adjust as quickly), but have tureonphysicalinfrastructure.Thiswould however, makes most of the project-by- a limited impact in the longer rn (once require substantialreductionandrational- project planning methods inadequate. prices and wages adjust), when the under- ization ofcurrent expenditure. Importlib- Rogers discusses new approaches that lying factors affecting demand and the eralization will also have the expected fa- areneededtointegrate waterresourceuse supply of foreign exchange dominate. At- vorable impactoninvestmentbecause such among different users and across differ- tempts to achieve real depreciation liberalization will be perceived as credible ent economic sectors. through continuous devaluations, or by and sustainable when accompanied by ef- This paper - a joint product of the accelerating the rate oferawl -when not ficient fiscal ajustment Water and Sanitation Division, Trans- supportedbychangesin other policies and Polley Research Working Paper Series 39 in the underlying conditions - usually over the official exchange rate are prima- * There may be a leakage of transee- end up increasing inflation, yet remain rily determined by macroeconomic poli- tions from the official to the parallel mar- ineffective in changing the real exchange cies. Policymakers should be cautious in ket rate. adopting dual (or multiple) exchange rate * Depreciationofthe parallel exchange As a rule of thumb, Kiguel argues that systems, as they provide less insulation for rate can enter inflationary expectations. maxi-devaluations are most effective in domestic prices than most analysts as- * The spread might be an important economies with low and moderate infla- sane. factor when the central bank determines tion (below 20 percent a year), especially the rate of devaluation of the official ex- when the underlying causes call for real Ghei and Kiguel empirically examine the change rate. Ghei and Kiguel findempiri- depreciation. In these circumstances, a determinants oftheparallel exchangerate cal evidence supporting this factor. devaluation can reduce the costs in terms for a cross-country sample of developing This paper - a product of the Transi- af the unemployment and lower growth countries. The sample includes countries tion and Macro-Adjustment Division, associated with achieving the desired real in which the parallel exchange rate is offi- Policy Research Department-is part of depreciation through deflation. cial (dual exchange rate systems) as well the department's project,Macroeconomic Latin America is a rich laboratory in as those in which it is unofficial (black Implications of Multiple Exchange Mar- *hich to study different exchange rate market). kets in Developing Countries. Copies of regimes. The real exchange rate varies In the typical exchange rate arrange- the paper are available free from the over time in countries that have adopted ments considered, the central bank fixes WorldBank,1818HStreetNW,Washing- the crawling peg (such as Colombia and or pegs one rate (the commercial rate), ton, DO20433. PleasecontactRaquelLuz, Brazil) andin those that use the exchange used primarilyfor current account trans- room N11-059, extension 39059 ( 31 -te more actively for disinflation. actions, and allows the parallel exchange pages). Colombia in the mid-1980s is an ex- rate, usedforcapitalaccounttransactions, ±iiiple of successful real depreciation. to be market-determined. C.lombia achieved a 40 percent real de- They base their empirical analysis on a 882. Issues In Reforming FinanCial praciationintwoyears withnosignificant portfolio macroeconomic model in which Systems In Eastern Europe: --rease in inflation. It achieved this by the parallel exchange rate is determined The Case of Bulgaria -iding maxi-devaluations (instead it by expectations and equilibrium asset srielerated the rate of crawl) and by lim- considerations in the short run - but Alfido Thorne .a-igthe size of the desiredreal deprecia- depends on the evolution of key policy (April L992) -n. variables (such as the stock of money, In Mexico in 1987, by contrast, aggres- budget deficits, and trade policy) in the Authorities inEa sternEupen countries -eexchange rate policiesbacired in the long run. shouldencouragetheirreformedfinancial - ise that they led to an acceleration of The results indicate that macroeco- systems to stimulate the supply response -!dation while failing to achieve a sus- nomic variables explain more than 70 by linking the reform of the fnancial sys- ---ned real depreciation. percent (on average) ofthe variationin the tem to the privatization ofbanks and en- This paper - a product of the Transi- spread between the official and parallel terprises -n and Macro-Adjustment Division, exchange rates. The results are stronger licy Research Department- is part of for countries where the spread is large What difficulties do Eastern European rger effort in the department to study (above 35 percent), somewhat weaker in countriesfaceinreformingtheirfinancial * ne macroeconomic implications of ex- countries withmoderatespreads(between systems? Whatshould theirreform priori- timge rate policies. This paper was pre- 10 and 35 percent), and poor when the ties be? Can financial reform make the oedfar the Conference on'"Ladinamica spread is below 10 percent. supply response more positive? losmercadosinternacionalesypoliticas They cannot reject the hypothesis that Thorneaddresses these questions using aerciales para el desarrollo,' El there are no differences in the determi- the situation in Bulgaria toillustrate the :orial, Spain, July 1991. Copies are nants ofthe spread when the parallel rate financial system most Eastern European Ailable free from the World Bank, 1818 is official and unofficial. This is not en- countrieshaveinherited.Reformingthese Street NW, Washington, DC 20433. tirely surprising, as in most cases where financial systems is especially difficult ase contactRaquel Luz,roomN11-059, the parallel rate is unofficial, it is largely because of the problems inherited from a -'nsion 39059 (22 pages). tolerated by the authorities. centrally planned economy (CPE). The Inaddition,althoughtheycannotreject financial system in a CPE is completely the hypothesis that restrictions on the different from the financial system in a 1. Dual and Multiple Exchange capital account affect the spread, theyfind market economy. It is only a slight exag- Ae Systems In Developing that restrictions on the current account geration to say that reforming the finan- Juntries: Some Empirical have no affect on it. These results are con- cial systems in these countries means cro- Idence sistent with their prior finding that part- ating a financial system from scratch. folio considerations dominate the determi- Thorne illustrates the types ofproblems a Ghei and Miguel A. Higuel nation ofthe parallel rate in the shortrun. Eastern European countries face in re- ril 1992) They find evidence that the adoption of forming their financial systems. He ar- dual exchange rate systems at best only goes that these countries can stimulate e parallel exchange rate (whether offi- partly insulates domestic prices. This in- the supply response by giving the emerg- lor unffBical) and the resulting spread sulation may be limited by three factors: ing private sector more access to credit 40 Policy REF3ch Working Paper Sertes and by increasing the savings deposited around the small town of Farafenni, in efciency in Ghanals coarsegrin market. in thefinanciai system.He argusthatthe central Gambia. Two interventions-bed- authorities should- nets treated with Permethrin and Aldermanexpandson a dynamic model of * Linkreform ofthefinancia sector to chemoprophylaxis with Maloprim market integration, first introduced by the privatizationofbanksandenterprises. (dapsone = pyrimethamine) - were con- Ravallion (1986) to Ghana's principal * Quickly privatize a group of banks. ducted in "primary-health-care" villages, maize markets, to investigate how infor- * Encourage privatized banks to lend with non-PHC villages serving as controls. mationistransmitted acroscommodities. exclusively to the emerging private sector. The study showed that general and He investigates one property of an effi- * Turn therestofthebanksintoinvest- malaria-specific mortality in young chil- cient market: the full use of available in- mentbanksandmake them participate in drenwas sharply reduced by introducing formation. the restructuring and privatization of Permethrin-treated bed-nets. The effects Studies of spatial price integration si- state-owned enterprises, of using treated bed-nets were clear, be- multaneouslyinvestigate the flow ofinfor. This paper - a product of the Private causemany childrenhadbeensleepingin mation and commodities, but it is often Sector Development and Finance Group, bed-nets before the intervention began difficult to distinguish between the two. Technical Department, Europe and Cen- without the same strong effects. A low correlation of prices between two tral Asia and Middle East and North Af- The treated bed-net intervention had markets may indicate either a poor flow ricaRegions-ispartofthedepartment's the additional effect of reducing other ofinformationoreconomicinefficieny,for regional study on financial sector reform causes of death. This 'frailty protection! example - but could also indicate com- in Eastern European countries. This pa- effect was substantial but is largely unex- petitive trade andlinked markets thatare per was presentedat a conference on Cre- plained - more basic research is needed. seasonally separated because of high ating Capital Marketsin EasternEurope, Also, not all children have to be sleep transport costs. organized by the Woodrow Wilson Center inginbed-nets for the benefits ofthe treat- So Alderman also investigates the flow in Sofia, Bulgaria, in September 1991. ment to be felt. Small rates of noncompli- of information within a single spatial Copiesofthepaperareavailablefreefrom anceneednotinvalidatetheeffectiveness market and the relationship between the World Bank, 1818 H Street NW, of the intervention. prices in spatially separate markets. Washington, DC 20433. Please contact The nets were dippedby village women, He studiesintercommoditypricetrans- Luz Hovsepian, room H9-065, extension supervised by the village health worker mittal from two perspectives. First, he 37297 (42 pages). and the traditional birth attendant, with asks whether the government can concen- the supportofthe women'sassociation. It trate on a single commodity price, yet appears that the washing and dipping achievepicepolicyobjectivesinabroader 883. Malaria: The Impact of Treated process can be undertaken successfullyby arena. Thisis importantinGhanabecause Bed-Nets on Childhood Mortality local people with a minimum of supervi- no single commodity dominates consum- in the Gambia sion, at a cost for the solution of a few US ertfoodbudgets,althoughforadministra- cents per net dipped. tive andlogisticalreasons,directinterven- Pedro L Alonso, Allan G. Hill, Patricia H. The extra reduction in mortality attrib- tion in all commodity markets is not fea- David, Greg Fegan, Joanna R.M. Armstrong utable to the use of Maloprimas aprophy- sible. He finds that price movements for Andreact Francisco, K. Cham, and Brian I lactic was probably slight and difficult to the main cereal consumed in the country Greenwood detect in this study because of the strong (maize) are fully transmitted to other (April 1992) effectofsleepingunderatreatedbed-net. grains and to other regions. This simpli- This paper - a product of the Popula- fiesanystabilizationprograms.(However, In rural Gambia, as in many parts ofSub- tion, Health, and Nutrition Department it takes three months for the price shock Saharan Africa, malaria remains a ma- - emanated from the Bank's support of to be fully transmitted In the long run, jor cause of death for children below the Johns Hopkins University fora child sur- this indicates market integration, but it age offive - indeed, the principal cause vival workshop focused on the is puzzling that it takes so long to move ofdeath when vaccination coverage rates departments Health Sector Priorities commodities between markets.) are high and death rates from common Review. Copies of the paper are available Second, he investigates the working of infectious diseases of childhood are re- free from the World Bank, 1818 H Street commodity markets in developing coun- duced. a recent years, concern has gmwn NW, Washington, DC 20433. Please con- tries. He notes imperfections in the way about the development of drug-resistant tact Otilia Nadora, room S11-219, exten- markets process information: the lagged strains of malaria - prouoking renewed sion 31091 (30 pages). price ofmaizeconveysinformation thatis interestinvector control and the reduction not contained inthe past price ofsorghum of man-vector transmission rates. or millet. 884. Intercommodity Price There are several possible explanations The effectiveness of insecticide-treated Transmittal: Analysis of Food fortbismarketinefficiency.Forexample, materials had been unclear, as earlier Markets In Ghana traders may set prices for other coarse studies had based their results on the ef- grains in response to information about fects on vectors rather than on human Harold Alderman maize prices- requiring supply changes morbidity and mortality rates from ma- (April L1992) (especially storage buildup and draw- laria. Soin 1988 the UKMedical Research down) to bring markets into equilibrium. Council began a systematic trial of a com- This dynamic model of price integration Another possibility is that some traders binedinterventionfor controllingmalaria indicates functional - if not perfect - may not dealin all grains andmay there- Policy Research Working Paper Series 41 fore have different costs for acquiring in- countries are the diversion of investment preferential trading agreements and the formation - especially for sorghum, funds to EC countries and continued ex- increasing use of nontariff barriers which is both eaten and used for making ternal barriers - especially administra- against low-tech, labor-intensive develop- beer. Brewers, mostofwhom operate on a tive, nontariff barriers. ing countryexports and againsthigh-tech small scale, may trade and store only sor- The EC expects higher growth and U.S. and Japanese exports. ghum, which may thus be a conceptually lower prices as a result ofEC-92, as firms These barriers are likely to remain, as separate (although physically contiguous) will be able to exploit comparative advan- there has been no official commitment to market. But evenfor speculative markets tages and economies of scale more effec- their removal- The question is, will the in industrial countries, in which informa- tively-andascompetitionbetweenfirms (average) barriers be raised to protect the tion is generally available electronically will increase (although the last two effects least efficient producers in the EC? And and trade rarely requires the physical may nullify each other). The net effect on to the level of the highest preferential - exchange ofgoods, perfectprice transmit- developing countries of the removal of trading agreements? If national barriers tal is often rejected. internal trade barriers depends on devel- areconverted toEC-wide protection, there In sbort, from a practical viewpoint, oping countries'income and price elastici- is a good chance thatexternal barriers will Alderma's dynamic model of price inte- ties with the EC. Current estimates sug- increase. If so, they may do so by only a gration indicates functional -if not per- gest that the effect will be small. small amount, since a single market will feet - efficiency in Ghana's coarse grain Competition among European firms is force Article 115 (which limits the move- markets. likelytoincreaseif the removal ofbureau- ment ofrestrictedgoodsbetween member This paper - a product of the Agricul- cratic and trade barriers reduces collabo- countries) to be abandoned. An external ture Operations Division, Western Africa rative agreements between firms. Those tariff that allows efficient producers to Department, and the Agricultural Policies gains may not materialize if firms merge profit from the protection of those less Division, Agriculture and Rural Develop- or cooperate to increase their market efficient would conflict too obviously with ment Department - is part of a larger share andcompete better againstU.S. or the stated objective of greater internal departmental study of food security in Japanese firms. If new external barriers competition. Ghana. Copies of the paper are ava-lable emerge, or if EC-rude barriers replace This paper- aproduct ofthe Interna- free from the World Bank, 1818 H Street national barriers, EC firms may collabo- tional Trade Division, International Eco- NW, Washington, DC 20433. Please con- rate more with the large US. orJapanese nomics Department-is part of a larger tact Cicely Spooner, room N8-039, exten- firmsjust as theyhave done in Europe to effortin the department to analyze struc- sion 32116, or by electronic mail ( 36 circumvent trade restrictions. None of tural changes in world trade and to iden- pages)- these developments will improve develop- tify their impact on developing countries' ing countries' trade in manufactures or exports. Copies ofthe paperare aailable services. free from the World Bank, 1818 H Street 885. The Impact of EC-92 Investment in EC countries may in- NW, Washington, DC 20433. Please con- on Developing Countries' Trade: crease to meet the extra demand, growth, tactAudreyEitson-Walters,room87-053, A Dissenting View or trade diversion resulting from EC-92- extension 33712 (41 pages) That investment could lead to increased A. J. Hughes Hallett investmentsin developing countries,but- (April 1992) given limited financial resources, tight 886. FactOrs That Affect Short- monetarypolicies,andheavyindebtedness Term Commercial Bank Lending The tradecreation andthetradediversion in developingcountries -is more likely to to Developing Countries effects of EC-92 on developing countries divert investment funds from developing may cancel each other out. But important countries, thus limiting their future pro- Sudarshan Gooptu adverse effects may come frora diversion of duction growth. And U.S. and Japanese and Maria Soledad Martinez Peria investment from developing countries to firms, fearing greater EC barriers and lo- (April 1992) the EC. cal-content rules, may decide to establish bases in the EC. Apreliminary look at factors that affect the Most benefits of the EC-92 program, and Technical standards in EC-92 may be flow ofshort-term commercial bank loans the greatest impact on developing coun- tougher than national standards in mem- to developing countries. tries, will probably not come from mar- ber countries, which could hurt develop- ginal changes in trade flows dependenton ing country exporters. An increase in vol- Developing countries rely on short-term relatively small changes in prices and untary export restraints, a tightening of trade credits for imports of several essen- incomes. Nor will they come from cuts in local-content rules or reciprocity agree- tial consumer goods, including medicines average costs, from changes in market ments, and subsidies for public sector and basic food supplies. The credits also structure, from the removal of internal enterprises or agriculture could also make facilitate export-related transactions. barriers on trade and on the free move- life more difficult for them. Themechanisms commercial banksuse ment of factors, or from a 5 percent in- Is 'Fortress Europe" likely? The EC to provide trade credits to developing crease in EC output. Commission says no,butthe Community's countries are complex and costly. Even a Those changes may be important to record so far is not good. The CAP is the temporarybreakintheflowofshort-term European policyrnakers, but they are of most blatant example of protectionism. credit can seriously hurt a country'sbusi- only remote interest to developing coun- Another example is the local-content re- ness. But since short-term trade credits tries. The main threats to developing quirement. Others are the "pyramid" of can be structured so that they involve few 42 Policy Research Working Paper Series risks to a bank and at the same time are 887. Power Sharing and Pollution * One device is to grant the local gov- very costly to the debtor, they are gener- Control: Coordinating Policies ernmentfinancialautonomy,inthesense ally the last forms of credit to be cut and Among Levels of Government that any taxes or fines it collects from the first to be reestablished in debt-dis- enforcement are retained locally. There tressed developing countries. William Jack are substantive implications in the choice To gauge the likelihood of continued (April 1992) of control instrument. For example, if lo- short-term trade-related financial flows to cal goverriments maximize revenue and developing countries, Gooptu and Peria Most policy decisions about targets and an emission tax is used, firms with high examined the factors that affect such instruments of pollution control should costs of abatement could be forced to bear short-term commercial bank loans. Little probably be made at the highest level of most of the cost of reducing emissions. It literature was available on the subject government involved But effective imple- may be more efflcientfor the local govern- Only recently have relevant data become mentation - including inspection, en- ment to enforce astandart, because then available, and further analysis would be forcement, and prosecution -may require mostabatementis carried out bylow-cost facilitated by more useful disaggregation involuing all levels of government. Coor- abaters. of the data that are made available. dination is then necessary, with substan- * Amore subtle incentive is to explic- Gooptu and Peria studied relevant data tue implications for choices ofpolicy tools itly affect the enforcement budget ofa lo- over time for seven countries for which and the assignment of responsibilities. cal regulator. By controlling the size ofthe data were available: Argentina, Brazil, budget through lump-sum transfers and Egypt, India, Kenya, Mexico, and Turkey. Traditional approaches to pollution con- indirectly through fine rebates, the cen- They found that: trol emphasize the'government' rolein tral governmentcanmodifytheinspection * Countries with greater growth pros- providingincentives to alter the behavior activities of alocal regulatory agencyin a pects (higher investment-to-GNP ratios) ofrelevant economic agents. Buttoexploit way that improves welfare. get more short-term credit. cost advantages at different levels ofgov- * Under decentralized control, com- * Short-termcreditsareusuallymeant ernment, pollution control policies typi- mand and control policies may be imple- tofinancecountrieswithsignificanttrade callyinvolveassigningavarietyofrespon- mented more efficiently than market- deficits. sibilities to different public agencies. based instruments. And uniform national * Higher levels of external indebted- These responsibilities can include or regional standards may improve the ness (as a ratio of total debt outstanding choosingpolicytargetscontrollinginstru- efficiency of interjurisdictional negotia- to GNP) are generally coupled with higher ments, and developing and implementing tions. levels ofshort-term external indebtedness strategies for monitoring and enforce- This paper - a product of the Public tocommercialbanks(ahigh-ratioofshort- ment. Economics Division, Policy Research De- term debt to GNP). Ahierarchically decentralizedmanage- partment-is part of CEOPEs work pro- * Country-specific factors affect the ment structure -introduces problems of gram on evaluating economic policy in- volume ofshort-term lending available to coordination because different agencies struments for pollution control, and part a country. If all else is equal, some coon- mayhave different objectives. These prob- of the research project 'Pollution and the tries (such as Kenya) find it harder to get lems canbe alleviated-andthe efficiency Choice of Economic Policy Instruments in short-term commercial bank financing gains from decentralized control retained Developing Countries" (RPO 676-48), than others (such as Mexico). Further -by modifying intergovernmental rela- funded by the Banks Research Support analysis is needed to determine which tions, particularly by using implicit and BudgeL Copies ofthe paper are available factors account for these differences, but explicit financial transfers and by divid- free from the World Bank, 1818 H Street possibilities to be explored include a ing initial property rights equally among NW, Washington, DC 20433. Please con- country's track record in implementing local authorities to ensure that they will tact Peggy Pender, room N10-067, exten- World Bank/IMF structural adjustment all want to participate in the negotiating sion 37699 (53 pages). programs;theexistenceofdomesticfinan- process Jack describes in this paper. cial markets; and orderlyresolution ofthe Among Jack's conclusions: country'sexternaldebtburdeninlinewith * Nosinglelevelofgovernmentshould 888. Transformation of Agriculture a thoughtful trategy formanaging exter- be responsible for all environmental in Central Eastern Europe nal debt. policy. Policy decisionsabouttargets and and the Former USSR: Major Thispaper-aproductofthe Financial instruments shouldbe based on the most Policy Issues and Perspectives Advisory Service Unit, Office of the Vice complete and accurate dataavailable and President, Cofinancing and Financial should encompass all aspects of the prob- Cmnha Csiki Advisory Services - is part of a larger lem. But effective implementation -in- (April 1992) Bank effort to understand the attributes cludinginspection, enforcement, andpros- of alternative types of financial flows to ecution - may require involving all lev- The former USSR could become self-suffi- developing countries. Copies ofthe paper els of government. cient infbod, but in the medium term will are available free from the World Bank, * Coordination of government policies probably remain a net agricultural ir- 1818 H Street NW, Washington, DC -between levels of'government (vertical porter - if it can persuade exporters to 20433- Please contact Rose Vo, room S8- coordination) or between administrative extend credit But Central Eastern Euro- 042, extension 33722 (41 pages). bodiesin the same tier Chorizontal)-may pean agricultural exports are likely to ex- be improved by using intergovernmental pand. Cent-al Eastern Europe could be- incentive schemes. come a tougher, more aggressimeplayer in Policy Research WodkIng Paper SerIes 43 agriculture, principally in the marketsfor come parity among agricultural produc- tence of teachers already in the system: more demanding food products - espe- ers. This means developing a new legal providing inservice training and encour- cialy pork, poultry, and fruits and oeg- framework, including, among other aging regular classroom supervision. etables. things, a land law that defines ownership After examininga nationwide sample of and land use rights and defines the pro- small rural primary schools in Thailand, Csdki surveys agricultural reform to date, cesses for distributing ownership titles, they found that a teacher's experience in identifies key policy issues, and outlines handling former owners' claims, and inservicatrairingcoursespredictsneither potential scenarios for the transformation transferring land and other assets of co- instructional quality nor studentachieve- of agriculture in Bulgaria, Czechoslova- operatives to private ownership. ment. In sharp contrast, intensity of su- Ida, the former GDR, Hungary, Poland, * Supportenvironmentally sustainable pervision within a school significantly Romania, and - to a lesser extent - the agricultural production technologies and predicts both instructional quality and -former USSR. better environmental protection. student achievement, after cantrolling for After decades of socialism, these coun- In analyzingfuture possibilitiesfor, and avariety ofschool, teacher, and classroom tries' agricultural sectors are character- influences on, the region's agricultural variables. ized by large, inefficient farms with high markets, Cs6kifocuseson these questions: The effect of supervision is significant productioncosts;heavierfoodconsumption What will the trendinfoodproductionbe, - roughly the same as the effect of than in market economies of comparable particularly for grain and meat? Will food preservice education. Intensive fiel d work prosperity, and excess demand for food, at consumption increase, and how will that in carefullyselected rural schools suggests subsidized food prices; macroeconomic affect domestic markets? How will the that supervision by effective principals is imbalances, including inflation, budget international market change? How much a critical component in a larger strategy deficits, and foreign debt; and a monopoly will conditions of trade policy improve for to create andsustainan "ethosofimprove- in food processing and distribution, agricultural exports, and how will rela- mentin school teaching and learning. Central Eastern Europe isbeginningto tions among countries change? This paper - a joint product of the create a new agricultural structure based This paper - a joint product of the World Bank and Michigan State Univer- on private ownership, real cooperatives, AgriculturalPoliciesDivision,Agriculture sity-ispartofalargereffortintheBank anda marketeconomy. TheformerUSSR andRuralDevelopmentDepartment, and to understand differences in educational is also striving to overcome serious eco- the Transition and Macro-Adjustment effectiveness. Support for this analysis namic difficulty with comprehensive eco- Division, Policy Research Department - was provided by the Banks Research nomic and political reform but is in a far is part of a larger eflfort in the Bank to Support Budget for the research project earlier stage of agrarian reform. To de- analyze the transformation of agriculture On-the-Job Improvements in Teacher velop a market-oriented, competitive ag- in theformer socialist countries. Copies of Competence: Policy Options and Their ricultural structure, these countries need the paper are available free from the Effects on Teaching and Learning (RPO to: World Bank, 1818 H StreetNW, Washing- 676.36C). Support for datacollection was * Create marketable landed property ton, DC 20433. Please contact Cicely provided by Project BRIDGES under a (CsAki discusses several ways to do this). Spooner, room NB-039, extension 32116, cooperative agreement between Harvard * Change agriculture's structure to or by electronic mail ( 32 pages). University and S&T ED, United States emphasize medium-size private agricul- Agency for International Development tural ventures and various cooperatives (DPE 5824-AOO-5076-00). Copies of this (whose future is a heavily debated issue), 889. On-the-Job Improvements paper are available free from the World together with state or communal farms. In Teacher Competence: Policy Bank, 1818HStreetNW,Washington,DC * Change government!srole, reassess- Options and Their Effects on 20433.Please contact Cynthia Cristobal, ing the agricultural sector as part of the Teaching and Learning in Thailand room S6-035, extension 33640 (45 pages). jnacroeconomic framework. Thisinvolves liberalizing consumer and producer food Stephen W. Raudenbush, Suwanna prices, eliminating food subsidies, and Eamsukkawat, Ikechuku Di-Ibor, Mohamed 890. Population, Health, providing an extension service and net- Kamali, and Wimol Taoklam and Nutrition: Fiscal 1991 Work. (April 1992) Sector Review * Create a government environment supportive of private ventures and the Teachersuperuisionby effectiveprincipals Denise Vollancourt, Janet Nasuim, transformation of the cooperative sector. is critical to improved teachingand learn- and Stacye Brown The government'srole should be to create ing in developing countries. Both teacher (April 1992) physical facilities for farmers' markets supervision and preservice training are far and a wholesaling network for private more important than inseruice teacher To strengthen efforts to alleviate poverty farming. training, and to develop management and institu- * Create a real agricultural market tional capacity, the Bank should improve that encourages fair competition. This Teachers must hone their teaching skills theskill mixofits population, health,and means fully eliminating food subsidies on the job ifthe quality ofprimary educa- nutrition staff proide befter standards within a few years and eliminating the tionis toimprovein developing countries. and guide resfranalyzingandadds- state monopoly on foreign trade. The five authors ofthis paperuse a multi- ing institutional and management issues, * Develop agricultural policy that level modeling procedure to examine two and ensure that enough time is spent on emphasizes efficient production and in- policy options for improving the compe- institutional and management issues. 44 Policy Research Working Paper Series Growth in both number of projects and ment experts in divisions working on the complex, nontransparent legal and rego- amount of lending has been a notable fea- PHN sector. latory institutions and compare theircosts ture of the Bank's support to the popula- * Revising Bank priorities and prac- with those of Chile's institutions, which tion, health, and nutrition (PHN) sector tices to ensure that enough time is spent are relatively simple. since fiscal 1981, when the Bank first on supervision and on upstream diagnos- They examine four basic areas where began lending for health. The proportion tic work, and that managementrigorously legal and regulatory institutions could of total Bank lending to the sector in- reviews the management and institu- createcritical obstaclestoefficiencyin the creased from 4.5 percent in fiscal 1990 to tional development content of lending and garment industries of Sao Paulo and 6.9 percent in fiscal 1991 (from 4.1 percent sector work. Santiago: to 5.8 percent, iflendingto non-PHNcom- * Grounding PHN policies in a macro- * The start-up of a new business (en- ponents is excluded), surpassing targets economic and multisectoral framework try). set by the Bank's senior management for oriented toward growth with poverty re- * The regulation of business. growth in the sector. duction, together with asound strategy for * Orders by customers of garment In September 1990, President Conable building institutions and the capacity to irms. expressed the Banks determination to implementandmanagepolicy. Thismeans * Sales with credit. provide greater support for primary country operations divisions have a criti- They find that Chilean business trans- health care - and set a goal of increasing cal role in helping key national actions benefit from legal simplicity and lending for primary health care from decisionmakers understand andinternal- more consistent enforcementthaninBra- about 3 percenttoabout 5 percent oftotal ize objectives of poverty alleviation and zil, but that these perceived advantages Bank leading in the next three to four institution building. are offset because of the differences be- years. This goal was exceeded in fiscal * Seeking more creative use of Bank tween formal law and practice in Brazil. 1991: lending to primary health care for instrumentsthroughareviewandassess- In two of these areas, Brazil has evolved that year amounted to US$1,220 million, ment of the best use of lending instro- some effective institutional substitutes to or 5.4 percent of total Bank lending. mentsforPHN sector interventionspore reduce the costs that would otherwise The momentum in actual and fore- innovative identification and financingof have been imposed by inefficient formal casted growth in PHN lending is attrib- local expertise; and greater effort to en- institutions. utable to several factors, including the courage the exchange of experience and In the entry of new businesses, profes- high priority assigned to human resource ideas among developing countries. sions have evolved to transform the pro- development (as a key component of eco- This paper - a product of the Popula- cess of registering a new business from a nomic reform and developmentobjectives) tion, Health, and Nutrition Department potentially torturous obstacle path into a and the Bank's strong commitment to the - is part ofa larger effort in the depart- firly affordable one-stop process. In debt alleviationofpoverty, which requires pro- ment to address management and insti- collection, information systems limit the viding basic social services to the poor. tutional issues in the PHN sector. Copies need to resort to the formal legal system. The theme of this year's annual sector of the paper are available free from the Nonetheless, regulation -in the form review blends two special topics: poverty World Bank,1818HStreetNW,Washing- of complex and resource-intensive tax alleviation and the development of man- ton, DC 20433. Please contact Otilis rules, regulatory processes, and conflict- agementandinstitutionalcapacity.Based Nadora, room S11-219, extension 31091 resolution mechanisms -raises the cost on a review of project experience, both (65 pages). of transactions for Brazilian businesses. within and outside ofthe PHN sector, this Costs are furtherraisedby greateruncer- report distills lessons that should assist tainty and frequent renegotiation of or- task managers in the design and imple- 891. Public Institutions and Private ders.So, overall, theenvironmentforbusi- mentation ofinterventionsto develop pov- Transactions: The Legal ness in Brazil is less favorable than that erty-sensitive management and institu- and Regulatory Environment in Chile. tional capacity in the PHN sector. for Business Transactions But the authors warn against a preoc- The Bank's ability to strengthen insti- In Brazil and Chile cpationwithformallegalandregulatory tutions, especially those needed to allevi- reform as a short-term means of promot- ate poverty, are constrained by the num- Andrew Stone, Brian Levy, ing economic development. In the eyes of ber and the skills mix of PHN staff, by the and Ricardo Paedes Brazilian entrepreneurs, macroeconomic absence of standards and guidelines for (April 1992) and political instability are far more im- analyzing and addressing institutional portant problems. and management issues, and by too little Chile enjoys a better formllegal and regu- This paper - a product of the Finance time to spend on institutional and man- latory environment than BraziL But dif- and Private SectorDevelopmentDivision, agement issues. Therefore, the sector re- ferences are reduced by Brazil's effective Policy Research Department-is part of view recommends: informal substitutes. In fact, Brazilian a larger effort in the department to pro- * Improving the sector staff not only in entrepreneurs rank macroeconomic and mote realistic assessment of obstacles to numbers but in access to ridelines and political stability as a higherpriority than private sector development through firm- training; malcing more use of in-house legal and regulatory rejorm. level surveys. Copies of the paper are management and institutional develop- available free from the World Bank, 1818 ment expertise; using more consulting Drawingonthenewinstitutionaleconom- H Street NW, Washington, DC 20433. specialists; and increasing the number of ics, Stone, Levy, andParedesexamine the Please contact Daniele Evans, room N9- management and institutional develop- impact on businessesofBrazil'srelatively 057, extension 37496 (30 pages). Policy Research Wolkng Paper Seles 45 892. Evaluating the Asset-Based characteristics of the corporate tax com- ment ofa legal framework that can act as Minimum Tax on Corporations: pletely dominate the impact ofrvarious tax a decentralized 'invisiblehand7toreplace An Option-Pricing Approach provisions on the marginal effective tax previous administrative controls andsteer rate (MERT) under full certainty. the private market in an efficient direc- Antonio Estoche and Sweder van Wijnbergen * The MAT, with its simple tax code tion. (April 1992) and marginal impact on the MERT, is an Gray and Stiblar describe the current appealing short cut to comprehensive tax legal framework in Slovenia in several Theminimumassettax, withitssimpletax reform - and the revenue effects in Bra- areas - including contract, company, codeandmarginal impact on the marginal zil could be substantial. In countries like bankruptcy, constitutional, real property, effectiue tax rate, is an appealing short cut Brazil -whererate-of-return uncertainty intellectual property, foreigninvestment, to comprehensive tax reform - and in is more likely to be increased by macro- andantimonopolylaw. These areasoflaw Brazil it could substantially impme flu- economic uncertainty than by introduc- define (1) property rights, (2) the means enue tion of a MAT - if a MAT could reduce to exchange them, and (3) the rules for fiscalimbalancesandthusmacroeconomic competitive market behavior. They form In many countries, well-meant ad hoc uncertainty, it might also indirectly help the bedrock of alegal system for amarket tax incentives proliferate over time, cre- lower the MERT more than it would raise economy. ating an opaque corporate tax structure it directly. The situation that Slovenia faces in and many unanticipated tax loopholes. Two common assumptions turned out undertaking legal reformas differs from Tax authoritiesin several countries have not to he true. First, because capital in- that for other Central and Eastern Euro- considered and sometimes introduced tensity varies greatly across sectors, the pean (CEE) countries for three reasons. minimum corporate taxes. These are de- MATdoes not reduce sectoral distortions. First, Yugoslavia took an independent signed to reduce losses in revenues and The standard deviation of the MERT is course and began experimenting with the distortions in the allocation of resources higher with MAT than without. introduction of market forces soon after thatresultfrom the interaction ofvarious Second, although that variation gives World War EL As a result, Slovenia - credits, exemptions, and so on. the MAT a higher marginal impact, it is which was the richest of the Yugoslav Liability under such a tax is sometimes not true that high-risk firms are hardest republics -leads other CEE countries in linked to profits but more often to assets, hit by the MAT. High-risk firms tend to standard of living experience with mar- as these are harder to manipulate. be high-rate-of-return firms, which re- kets, and openness to influences from EstacheandvanWijnbergenrefertosuch duces MATs impact. Concern that the abroad (particularly from Western Eu- a tax as a minimum asset tax (MAT).. MAT would discriminate between the rope). Second, unlike otherCEEcountries, The assessment of a minimum tax is most innovative but riskiest firms seems the federal structure of Yugoslavia over usually based on the computation of the to be unwarranted.- thepast4Oyearshasgrantedconsiderable changes the minimum tax will introduce This paper - a product of the Country law-making powers to the republics. The in marginal effective tax rates, using the Operations Division, Country Depart- issue offederal-republiclegal relationsand standard King-Fullerton methodology. ment , Latin America and the Caribbean 'conflicts of laws" has thus always been This methodology has greatlimitations as Region - is part of a larger effort in the central.Third, Sloveniaistryingtoresolve it does not deal with the revenue effects region to assist the government of'Brazil the question of which Yugoslav laws to ofthe loopholes and cannot handle uncer- in reforming its tax system. Copies of the adoptandwhichtoreplace withwhollynew tainty. Thisis aseriousshortcomingasthe paper are available free from the World Slovenelegislation.Legal'successiohas impact of the MAT depends on the sto- Bank, 1818HStreetNW,Washington,DC become a major issue. chastic characteristics ofthe link between 20433. Please contact Antonio Estache, Sloveniahasprogressedsteadilytoward assessed asset value and asset income in room E10-081, extension 81442 (28 creatingabasiclegalframeworkin which each period. pages). the private sector can grow and develop. . Estache and van Wijnbergen suggest an It benefits from the efforts that Yugoslav alternative approach based on option pric- economic and legal reformers have made ing, an approach designed to incorporate 893. The Evolving Legal since mid-1988, and from its willingness the impact of rate-of-return uncertainty Framework for Private Sector to adopt many of the Yugoslav solutions on the burden a MAT will impose. This Activity In Slovenia upon independence rather than trying to approach allows the assessment of the start again from scratch. minimum's taxes expected tax burden. It CherylW. Gray and Frajo D. Stibla Few changes appear to be needed in also yields a measure of the value of a (April 1992) some areas of law -including company, minimum tax to agovernment faced with foreign investment, and intellectual prop- great uncertainty aboutrevenue prospects In moving toward a market economy, erty law. But in others, such as bank- because of the proliferation of tax incen- Slovenia is working hard to create a legal ruptcy and antimonopoly law, both the tives. They use their methodology to as- frameworkthatcanfosterthegrowthefthe legalframeworkandthelegalinstitutions sess a recent Brazilian MAT proposal us- private sector. to interpret and implement the law still ing sectoral data on corporate income tax lack an adequate structure and sufficient revenue and asset value. They conclude: The government of Slovenia is moving credibility to support a private market * Uncertainty should play an explicit rapidly to promote the growth of an effi- economy. Asin other post-socialist econo- role in evaluations of MAT proposals and ient market economy. One of the most mies, real property rights is an area of corporate taxes generally. The option important tasks it faces is the develop- tremendous uncertainty, both because of 46 POCy Research Working Paper Series Slovenia's determination to reverse the According to Ingram, gaps in per capita 20433. Please contact Jean Gray past through reprivatization andbecause GDPhave increased among low-, middle- Ponchamni,room S3-032, extension 31022 ofthe limits it places on foreign ownership. , and high-income countries. The range of (40 page, including tables). Finally, true legal reform -notjust on per capita GDP growth rates in develop- paper - cannot move more quicdy than ing countries has widened as well. political and economic reform. IfSlovenia Ingram finds that evidence does not 895. How Can Debt Swaps can advance on the political and economic indicate a convergence ofproductivitylev- Be Used for Development? fronts as well in 1992, it can create an els across the sample ofcountries. Differ- attractive setting for new private invest- encesinabsolutelevelsofproductivity are MoluaMukherjee ment. increasing, not decreasing - among the (April 1992) This paper - a product of the Transi- developing countries, and between devel- tion and Macro-Adjustment Division, oping and industrial countries. In addition to fiancial benefits,debt con- Policy Research Department-is part of There is some convergence in average version projects initiated by debtors pro- a larger research effort on legal reform in productivity growth rates between devel- vide a valuable opportunity for strength- Central and Eastern Europe. Copies are oping and industrial countries, but mod- ening institutions. available free from the World Bank, 1818 est disaggregation by income level and H Street NW. Washington, DC 20433. region reveals a divergence in growth The idea behind debt conversion is that Please contact Maxine Berg, room N11- rates among developing country groups instead of continuing to make payments 054, extension 36969 (35 pages). and between those groups and high-in- an outstanding loans in hard currencyin come countries. the face of debt servicing difficulties, the However, the evidence shows strong debtorsfindsome otherwaytosettle debts 894. Social IndIcators convergence across the sample for several that is satisfactory to themselves and the and Productivity Convergence social indicators that are good measures creditor. In particular, debt for develop- In Developing Countries of human welfare. Pour social indicators ment can be a useful way to stabilize a -life expectancy, caloricintake,primary growing debt stock, far example, by con- Gnrepy Ingram enrollment ratios, and urbanization - verting amounts which are already in (April 1992) show evidence of convergence for every arrears. convergence index used. Two social indi- Mukherjeediscussestherelativeimpor- If the goal of economic development is to cators - labor force participation rates tance ofdebt conversion as a development promote human welfare, the masteefient and defense spending as a share of GNP tool, contrasts conversion of debt owed to focus ofdevelopment efforts is in eryl- -shownoevidence ofconvergence by any public and private creditors, touches on income developing countrie. ere the index used. The other 10 social indicators the issue of its impact on inflation, and payoff in improved social indicatorsthat sbowsomeevidenceofconvergence;social examines criteriafar decidingwhich types measure human welfare is highr than it spending as a percentage of GNP is the of debt are suitable for conversion. She would be for similar efforts in middle-in next most convergent of the remaining contends thatthe principle ofdebtconver- come coun&res. indicators. sion could be applied in many situations, Social indicator levels are oten closely provides examples, and describes the Most analysis of the convergence of pro- relatedtoGDPlevels,butotherfectorsare mechanicsof debtconversionfordevelop- ductivity addresses industrial countries, also clearly at work, including the trans- ment purposes as part of an overall sec- Ingram takesabroaderapproach tomes- mission of knowledge, information, and toral strategy. sures of performance. new technologies acrossnational borders. She concludes by discussing tw-, ways For one thing, he analyzes some mea- Ingrams main conclusion- a given ab- tostrengtheninstitutionsfarcarzyingout sures ofproductivity but focuses far more solute or proportional increase in per debt conversions. on social indicators that are not narrowly capita GDP in very low-income develop- Large, unanticipatsd inflows of re- economic, including: ing countries is generally associated with sources can create diWcult relationships * Indices of outcome, such as life ex- greate improvements in the social indi- in traditionally underfunded activities. pectancy. cators that measure human welfare than Creditors often havelittle confidence that * Indices of the availability of inputs, is a similar increase in middle-income debtars will be able to fulfill project-re- such as doctors per capita. developing countries. lated obligations because they have inad- * Indices that can be either inputs or To the extent that improving welfare is equate absorptive capacity, weak institu- outcomes, such aspercapitacaloricintake the objective of development efforts, itis tions, inadequate sources of information offood. most efficientto focus such effortsonlow- inthedacisionmaldngmacinery, andin- * Measures of government spending income developing countries. adequate managerial andadministrative patterns. Thispaper-aproductoftheResearch skills. Moreover,he examines alarge universe Advisory Staff, Office of the Vice Presi- Debt conversion projects may be a use- ofcountries* 21 high-income or industrial dent, DevelopmentEconomics-was pre- ful, noncontroversial vehicle for bringing countries and up to 88 developing coun- pared for the Conference on Historical in domestic mnagerial talent from local tries (depending on the availability of PerspectivesOn the International Conver- naugovermentorganizationsoncontract data). Some data cover the entire period, gence of Productivity held in April 1992. (for example, to a ministry) to be respon- 1960-85; some cover only a few years in Copies are available free from the World sible for implementation - to make the that period. Bank, 1818HStreetNW,Washingta,DC project deliverable.! Policy Research WorkIng Paper Series 47 One instrument for allowing this to Escuela Nueva was created in the 1976 participation, as well asreducing dropout happen is a trust fund. The trustee has as an official improvement on tho unitary rate. legal title over the fund and a fiduciary school. By 1978, more than 500 schools And their preliminary findings suggest responsibility to the beneficiaries to follow were involved; another 1,500 were added that this was done at a unit cost only 5 to the terms and comply with applicable by 1982. Further expansion, partially fi- 10 percent higher than unit costs in tra- laws.National environmental trust funds nanced by the World Bank, increased en- ditional schools.The extracostB ofprovid- have been establishedin several countries rollment to 17,948 schools by 198, mev- ing special study guides, a library, and in connection with debt-for-nature swaps. ing 800,000 students. teachers with extra training - three Another is for sector policymakers to EscuelaNueuaisarural school in which times the amount of teacher training re- approach international counterpart one or two teachers offer all five years of quiredfortraditional classes-are offset nongovernment organizations directly to primary education in one or two multi- by the fact that the schools have only one find out ifthere isinterestinfunding spe- grade classrooms. Promotion is flexible, or two teachers for five grades. cific development activities (especially but not automatic; the student is pro- Is Escuela Nuea replicable? People those which are not eligible for multilat- moted to the next level once athe accom- worry about this. It took more than 15 eral financing) through debt conversions plishes the minimum educational objec- years for it to become a formal program, to support a well-defined sectoral tives, which could take more than oe andthesupportitgetsdependslargelyon program. The lesson from debt-for-nature academic year. (This system alters the the personal preferences of local admin- conversions ia-ty be that the development system of automatic promotion to which istrators. Some also fear that expansion community an? banks must worktogether there were objections.) of this innovative program might lessen closely, combining their expertise to Special instructional materials are officials'contrlofthequa]ityofitsimple- provide long-term resources for develop- used,includingmanualsfor teachersand mentation, including the quality of ment. supervisors and studentguidesthatfacili- teacher training, of delivery ofmaterials, This paper is a product of the Project tate individual and group work. Curricu- and of school follow-up. Financing Group, Cofinancing and Finan- lum and materials encourage the practi- This paper - a product of the Human cial Advisory Services Department. Cop- cal application ofwhatislearnedtolifein Resources Division, Technical Depart- ies of the paperare available free from the a rural community. Teachers and super- ment, Latin America and the Caribbean WorldBank, 1818HStreetNW, Washing- visors get special training in how to in- -is part ofalarger effortin to assess the ton, DC 20433. Please contact Kamar volve the community and how to use the qualityafprimaryeducationintheregion. Yousus,room H9-055, extension 33102( new educational materials, student Copies ofthe paperare available free from 24 pages). guides, and the studentlibrary. Each edu- the World Bank, 1818 H Street NW, cational district has a demonstration Washington, DC 20433. Please contact school. Maria Malca, room 813-139, extension 896. AchIevement Evaluation The system supports peer instruction, 37720 (21 pages). of Colombia's Escuela Nueva: with older students coaching younger Is Multigrade the Answer? ones. The schools have study corners fo- cused on different subject areas and a 897. Unemployment Insurance George Psachampoulos, Carlos Rojas, small library that also functions as acom- for Developing Countries and Eduardo Velez munity information center. Many activi- (April 1992) ties - such as an agricultural calendar Daniel s. Hamermesh and a county monograph - are designed (May 1992) Other things being equa, students in to involve parents in support of their Colombia's innovative multigrade rural children's learning. What structure of tazes and benets is school program achieve higher achieve- A self-monitoring mechanism allows appropriate for an unemployment insur- ment.scores than their counterparts in tr- students tomonitortheir own attendance ance program? Can the sameprinciples be ditional schools - at unit costs that ap- records; they can communicate concerns applied in developing as in developed pear to be only 5 to 10 percent higher. and problems through a suggestion box. countries? * Student progress is monitored in a Tn the mid-1980s, half of Colombia's rn- progress control book, geared to mastery Unemployment insurance, contends ral schools did not offer complete primary of activities and the flexible promotion Hamermeash, provides compensation for education and mere than half of rural concept lost income by requiring individuals or children between the ages of 7 and 9 had . A traditional school follows a national employers, or both, to pay taxes into a never attended school. Unitary schools - curriculum, does not give slow learners common fundIt ispartofageneral safety multigrade classrooms taught by one special attention, and does not stimulate net constructed by citizens of developed teacher - were established in the early students with special materials. countries.Itisuniqueamongsocialinsur- 1960sin isolatedrural areas with few stu- Pancharopoulos,Rjas, andVeles evalu- ance programs in that it offers payment dents, but when efforts were made to ex- ated a 1987 sample of more than 3,000 foraneventthatispartly preventable and pand the program nationally several prob- third and fifth graders from 168 Escuela thatin not physically painful. Thus, it dif- lems became apparent - with teacher Nueva and 60traditional schools (a con- fersfromold-ageanddisabilityinsurance, training, with the automatic promotion trol group). They found that Eacela from compensation for work-related in- .,stem, and with the relevance of course Nuevahad significantlyimprovedstudent jury and illness, and others. This exposes wontent to rural life. outcomes and student and community it to greater criticism from citizens op- 48 PolIcy Researh Working Paper Series posed to any social insurance, criticism 898. Reforming Finance But taking concerns about moral haz- that planners who build unemployment in Transitional Socialist ard to an extreme - prohibiting debt fi- insurance programs must take into ac- Economies: Avoiding the Path nance-could starve new firmsforcredit count. from Shell Money to Shell Games and limit economic growth. And without Elamermesh analyzes the various goals healthy growth, the reform-oriented re- that have been adduced for unemploy- Gerard Caprio, Jr. and Ross levine solve of TSEs resolve may wane. ment insurance and decides which ones (April 1992) This paper-aproductoftheFinancial make sense. -Sometimes the supposed Sector Development Department - is goals run counter to what unemployment In several transitional socialist economies part of a larger effort in the department insurance programs actually do, but one thefinancial system is indangerqfbecom- to study financial reform in transitional goal - providing consumption insurance ing part ofa shell game to hide the losses socialist economies. Copies of the paper - is at least partly met by typical unem- of the 'rear economy. Rapid, successful are available free from the World Bank, - ployment insurance programs in devel- economic reform requiresputtingtheshell 1818 H Street NW, Washington, DC oped countries. game to an end. 20433. Please contact WilAi Hamermesh lists the parameters of Pitayatonakarn, room N9-003, extension typical unemployment insurance pro- In the late 1980s, transitional socialist 37666 ( 37 pages). grams and theirrangesinindustrial coun- economies (TSEs) in Central and Eastern tries.Evidenceabout the economic impact Europe were only somewhat more sophis- of these parameters provides planners ticated than shell money systems: savings 899. The Financing of Small with abasis for choice thatcan guide them books orcurrency hadtobe usedformost Firms In Gennany inconstructingunemploymentinsurance transactionsand there wasnoriskassess- programs elsewhere. ment, information monitoringandacqui- Christian Earm Experience and evidence in developed sition,orportfoliomanagement.TheTSEs (May 1992) economiesmaycarryoverinto developing have moved toward a two-tiered banking economies, Hamermesh concludes, but system (at different speeds), but they lag In Germany, small banks ftnance small this is unlear. Several characteristics of in the development ofcompetitive,market- firms. Adioe government support and a developing economies, particularly the based financial systems. In several TSEs sophisticated reftnancing netumrk efOe- possibilitythataduallabormarketexists, the financial system seems tobe part of a tively overcomefunancial market imperfw- are important. This suggests the need for shell game to hide the losses of the real" tions. careinintroducingunemploymentinsur- economy. ance programs in these economies. Caprio and Levine argue that rapid, In Germany, small firms are financed Hamermesh suggests several lines of re- successful economic reform requires put- chieflybysmall banks, which are grouped search to answer questions about the va- tingtheshell game to an end. Theyreview into two systems* the savings banks lidity of the consumption-insurance goal several contentious issues of financial (Sparkassen) and the creditcooperatives. in developingcountries, and aboutappro- reform in the TSEs, especially issues in- The government actively supports the fi- priate structures of taxes and benefits. volving macrofinance, corporate finance, nancing ofinvestmentsin small industry Hamerrnesh's discussions of dual labor the internal debt problem, and the need - especially business start-ups. Harm markets and the size of the modern sec- to build efficient banks. explains how small firms are financed in tor do not apply to the formerly planned Key problems in the financial sector are Germany. economies of Eastern Europe, butbis dis- achieving some flexibility with interest Harmcontendsthatsmallandmedium- cussion of program parameters and goals rates, making the financial system com- size firms contribute alot to the Germani may be useful for policymakers there who petitive and efficient,helpingin theretool- economy. Small firms are not subject to must analyze expectations about any un- ingof existing firms and the construction the control institutions - such as super-. employment insurance program that is of new ones, building the banks' institu- visory board seats, proxy voting, and eq- proposed. tional capability for commercial lending uity holdings - that shape the relation- This paper - a product of the Educa- (includingimprovingthebanksinonitor- ships between large firms and large tion and Employment Division, Popula- ing capability and skills in assessingrisk banks. tion and Human Resources Department and credit), and cleaning up the heavy Government programs - whether -is part of the department's program of arrears in debts between enterprises loans from government banks or credit studies on employment and labor market Caprio and Levine contend that the insurance from subsidizedcredit-guaran- issues. Copies are available free from the banks should be 'cleaned up" when they tee institutions - are all administered World Bank, 1818HStreetNW, Washing- are privatized, to prevent the quick re- through the banking system. The govern- ton, DC 20433. Please contact Selina emergence ofdebtproblems.They believe ment funds or insures selected projects, Khan, room 86-228, extension 33651 (44 that either ofthe proposed alternatives for but the banks assume therole ofthemoni- pages). shaping financial systems in the TSEs - tor and credit analyst in return for com- veryhighly capitalized banking ar narrow pensation. banking - would minimize the need for The operations ofgovernmentbanks do future support. Either alternative would not have a subsidy component beyond reduce leverage in the TSEs and provide profits forgone. Their loans carry low in- more financial stability. terestratesbut not to the extent that they Policy Research Working Paper Series 49 allow profitable arbitrage with financial German banks are often criticized, or the factionalized U.S. system. investments. The subsidy associated with praised, depending on a person's view- Thispaper-aproductofthe Financial the credit-guarantee institutions benefits point, for owningGermanindustryandfor Sector Development Department - is almost exclusively the entrepreneur who playing an activepart in corporate control. part of a larger effort in the department would otherwise have been rationed out Harm argues that this misrepresents to study the role and functions of finan- of the market. Banks benefit only to the German banking- First, the number of cial institutions. Copies of the paper are extent that overcoming such rationing German firms a bank can own or control, available free from the World Bank, 1818 brings them new business. Therefore, although significant, is limited. H Street NW, Washington, DC 20433. subsidies are not exploited beyond an in- Some very large firms are predomi- Please contact Wilai Pitayatonakarn, tended level. nantly privately owned, or are not char- roomN9-003, extension37666 (32pages). Harm points out that small banks, tered as joint-stock companies that could .which are part of a decentralized market potentiallybe listed on an exchange. Most structure, overcome imperfections in the small firms, and even somelarge firms, do financial market by buildinginstitutions not even have a supervisory board - that supersede the market mechanism. which is the most important forum 'The savings bank and credit cooperative through which bankers can represent systems have each developed an internal their interests in a firm. capital market, not unlike those within Second,althoughmostofthelargest100 large banks operating nationwide. Only firmshaveaban1cmemberontheirsuper- central institutions participate in the do- visory board, this does not imply effective mesticimoney market to place the system's bank control. Many companies have two excess liquidity or to raise funds to cover bankers from different institutions on the system'sdeficits.Also, thefundingpro- their board. gramsofthegovernmentbankscanbeseen Third, the role of the banker in the su- asareflnancingmechanismthatespecially pervisory board has to be viewed in the helps small banks. The same is true for lightoftherigorousstandardsofcorporate rediscountable trade bills. governance imposed on German public Harm stresses that the nonmarket firms. The Codetermination Law of 1976 means for allocating funds have developed mandates that laborberepresented on the only to counter market imperfections. supervisory board of the largest firms as Marketincentives provide theframework well as all joint-stock companies. for economic decisions. The system is bal- This stresses the role ofthe supervisory anced to the extent that the scope for per- board as a negotiating forum for all inter- verse allocation of funds is minimized by ested parties. It leaves little room for the mandating joint decisions of potentially interpretation thatthe bankers are eXclu- conflicting parties. sively in control. This paper-a product ofthe Financial Fourth, bank ownership of industry is Sector Development Department - is not pervasive, but is in fact limited to a part of a larger effort in the department few special cases. Ownership ofsignificant to study the role and functions of finan- stakes has further decreased during the cial institutions. Copies of the paper are last decade. available free from the World Bank, 1818 Fifth, proxy voting is more important H Street NW, Washington, DC 20433. than stock ownership as a potentialmeans Please contact Wilai Pitayatonakarn, ofcontrol. Harm notes that it is generally room N9-003, extension 37666 (35pages). agreed in Germany that banks provide a useful service to small shareholders. Al- though more than half of the largest 100 900. The Relationship between firms are notaffected by proxyvoting, the German Banks and Large German continued attractiveness of corporate eq- Firms uities for the general public suggests that the control issues associated with proxy Christian Harm voting will become increasingly impor- (May 1992) tant. Harm argues that the German system Large German banks provide ail kinds of of corporate governance represents an financialservicesto largeindustrial com- efficient attempt to minimize socially panies and participate in an effectEve sys- wasteful behavior. The negotiated consen- tem ofcorporategovernance.But contrary sus achieved in the boardroom provides to widely-Aeld views, they do not own Ger- betterincentives to managementtomaxi- man industry. mize firm value and social welfare than Volume X Numbers 901 - 1000 Policy Research Working Paper Seres 53 901. Opening the Capital .ccount: from opening the capital account domes- domesticinterestrates.Thepublicsector's A Survey of Issues and Results tic real interest rates would decline, and domestic debt was substantial, however, there mightbe a 10 to 15 percentincrease andthe highinterestrates drove the pub- James A. Hanson in investment, which also might bringbet- lic sectorsinterest bill considerably above (May 1992) ter technology and management with it. its non-interest surplus. The public sector Reasonable fiscal balance and a sound could therefore cover its interest bill only Opening the capital account allows indi- domestic financial system are precondi- by taking on additional debt- Because the uiduals to diversify and protect themselves tions to successfully opening the capital interest bill was so large, domestic debt betteragainst risks, as well as increasing account- Without these preconditions, grew rapidly. Hyperinflation resulted the economy's access to foreign saving. But capitalflightmay occur orthe government when the outstanding debt became larger it also limits the country's ability to make may have to bail out domestic banks. than domestic financial markets could be monetary policy and tax capital Capitalaccountliberalizationcan,tosome persuaded to hold. extent, be phased with current account The Central Bank played a focal role in Increased trade, improved communica- liberalization by legalizing and limiting these processes.It issue? !iterest-bearing tions, growinginternationalization ofpro- different instruments and institutions to debt in the forms of remunerated bank duction, and legalization of foreign cur- varying degrees. Finally, tradeliberaliza- reserves, "inaccessible deposits,"and Cen- rency instruments have increased access tion programs and exchange rate policy tral Bank hills, to absorb money. The in- to international capital markets. Develop- need to be viewed not only in terms of terest bill on these liabilities generated ing country governments are beginning to maintaining current account balance but mounting 'quasi-fiscal" borrowing re- consider complementing increasingly also how they affect the real interest rate quirements, which the Central Bank fi- open goods markets with de jure capital and investment, through the capital ac- nanced through additional debt issues. account liberalization. To assist this count. This debt washeldmainlybycommercial analysis, Hanson surveys the costs and This paper - ajoint product of the Of- banks who financed themselves through benefits of opening domestic capital mar- fice ofthe Director, Country Department high-yielding short-term deposits. kets and including some practical issues. W, Latin America and the Caribbean Hyperinflationary pressure developed Capital account liberalization provides Region, and the Financial Policy and Sys- when depositors, perceivingthat the Cen- greater access to foreign financing for tems Division, Country Economics De- tralBank'sdebtaccunulationwasbecom- aggregate investment. Italsoallowsindi- partment - is part of a larger research ing excessive, withdrew and moved rap- viduals to diversify and protect them- effort to understand financial reform. It idly into foreign exchange, engendering selves against risks more easily. But in- was funded by the Bank's Research Sup- heavy devaluation pressure. dividualsoftenseektoprotectthemselves port Budget for research project 'The Copies of this paper are available free against actual and potential government Impact of Financial Reform" (RPO 676- from the World Bank, 1818 H Street NW, policies. This may lead to reduced domes- 13). Thepaperfocuses on the debate about Washington, DC 20433. Please contact tic saving when the capital account is the sequencing ofreform -which should Alexandra Blackhurst, room 16-018, ex- opened, particularlyin an unstable policy come first: the liberalization ofcapital or tension 37897 (53 pages). An earlier ver- environment. current accounts? Copies ofthe paper are sionofthispaper-aproductoftheCoun- Open capital accounts reduce the abil- available free from the World Bank, 1818 try Operations Division, CountryDepart- ity totax capital and to conduct monetary H Street NW, Washington, DC 20433. ment IV, Latin America and the Carib- policy (under a fixed exchange rate). They Please contactDiane Bouvet, room 18-061, bean Region - was published as the also increase a country's exposure to ex- extension 36783 (43 pages). Region's Internal Discussion Paper 66, ternal monetary shocks. But the loss oftax 'Public Sector 'Debt Distress' in and monetary independence brings an Argentina'sRecentStabilization Efforts." offsettingbenefitthegovernment'sincen- 902. Public Sector "Debt Distress" tive to undertake such policies is reduced, In Argentina, 1988-89 which lessens the risk of policy instabil- 903. The Economic Effects ity. An open capital account also may en- Paul Beckerman of Minimum Import Prices .hance the ability to conduct fiscal policy, (May 1992) (With an Application to Uruguay) dependingon howinternational investors respond to variations in fiscal deficits. Efforts to control Argentina's inflation in Federico Changanaquf Finally, in evaluating the costs and ben- 1988 and 1989 failed,generating episodes and Patrick Messerlin efits aflegally opening the capital account, of hyperinflation, largely because the sta- (May 1992) it is important to consider just how open bilization programs drove the public sec- the capital account really is and to what tar into debt distres." By imposing floor prices on imparts, the extent existing regulations merely shift procedures for refence and minimum the burden of implicit taxes onto those UndertheAugust L988"Primavera Plan export prices jeopardize trade liberaliza- with less access to foreign exchange. and the July 1989 "Bunge y Born" Plan tionefforts bycreatingtheimpression that Most evidence about theimpactofeapi- stabilization programs, the Argentine tariff cats are greater than they are Ref- tal account liberalization comes from in- authorities sought to anchor the price erencepriceraddto the distortions created dustrial countries. Available evidence level through an appreciated real ex- bya pure tariffsystem, by distorting rela- suggests that developing countries with change rate, which they sustained tive domestic prices - by promoting the stable policy environments could benefit through policies that maintained high domestic consumption of highe-quality 54 Policy Research Working Paper Series goods and the domestic production of Ballantyne, room N10-039, extension high investment rates, such as deforesta- lower-quality goods. 37947 (23 pages). tion and sulfur oxides, tend to improve with higher incomes. By increasing the cost of imports, mini- * The main exceptions to this pattern mum unitimport reference prices notonly 904. Economic Growth are dissolved oxygen in rivers, municipal generate theusual distortionsoneexpects and Environmental Quality: waste, and carbon emissions - all of from tariff protection but add new ones Time-Series and Cross-Country which have negative effects that can be that a pure tariff system would not gen- Evidence externalized. erate. * Technology seems to workin favor of Reference prices substantially reduce Nemat Shafik and Susheqit Bandyopadhyay improved environmental quality. Except the price gap between imports with prices (Jine 1992) for fecal coliform, all environmental indi- above and below the reference price. By catorsimproveor donotworsenovertime,. making 'cheap" imports relatively more It ispossible to "grow ut orsome environ- controlling for the effect of income. expensive than `expensive" imports, ref- mental problems, but there is nothing an- * The econometric evidence suggests erence prices affect quality in three ways tomatic about doing am Action tends to be thattrade, debt, andothermacyceconomic that appear not to have been analyzed taken where there are generahzed local policyvariablesseemtohavelittlegener- before: costs and substantial private and social alizedeffectanthe enviromnent, although * They can induceforeignfirmstoshift benefits. Where the costs ofenvinmmental some policies can be linked to specific toward more expensive exports to the degradation are borne by others (by the environmental problems. country with reference prices. poor or by other countries), there are few * The evidence suggests that it is pos- * They can induce domestic producers incentives to alter damaging behavior sible togrow out of* some environmental in that country to shift production toward Trade, debt, and other macroeconomic problems, but there is nothing automatic lower-quality, cheaper goods. poliy variables seem to have little gener- about daing so-policies andinvestments * Because this decreases the relative alized effect on the environment toreduce degradation are necessary. The price of the expensive varieties, domestic evidence shows that most countries find consumers may lean toward buying more Shafik and Bandyopadbyay explore the such environmental policies and invest- expensive goods. relationship between economic growth ments worthwhile. In other words, this system ofadminis- and environmental quality by analyzing * Action tends tobe taken where there tered protection distorts domestic con- patterns ofenvironmental transformation are generalized local costs and substan- sumption and production. for countries at different income levels. tialprivate and socialbenefits.Where the Using the case of Uruguay, Theylook at how eightindicators of envi- costs of environmental degradation are Changanaquf and Messerlin estimate ranmental quality evolve in response to borne by others (by the poor or by other whatprotection the reference price proce- economic growth and policies across a countries), there are fewincentives to al- dures provide for Uruguayan industries Iargenumberofcountriesandacosstime. ter damagingbehavior. and analyze how this protection affects Has past economic growth been asso- This paper-a product ofthe Office of Uruguay's economy. ciated with the accumulation of natural theVicePresident, DevelopmentEconom- They show thatthe reference andmini- capital or the drawing down of natural ics - was produced as a background pa- mum export price procedures imposefloor resource stocks? Is the accumulation of per for World Development Report 1992, prices on imports that cover more than a physical andhman capitala complement which focuses on the environment Cop- third of value addedin Uruguayanmanu- to or a substitute for the accumulation of ies of this paperare available freefrom the facturing. The minimum exportprice sys- natural capital? How do these relation- WorldBank, 1818 HStreetNW,Washing- tem boosts published tariff rates for cow- ships vary across different environmental tan, DC 20433. Please contact the World ered goods by 7 percent (probably an un- resources? Andhowhave macroeconomic DevelopmentReport office, room T7-101, derestimate) and the reference system policies affected the evolution of environ- extension 31393 (50 pages). boosts them 18 percent. mental quality? Among their conclusionsc These systems jeopardize trade liberal- * Incomehasthemostconsistentlysig- ization efforts by creating the impression nificanteffectonallindicatorsofenviron- 905- Investing in Ali the People that tariff cuts are greater than they re- mental quality. But the relationship be- ally are. These systems also create mas- tween environmental quality and eco- Lawrence H. Summers sive distortions (from 15 to 30 percent) nonic growth is far from simple. As in- (may 192) between the relative domestic prices of comestise, most enviranmentalindicators imported goods above and below the floor deteriorate initially, except for access to Money spent increasing the educaton of prices. safe water and urban sanitation - prob- girls is not only more socially producrh,e This paper - a product of the Trade lems that higher incomes help resolve. than military outlays. It is also fir more Policy Division, Country Economics De- * Many indicators tend to improve as productive thamothersocialsector outlays partment-is part ofalarger effortinthe countries approach middle-incomelevels. -and than the vastly lagerphysicaloapi- department to monitor and improve the There is some evidence thatcountries with tal outlays projected for the ne:t decade effectiveness oftrade policyreforms. Cop- highinvestmentratesandrapideconomic ies of thepaperare availablefreeftem the growth put greater pressure on natural Recent research has convinced Summers World Bank, 1818H StreetNW.Washing- resources, particularly in terms of pollu- that once all the benefits are recognized, tan, DC 20433. Please contact Dawn tion.But some indicators thatworsen with investment in the education of girls may Policy Research Woing Paper Series 55 be th1e highest return investment avail- nual General Meeting of the Pakistan only paper, the legal framework comes to able in the developing world - and it is Society of Development Economists in life only when legal and administrative an especially high priority for Pakistan. Islamabad, Pakistan, in January 1992. institutions can enforce the laws and Summers stresses five points to make his Copies of the paper are available free from readily resolve the disputes they inevita- case for action: the World Bank, 1818 H Street NW, bly spur, and onlywhen the public accepts * Tens of millions of women (perhaps Washington, DC 20433. Please contact that the laws are binding. Moreover, the as many as 100 million) are missingworld- Maria Fernandez, room S9-035, extension laws by necessity provide only a general wide mainly because othigher death rates 33766 (26 pages, including tables). framework. Their content must be filled for young girls than boys. Higher death bymore detailedregulationsandpractice ratesare symptomatic ofthemoregeneral in individual cases, a process that takes pattern offemale deprivation in the devel- 906. Bulgaria's Evolving Legal time. The challenge of legal development oping world, especially in South Asia. Framework for Private Sector isasimmenseasthatofeconomicreform, * Underinvestment in girls is an eco- Development and the two are inexorably intertwined. nomic problem resulting from a vicious This paper -a product of the Socialist cycle caused by distorted incentives. Par- Cheryl W. Gray and Peter Innachhov Economies Reform Unit, Country Eco- - ents don't invest in their daughters be- (May 1992) nomics Department, and the Europe and cause they expectthem to grow upto serve Central AsiaDivision, Legal Department only their husbands; uneducated women The administrative and judicial machin- -is part of a larger effort in the Bank to have few alternatives, so the expectation ery for implementing new laws is slower study evolving legal frameworks in East- becomes self-fulfilling. to develop than the new laws themselves. ernEurope. Copiesofthe paperare avail- * Increasingeducationalopportunities The challenge of legal development is as able free from the World Bank, 1818 H for girls ofrers the best chance of break- immenseasthatafeconomicreform-and Street N"W, Washington, DC 20433. ing this vicious cycle. Considering both the two are inexorably intertwined Please contact Maxine Berg, room N11- private benefits andreturns to otherfam- 054, extension 36969 (34 pages). ilymembers, itis perhaps the best yield- ing return of all investments available in Bulgariaisin themidstofahistorictrans- developingcountries.Amongotherthings, formation from a planned to a market 907. Institutional ReforM women spend more of their income on economy. The Bulgarian government is in Emerging Securities Markets children than theirhusbands do, and edu- working steadily to create a legal frame- catedwomenaremorelikelytoseekmedi- work in which the private sector can de- obertpady cal care and to improve sanitation prac- velop. Manynewlaws -including a new (ay 1992) tices Educated women choose to have constitution and new laws on companies, fewer children and can provide more for foreign investment, and competition - Developing a securities market is a long- those they do have. have been adopted overthepasttwoyears, erm, task that requires - * Giving an extra 100 girls an addi- and more are now being drafted and de- tense instiutional developmez, for tional year of education in 1990 would ated. Bulgaria!s pre-warlegal framework which there are few shortcuts. And many have cost approximately $30,000. This was quite modem for its time, and most ofthe asrered have both positime investment would prevent roughly 60 in- of these new laws draw on pre-war Bul- and negative ramiications in oter pars fant deaths and three maternal deaths - garian tradition. of the financial system, and the economy. andavert 500 births. Summers concludes Gray and Ianacbkov describe the cur- that the social benefits alone of increased rent legal framework in Bulgaria in the In the longrun, sound, efficient securities femaleeducation are more thansufficient areas of onstitutional, real property, in- markets can contribute to economic to cover its costs. tellectual property, company, foreign in- growth- in the short run, they play an * Programs to increase female educa- vestment, bankruptcy, contract, and important role in fmancial liberalization tion are less expensive than other devel- antimonopoly law. These areas of law and deepening. They do so principally by opment investments and could quicldy define property rights, the means for ex- providingameansforboth capital raisers .increase female enrollment rates. Priori- changingpropertyrights, and the rulea for and investors to diversify risk. ties should be to reduce the cost ofschool- competitive market behavior - the bed- Pardy provides a guide to issues in- ing for girls and to make special efforts to rock of a legal system for a market volved in institutional and regulatory re- accommodate parents's practical needs. economy. form of securities markets - and a dis- * Major initiatives to increase female In Bulgaria as in the other countries of cussion of the practical implications of education can transform society over time. Central and Eastern Europe, definingreal different policy options and sequencing If more girls had gone to school a genera- property rights and creating the condi- decisions. tion ago, millions of infant deaths could tions for free and fair competition are the Pardy argues that establishing sound have been averted each year, and tens of mostcontentious and confusedlegal areas securities markets requires institutional millions of families could have been because they tred so heavily on vested developmentthatisasubstantial taslkfar healthier and happier. interests. Other areas oflaw are less ofa many developingcountries. Prerequisites This paper, by the Vice President, De- problem, for the developmentof securitiesmarkets velopment Economics, and Chief Econo- But the administrative and judicial include. mist, World Bank, was prepared for the machineryforimplementingthoselawsis * Amacroeconomicandfiscalenviron- Quad-i-Azam Lecture at the Eighth An- lowertOdevelop.Lawsbythemselvesare ment conducive to the supply of quality 56 Policy Research Working Paper Series securities -as well as sufficient demand tion by the Tax Incentives Evaluation Copies ofthe paper are available free from for them. Project of the Public Economics Division the World Bank, 1818 H Street NW, * Alegal, regulatory, and institutional constitute interestingnewworkfor devel- Washington, DC 20433. Please contact infrastructure that can support efficient oping countries. Carlina Jones, room N10-063, extension operation of the securities market. Rajagopal and Shah argue that analy- 37699 (70 pages, with tables)- Pardy discusses the second of these in ses of such questions can be considerably detail, providing guidelines for basic enriched by explicitly incorporating into infrastructural requirements. Essentially the analysis the industrial market struc- 909. Parallel Markets, the Foreign such an infrastructure must provide four ture of the industry at hand and propos- Exchange Auction, and Exchange things: ing an empirical procedure to test the Rate Unification In Zambia * Certainty about property rights and marketpowerhypothesis. Such atesthas contracts. important implications for the effective- Janine Aron and Ibrahim A. Elbadawi * Transparent trading and other pro- ness offiscal incentives for investment. If (May 1992) cedures and public disclosure by compa- the producers in an industry have market nies of all information relevant to the power, they may be able to shift taxes for- Zambia's failure with macroeconomic re- value of their securities. wardcompletelysothatanytaxincentives form-includingechange-ratereform- * Protection againstunfair practices by would simply result in windfall gains for is the result of macroeconomic (especially insiders and intermediaries. the firms in that industry. But in a com- fiscal) laxity. And the exchange-rate pre- * Protection against the financial fail- petitive industry, producers are not able mium is likely to rise as terms of trade are ofintermediaries andmarketinstitu- to shift taxes forward completely so that worsen, foreign aid declines, and expecta- tions such as clearinghouses, tax incentives can stimulate investment. tions of devaluations rise. Pardy also provides examples of the Rajagopal and Shah test the market policy conflicts and uncertainties that are power hypothesis empirically using data Since Zambia!s independence in 1964, a routine in securities market reform and for selected industries- in Turkey, chemi- large, thriving parallel market forforeign development, and suggests approaches to cals and petroleum derivatives; in Pai- exchange has coexisted with a rich menu managing them. stan, textiles as well as chemicals and ofofficial exchange rate policies aimed at This paper - a product of the Finan- pharmaceuticals. In addition, they also achieving a more flexible exchange rate cial Policy and Systems Division, Country examine the impact of investment tax and price system as well as financial and Economics Department - is part of a credits (credits against tax liability), in- trade liberalization. Despite aggressive larger effort in the department to explore vestment allowances (deductions against policies in these areas, particularly for the ways to promote the developmentofsound taxable income), and research and devel- exchange rate, the blackmarketpremium securities markets. Copies of the paper opment expensing on production and in- (defined as the ratio of the black market are available free from the World Bank, vestment decisions and government rev- rate to the official rate) remains high - 1818 H Street NW, Washington, DC enues. averaging 100 percent for 1970-88 and 20433. Please contactFSD, room N9-005, They introduce three empirical innova- more than 400 percent in recent years. extension 37664 (32 pages). tions in this study. First, they specify an Aron andElbadawi examine the origins expression for the rental price of capital, ofthe parallel market, the statistical prop- consistent with rationalratherthan static erties of the parallel premium, and the 908. Tax Incentives, Market Power, expectations.Second,insteadofassuming shocks and macroeconomicpolicychanges and Corporate Investment: perfect competition, they implement an thatinfluence its evolution. Usingannual A Rational Expectations Model empirical test of market power. Third, data, they specify and estimate an eclec- Applied to Pakistani and Turkish they empirically derive an incremental tic error-correction model for the pre- Industries benefit-cost ratio for the incentives evaln- mium- ated in the study. They find that the large parallel mar- Dagmar Rajagopal and Anwar Shah Theyconcludethatfirmsin those indus- ket might have caused problems in mac- (May 1992) tries had limited market power and were roeconomic management '-d economic thus able to shift taxes forward only par- reform.Alarge exchange rate premium as. A production structure model incorporat- tially. Thus, tax incentives did have an an indication of foreign exchange short- ing rational expectations and market impact on production and investment de- ages will have direct deleteriousimpact on power is used to derive important insights cisions in firms in those industries. But copper production and export. It can also on the effectiveness of tax incentives on these impacts variedgreatly across differ- indirectly hurt copper exports through its industrial production and investment de- ent industries, and in three offive cases, negative effect on domesticincentives for cisions in developing countries, tax incentives resultedin higherrevenue the officially sanctioned copper economy. losses compared with their stimulative Abighpremiumwasalsofoundtoencour- Onlyrecently has empirical research been impact on investment in physical or age overimporting (and probably used to evaluate tax andindustrial policy knowledge capital. overinvacing)ofofficiallytradedimports. indevelopingcountriesusingaframework This paper - a product of the Public Aron and Elbadawi find that foreign that incorporates the cost of capital and Economics Division, Country Economics inflation and depreciation of the black the production structure. Recent applica- Department-is part of alarger effortin market rate (in a cost-push manner) di- tions of dynamic duality and computable the department to evaluate fiscal incen- rectly increase domestic inflation. Depre- general equilibrium analyses ofthis ques- tives for domestic andforeign investment. ciation of the black market rate also sig- Poricy Researh Working Paper Sedes 57 nais indirectly that economicreform lacks free rate -before the foreign sector can and protective controls andespeciallyon =dibility and thatmacroeconomiepolicy begintorespondtorealdepreciation.Then the need for capital adequacy and for iz unsustainable. Short-term changes in there will be less needfor aid flows to con- strong banking supervision. the premium reflect expected changes in tinue at their initial levels. * There is ample recognition of the pUlicy and politics. This paper - a product of the Macro- importance of speedy and decisive inter- The major factor behind the failure of economic Adjustment and Growth Divi- vention to prevent insolvent institutions unification and economic reform is the sion, Country Economics Department - from magnifying losses and infecting the Lundamental endogeniety of the parallel is part ofalarger effortin the department rest of the financial system. premium in macroeconomic and trade to study the macroeconomic implications * The role of deposit insurance is still policy - as well as in exogenous terms- ofmultipleexchange marketsin develop- unclear. It is instrumental in protecting ftrade and foreign aid shocks. Improv- ing countries. Copies of the paper are smallsavers, butotherwise its role in pre- ing the terms of trade or increasing for- available free from the World Bank, 1818 venting bank runs, promoting competi- eignaidleadstoadeclineinthepremium. H Street NW, Washington, DC 20433. tion, or stimulating better regulatory irus effect dominates the indirect effects Please contactAnna Maranon, room N11- mechanisms is open to serious objections. ofreal wealth and real appreciation, which 042, extension 39074 (115 pages). * The regulatory issues of nonbank fi- work toincreasethepremium. Expansive nancial intermediaries are similar to tbcal and monetary policy cause the pre- those ofbanks. For life insurance compa- iuam to rise. 910. Policy Issues in Financial nies, price and productcontrols-which Ofall the factors thatinfluence the pre- Regulation inhibit competition -are being replaced mium and have caused exchange rate by solvency controls. In addition, the use unification to fail, terms-of-trade shocks Dimitri Vinas of insurance (and pension) funds fir fi- dominate. But the driving force behind (May 1992) nancinglarge public sectordebtsatbelow- pesistence of the premium was outright market yieldsisbeingreplaced byinvest- laxity in fiscal and monetary Folicy - The 1980s were a decade ofextensive regu- ment rules that emphasize safety and -pecially in 1985 and the following two latory reform.Macroeconomicandalca- profitability. ,ears of the exchange rate auctions, and due controls that inhibit competition, in- * Themostcontroversialtype ofcontrol during the collapse ofeconomic reform in noution, and efficiency were lout Prn- is still structural controls that impose 1987. dential and other controls that promote geographic or functional limits on the ac- Aron and Elbadawi conclude that ex- stability and fairness were "in.' The rela- tivities of financial institutions. There is :±.ange rate reform without fiscal reform due costs and benefits ofunifesal banks a worldwide trend in favor of universal inmybefutile.Fiscalretrenchmentfor the and financial groups remain a subject of banking and even in favor of close links Zrst two years of the crawling peg was controversy. between banks and insurance, but less influenced by political considerations. supportfarcloselinksbetweenbenksand Zambiaisoneofthemosturbanizedcoun- DimitriVittassummarizesthefindingsof industrial companies. tries in Africa: about half the people live aforthcomingbookonfmancialregulation * Universalinstitutions pose aserious inurbanareas,andtheurbanmiddleclass that examines the policy issues of finan- challenge to regulators and supervisors- wields considerable influence. This ex- cial regulation and reviews the experi- Countries with weak supervisory agencies '-ins the pervasive ensemble of price ences of both developed and developing would be well advised to promote simpler - trol and subsidy schemes that have countries. He stresses the following ten and more transparent structures. ---vived reform attempts. But the ratio points: * There is considerable controversy governmentrevenue toGDP has never * The 1980s were not a decade of de- about the desirability and benefitsofuni- - abelow 20 percent (one of the highest regulation,but aperiod ofextensiveregu- versal bRnking. Manyanalysta emphasize es in Africa) despite sharp declines in latoryreform. There was decreased reli- the difficulties of regulation by function ins of trade. More emphasis should be ance on economic regulations thatinhibit and ofrelyingon rules ofconductfor over- en to the political economy and distri- competition, innovation, and efficiency - coming excessive risk taldng conflicts of lonal consequences (especially thern- butincreasedemphasisonprudentialand interest, and the abuse ofpEivilegedinfor- -urban nexus) in the early stages of other regulations that promote stability mation. These analysts favor structural nomic reform. and fairness. controls that limit the scopeforfraudand Zambia's economy, heavily dependent * There is now widespread consensus mismanagement. But other analysts ar- zopper exports, is particularly suscep- on the need for market mechanisms for gue that the threat of regulation, consid- e to external shocks. Itisimportant to monetary and credit control and for allo- erations of reputation, and provisions for ralize major trade and financial mar- eating scarce financial resources. legal redress against offending institu- kets in such a way as to compress the * What the best speedand sequence of tionswouldbeeffectiveinpolicinguniver- allel marketandpreventthe premium financial reform are remains an open sal institutions. n serving as a major signal to the question. The contrasting experiences of Vittas concludes by noting that most ---nomy. Japan and Chile support a cautious, Anglo-American andScandinaviancoun- Increased foreign aid could help aiti- gradual approach,Indonesia's experience tries currently suffer from the conase- e the destabilizing effects of terms-of- suggests that several paths ofreform may quences ofexcessive anduncritical expan- ce shocks. This is likely to be most work. sion of credit as well as from widespread pfulin the early stages afreform, when * There is strong consensus on the m a etandasignificmntamount an foster credibility and stabilize the importance ofprudential, organizational, offrand. He argues thatiffinancial prob- 58 Policy Research Working Paper Series lems were to persist, the case for impos- be influenced by the invoicing of exports. initial contraction (a period ofone to two ing portfolio and growth limits for pruden- Exports from Canada and Japan to the years), a long pause (for three to flueyears), tial purposes mightmerit detailed consid- United States are invoiced primarily in and sustained recovery. The length ofthe eration. U.S. dollars. The same can be said of investment pause is longer for low-income This paper -a product of the Financial Japan's and Australia's total exports- The countries, and the cycle of public invest- Policy and Systems Division, Country exports of the other countries are priced ment is ofgreateramplitudethanthe cycle Economics Department-is the introduc- mostly in their own currency. If exports ofprivate investment. Thepaperdiscusses tory chapter of a forthcoming Economic are invoicedinthe exporters'ecurrency,as the roles of macroeconomic restraint, co- Development Institute book cn financial is common in industrial countries, ex- ordination failures, value ofwaiting, and regulation. It reviews and summarizes change rate volatility does not matter. lack ofsupportive infrastructure ingentr- several papers that have already been Exporters pass price changes due to ex- ating these cycles ofinvestment issued as World Bank Policy Research change rate fluctuations on to importers, Working Papers. Copies of this paper are who in turn pass them on to consumers. Solimano reviews recent literature on available free from the World Bank, 1818 There are several reasons why consumers capital formation and economic reform H Street NW, Washington, DC 20433. may be indifferent to the exchange rate and looks at the cycle of private invest- Please contact Wilai Pitayatonakarn, risk, especially for manufactured prod- ment that occurs during adjustment. He room N9-003, extension 37666 (38 pages). ucts. identifies three phases in the response of But if exports are prced in the import- private investment to adjustment pro- ers' currency or a third currency, volatil- grams: initial contraction, a long pause, 911. Does Exchange Rate Volatility ity matters -because both the exporter and sustained recovery. Hinder Export Growth? Additional and the importer must take into account The empirical evidence for Chile, Evidence how their profits vary when considering Mexico, and Thailand shows that the ini- the currency risk they face. For the ex- tial contractionlastsfrom one totwoyears Ting Qian andPanos Varangis porter, the covariance between costs and and the pause for three to five years. (Way 1992) revenues is likely to be smaller than for Moreover, the length of the investment the importer. That means that while the pause is longer for low-income countries Inconsistency in the relationship between importer or final consumer has a 'natu- such as Bolivia and Ghana. And the cycle erchange rate volatility and exportgrowth ralhedge available, the exporter does not- of public investment is of greater ampli- reflects differences among ountries in the Finally, one can argue that the effect of tude than the cycle of private investment. currency in which trade is invoiced. Also, exchange rate volatility on trade is over- In characterizing the cycles of invest- exchange rate volatility may affect the al- stated, fur the following reasons. Ex- ment, Solimano assesses the role of such location of trade more than its level. change rate volatility does not measure factors as demand restraint, currency the added riskiness of a firm's portfolio. depreciation, the value of waiting, cred- Qian and Varangis examine the impact of Exchange rates can provide a natural ibilityfailures, and the lack of supportive exchange ratevolatility on trade,usingan hedge in afirm's portfolio. Exchange rates infrastructure. ARCH-in-mean model. The advantages of may be negatively correlated with each This paper - a product of the Macro- this statistical approach over earlier ap- otheror with the firm'sother assets. And economic Adjustment and Growth Divi- proaches are that it provides more offi- finally, the use of forward markets can sion, Country Economics Department - cientcoefficientestimates anditprevents provide a useful short-term hedge. ispart ofalarger effort in the department the problem ofspurious regressions. They This paper - a product of the Interna- to study therole ofcapital formationin the applied the model to six countries, esti- tional Trade Division, International Eco- transition from a4justment to growth. mating both bilateral and aggregate ex- nomics Department - is part of a larger Copies ofthe paperareavailable free from ports. effort in the department to analyze the the World Bank, 1818 H Street NW, They found exchange rate volatility to effects ofthe exchange rate on trade. Cop- Washington, DC 20433. Please contact have a negative, statistically significant ies ofthe paper are available freefrom the Raquel Luz, room N11-059, extension impact in two cases: Canadian and Japa- World Bank, 1818 H StreetNW, Washing- 39059 (43 pages). nese exports tothe UnitedStates. Interms ton, DC 20433. Please contact Dawn ofaggregate exports, the relationship was Gustafson,roomS7-044, extension 33714 negativebutstatisticallyinsignificantfor (42 pages). 913. The Women's Development Japan and Australia; positive and statis- Program In Rajasthan: A Case tically significantfor Sweden and, to some Study In Group Formation extent, the United Kingdom; but statisti- 912. Understanding the Investment for Women's Development cally insignificant for the Netherlands. Cycle In Adjustment Programs: The nagnitude ofthe impact of exchange Evidence from Reforming Maitrei Das rate volatility varied greatly - from a Economies Oay 1992) reduction in exports of 7.4 percent (Canada)toanincreaseof5percent(Swe- Andrds Solimano Through awareness-building and group den), following a 10 percent increase in (May 1992) formation, rural women inseveraldistricts volatility, in India have realized that deprivation is These results led tothehypothesis that Private investment often goes through not unchangeable, that alternatives exist, the impact ofexchange rate volatilitymay three phases underadjustment progms: that they are competent enough to choose Policy Research Working Paper SerIes 59 between alternatives, and that they are not report on Gender and Poverty in India. all personnel in the country, not just those alone. Copies ofthispaper are available free from employed by the ministry of health. the World Bank, 1818 H Street NW, * Some countries need support to de- Das presents the Women's Development Washington, DC 20433. Please contact veloppoliciesthatwillhelpthemmakethe Program (WDP) - launched in six dis- Stella David, room 82-264, extension best use of regional training facilities (in trictsin Rajasthan, Indiain 1984, andnow 33752(94 pages). publichealthandmanagement) innearby extending to nine - as a case study in countries. More support should be given awareness-buildingand group formation to regional centersthatoffermanagement among rural women. 914. Health Personnel training for health workers and to initia- A departure from the traditional pat- Development in Sub-Saharan tives for improvingin-service andon-the- tern of viewing women as the objects of Africa job training in management skills. welfare, WDPhas been a distinctsuccess. * Guidelines are urgently needed on 'Rural women have realized that their J.Patrick Vaughan how to rationalize spending on health deprivation is not unchangeable, that al- (May 1992) personnel. ternatives exist, that they are competent * There is an urgent need to update -enough to choose between alternatives, Sub-SaharanAfiica needs regionaltrain- methods for monitoring health workers and that they are not alone. ingfacilitiesinpubhieheakhandmanage- andforprovidingthebasicnumericalpro- One important feature of the project ment, in-depth studies on the cost inpli- jections needed for planning. document was that it was provisional and cations of different training and staffing * In-depth studies are needed on the tentative, essentially a guide to structure options,guidelinesforspendingonhealth cost implications of training and employ- and financial patterns. Other programs personnel, and new methods for monitor- ing various types and numbers ofhealth focus on strengthening delivery systems; ing and projecting personnel needs. workers, to give more insight into the WDP`s sole aim was to form groups that optionsinnationalhealthpersonnelpoli- would consolidate themselves for their Despite a significant growth in the total cies. own development - these groups, once number of trained health workers, the This paper - a product of the Popula- formed, would initiate any action they Afica regionis still poorly staffed. It was tion, Health, and Nutrition Division, needed and decided upon. the only World Health Organization re- Population and Human Resources De- The second important element of the gion that showed a decline in the doctor- partment - is part of a larger study of project document was the degree of free- to-population ratio from 1980 to 1986. Afficenhealthpolicybythe Sector Opera- dom visualized for women's groups and Emigration oftrainedhealth workers- tions and Policy Vice Presidency. Copies nongovernment organizations. WDP particularlyphysicians-exacerbates the of the paper are available free from the stressed the need to build awareness and problem. Basic training for health work- WorldBank, 1818 HStreetNW, Washing- confidence among women as essential to ers is reasonably well established, but ton, DC 20433. Please contact Otilia integrating them into the development advanced and in-service training have Nadora, room 811-219, extension 31091 process. been widely neglected. There remains a (19 pages). The institutional perspective ofaplace serious shortage of senior staffwith train- or center where women can be offered ing in public health and management. continuing education and training gave Sub-Saharan Africa has not a single 915. Trade Policy and Exchange way to the conceptofan informal network school of public health, and it also lacks Rate Issues In the Fonmer Soviet of'women's groups. Education was defined adequateregional trainingcenters in pub- Union as the acquisition of knowledge, which lichealth andmanagement. Planning for may not necessarily mean literacy. It health workers has been based largely on W. Max Corden could even mean the acquisition of skills simple projections ofthe number of work- (May 1992) 'for generating or controlling resources. ers required - without much regard for WDP has demonstrated that illiterate the economic costs or the availability of One approach to trade policy among the women can be effective group organizers. financial resources. former Soviet republics is to have no trade .The question this project opens up is this Most countries in Sub-Saharan Africa policy -to have completely freetrade with organize women for what? Too much focus have undertaken structural adjustment convertibilityfor current account transac- on training in communication and group programs that, together with world eco- tions.l adepaicyshouldbetransparent. interaction could become an end in itself. nomic conditions, have led to declining Any tariffanderport taxstructurershould Mahila Samakhya, a program to organize financial allocations to ministries of be simple. Quantitativecontrolsshould be women for education, used the process of health. As spending cats have been made avoided. And no barriers to existing trade WDP but changed its aims and emphasis. for such items as drugs, maintenance, and between the republics should be intro- What emerges from the WDP experi- transport, the proportion spent on health ducedt ence is theprocess it unleashed: the orga- personnel hasrisen.There are now strong nization, interaction, and participation of pressures on ministries to reduce the Taking the long view (assuming prices women. number of health workers they employ have been liberalized), Carden reviews This paper - a product of the Women and to encourage more private health ser- possible trade and exchange rate policies in Development Division, Population and vices. Vaughan concludes that oftherepubliesoftheformerSovietUnian. Human Resources Department - was * Health personnel policies must be- Heconsidersalternativeexchange-rate prepared as a background paper for the come truly national, taking into account regimes, includingamonetaryunion. For 60 Pollcy Research Working Paper Series Russia, a fixed but adjustable regime is 916. Measuring the Risk of Default 917. Creditor Country Regulations most realistic. Frequent adjustment may In Six Highly Indebted Countries and Commercial Bank Lending be desirable, to prevent the use of trade to Developing Countries restrictions to achieve balance of pay- Marc Chemney and Jacques Morisset ments objectives. (June 1992) Asi Demirgag-Knat Trade intervention policies, if needed, (June 1992) should not weaken the fiscal situation. The risk that the debtor country will de- There may be a case for export taxes or fault on its external debt may be skgnift- The Bank for International Settlements for a uniform revenue tariff for example, cantly decreased by a debt-reduction op- capital adequacy regulations maybesome- but subsidies and quantitative restric- eration, by a reduction in international what less effectue than they appear in tions should be avoided. Ifsome domestic interest rates, and by changes in the accomplishing their main goal ofcontrol- price controls remain, export taxes are country's willingness to pay. ling the overall riskiness of the intena- needed. donal banking system. But they may be Corden examines the need for transi- The price of debt on the secondary mar- quite effectiue (probably unintentionally) tional tariffs, including the argument for ket reflects the risk that the debtor coun- in decreasing cmrnmercial bank lending to a temporary uniform tariff that is higher try might default on its external debt. developing countries. * than the long-ranrevenue tariff.The tem- Using the option-pricing theory, porary uniform tariff would be designed Chesney andMorissetidentify the factors Demirgal-Hunt discusses the possible to prevent temporary overshooting ofthe that influenced the risk of default in six impact of creditor country regulatory de- exchangerate-buttheargumentissub- highly indebted countries from 1986 to velopments on the asset choice and port- jecttoimportantqualifications.Ifthereis 1990. folio riskiness of commercial banks. She any protection of infant industries, there In particular, they provide a measure focuses particularly on the effect of the mustbea"hardtariffpath-thegradual of the debtorcountrisswillingnesstopay. Bank for International Settlement's decline of the tariff rate should be firmly They identify the parameters of the sto- (BIS's)risk-relatedcapitaladequacyregu- provided for in advance. ebastic process followed by this variable, lationsandcountryriskprovisioningprac- The case for a free trade area is strong so this approach can be usedto predict the tices. because therepublics ofthe former Soviet future price of debt. SheconcludeasthatBISregulationsmay Union are so highly specialized, butthere Their model also emphasizes that a be less effective than they appear on the will be problems if price controls remain debt-reduction operation may lead to a surface in accomplishing their main goal and differ among the republics. There significantincrease in the price of debton - controlling overall riskiness of the in- could be a free trade area even if there is the secondarymarket. This effectappears ternational banking system - but quite no monetary union. A customs union, in- tobe linked to the initial stock ofexternal effective (probably unintentionally) in volving a common external tariff would debt, assuggestedbythe 'debtoverhang! decreasing commercial bank lending to prevent border controls and trade dellee- hypothesis. developing countries. tion but would make a common tariff Finally, Chesney and Morisset show She adds that mandated provisioning policy(andbenceajointtariffcammission) empiricallythatacountryswillingnessto rules also deterincreasedbanklendingto necessary. payissignificantlyinfluencedby changes developing countries. One approach to trade policy, Carden inindicatorsafthecountry'sabileytopay Risk-related capital adequacy require- concludes, is in effect to have no trade (for example, by an increase in reserves ments pose two main problems for devel- policy - to have completely free trade or in GDP growth), and by exogenous oping country lending. First, by focusing with convertibility for current account events suchastheincreaseincommercial an individual asset risk and assigning a transactions. Some tariffs and export banks' loan reserves in mid-1987 or the highriskweight to assets withhigh return taxes may be justified, at least as second- Brady Plan announcement in 1989. variance, the regulation skews banks' best policies. If so, however, Corden This paper -a product of the Debt and asset choices away from assets with high' stresses that four principles be observed- International Finance Divisian, Interna- risk weights. To decrease the insolvency * Barriers to existing trade between tional Economics Department -is part risk of banks, what shouldbe controlled the republics should not be set up. ofalarereffortin the departmenttoin- is the portfoliorisk, not the choice ofindi- - * All quantitative control measures vestigate the benefits and costs to debtor vidual assets. Taking into account asset- should be avoided. countries andcreditorsofroluntazy, mar- return correlations, it is possible to con- * Tariff and export tax structures ket-based debt and debt service reduction struct low-risk portfohlios that include should be very simple. arrangements. Copies of the paper are loans to developingcountries due to diver- * Trade policy should be transparent available free from the World Bank, 1818 sification benefits. This paper - a product of the Trade H Street NW, Washington, DC 20433. Second, the assignedrisk weights donot Policy Division, Country Economics De- Please contact Rose Vo, room 8-042, ex- measure assetrisk properly. By assigning partment- was preparedunderthe aus- tension 33722 (21 pages). very broad risk weights, the regulation pices of the UNDP/World Bank Trade lumps togetherassets with very different Expansion Program. Copies of the paper risks. Itisimportanttorealize that devel- are available free from the World Bank, oping countries are not a homogeneous 1818 H Street NW, Washington, DC group. Not distinguishin countries in 20433. Please contact PRDTP,room N10- assigningrisk weights unjustly punishes 023, extension 38004 (53 pages). low-risk countries, possibly retarding Policy Research Working Paper Sedes 61 improved access to financial markets. Madagascar's weak administrative sys- 919. Fiscal and Quasi-Flscal Also, by assigning a lower risk weight to tem and complex tax structure (with many Deficits, Nominal and Real: developing country bank loans of short exemptions) have led to tax evasion and Measurement and Policy Issues maturity, the regulation encourages credi- smuggling. De Melo, Roland-Holst, and tor banks to lend short term. This may Haddad compare Madagascar'sfiscal sys- Roberto do Rezende Rocha increase risks, especiallyifcountries find tem with that of other low-income coun- and Fernando Saldanha long-term projects by rolling over short- tries, noting its greater reliance on (June 1992) term loans. distortionary taxes. One stated objective of BIS guidelines Using a 10-sector model and general- When foreign exchange losses systemati- is to harmonize bank regulations across equilibrium calculations, they estimate colly accumulat, the interest rates on countries. This is largely true of capital revenue losses from exemptions, tax eva- domestic credits should be adjusted and and capital adequacy definitions. But for sion, and smuggling for three important the central bank's cash profits should stop developing countries, loan loss reserves- tax instruments: import duties, value- being transferred to the governnm.. These especiallymandatedprovisions-arealso addedtaxes,andexcisetaxes.Allowingfor losses may reflect the central bank's im- important, as they discourage lending. the agricultural and informal sectors to plicit financing of imbalances in other 'These provisioning practices still vary remain exempt from taxation, they esti- areas of the economy. Eliminating lasses widely across countries and are slow to mate that applyingpublished taxrates to at their source often requires a fiscal ad- adjust to improvements in developing the nonexempt sectors would raise tax justment, the need for which may not he country performance. revenue (from these three instruments apparent. At a time when commercial banks re- alone) from 6.A percent to 15.1 percent of main reluctant to lend to developing coun- GDP at a relatively low welfare cost (0.4 In many developingeountries, the central tries, BIS capital adequacy regulations, percent of GDP), because such a move bank assumes an activeroleinmobilizing coupled with country risk provisioning would reduce dispersion across instru- domestic and foreign exchange and allo- practices,appear to reinforce this ten6.ency. ments and within the import tariff struc- catingit to the public and private sectors. An international risk rating committee ture. In these countries, central bank opera- could correct the biases againstlendingto Next they calculate the welfare gain tions may create imbalances between developing countries by determining suf- that would result from less distortionary costs and revenues, usually called quasi- ficiently detailed countryrisk weights, as taxstructures.Simulationresultssuggest fiscal deficits. Sometimes these can be as well as a unified guideline for country that the excess burden of taxes would be Irge as, or larger than, deficits of the provisions. This committee could also re- greatly reduced if Madagascar moved nonfinancial public sector.Failure to con- flect improvements in country creditwor- closer to a tax system with uniform rates sider these operations may give rise to the thiness in their risk weights and could across sectors and instruments. Rela- puzzling simultaneous occuTence of low suggest provisioning levels in a timely tively low uniform taxes would raise the fiscal deficits and high inflation. manner so developing countries do not same revenue as the structure prevailing There have been few attempts to for- suffer unnecessarily in 1988, and would reduce incentives for mally integrate the accounts of the con- This paper- a product of the Debt and tax evasion and smuggling. tral bankand the nonfinancial public see- International Finance Division, Interna- Assuming that the uniform tax (for tor. Rochaand Saldanhaexamine the in- tional Economics Department - is part import and export duties,VAT, andexcise teractions between (nominal and real) of a larger effort in the department to taxes)wouldbeimposedonlyinsectorsin government and central bank accounts, analyze commercial bank lending to de- which tax collection is nowpositive, simu- analyze the problem of systematic foreign veloping countries. Copies ofthe paperare lations suggest that a uniform tax rate of exchange losses in the central bank, and available free from the World Bank, 1818 6 percent across instruments would be identify policy issues associated with H Street NW, Washington, DC 20433. enough to raise the same revenues cal- quasi-fiscal deficits. Please contact Rose Vo, room 88-042, ex- lected under the current structure. More- Despite their limits, real measures of tension 33722(37 pages). over, lowerbound estimates indicate that the deficit areless distorted than nominal the excess burden of taxation would be measures, especiallyforthecentralbanks reduced by moving toward uniformity of quasi-fiscal deficit. Central banks rarely 918. Tax Evasion and Tax Reform about 5 percent of the tax base. spell out losses in their income state- in a Low-Income Economy: This paper - a product of the Trade ments, which often show sizable nominal General Equilibrium Estimates Policy Division, Country Economics De- surpluses - even where there is a real for Madagascar partment - is the product of a follow-up deficitin operations ofthe private domes- activity from a technical assistance mis- tic and foreign sectors. Jaime de Melo, David Roland-Hols, sion to Madagascar in February 1989, The accumulation of foreign exchange and Mona Haddad carried out under the auspices of the joint losses imposes a burden an the consoli- (June 1992) UNDP/WarldBankTradeExpansionPro- datedpubicaector'sfinances.Thisburden gram. Copies of this paper are available - especially the central banks foreign If Madagascar moved toward a simpler, free from the World Bank, 1818 H Street exchange losses -is transferred in part uniform tax structure, it could raise the NW, Washington, DC 20433. Please con- to future periods, so policymakers often same revenues it now raises - with less tact Dawn Ballantyne, room N10-023, overlookitsconsequences.Itisnotuncom- incentive for the tax evasion and smug- extension 38004 (34 pages). monfortheseloasestobeallowedtoacem- gling now prevalent mulate in large amounts, while domestic 62 Policy Research Working Paper Serles interest rates are kept low and the cen- Among economists, it is generally taken struments for controlling pollution in de- tral bank keeps transferring its declining as given that environmental regulation veloping countries. This research was cash profits to the nonfinancial public based on the use of economic incentives funded by the World Bank's Research sector. The mounting burden of net inter- and the competitive market will be more Support Budget under research project est expenditures may then contribute sig- efficient (attain the same environmental "Pollution and the Choice ofPolicy Instru- nificantly to monetary expansion -a situ- goal at lower social cost) than traditional ments (RPO 678-48)." Copies ofthe paper ation that worsens when the central bank command-and-control approaches repre- are available free from the World Bank, must repay its net foreign liabilities. sented by environmental regulations in 1818 H Street NW, Washington, DC Rocha and Saldanha argue thatforeign the United States and to a lesser extent 20433. Please contactCarlinaJones, room exchange losses must be considered in the European Community. The sulfur N10-063, extension 37754 (46 pages). evaluatingfiscal policy,even wherelosses trading provision of the recent amend- seem to be largely unrealized - as over ments to the U.S. Clean Air Act suggests time all losses are "realized" through in- that some attentionisbeingpaidtoecono- 921. Road Infrastructure terestflows. When foreignexchangelosses mists' claims, but it would be unrealistic and Economic Development: systematically accumulate, the interest toassume that the command-and-control Some Diagnostic Indicators rates on domestic credits need to be ad- structure ofU.S. environmental policywill justed and the central hank's cash profits be displaced by economic incentives any Cesar Queiroz and Surbid Gantam should stop being transferred to the gov- time soon. (June 1992) ernment. Otherwise, a large quasi-fiscal While incentive- and market-based deficit can leadto monetary expansion and regulation may have penetrated verylittle The average stock ofpaved moads per mil- spiraling inflation, as happened in Yugo- in the United States, their potential use lion inhabitants in high-income economies slavia in the 1980s In certain circum- for environmental improvement in the is 59 times that in low-income economies stances, subsidies implicit in public see- rapidly developing countries ofthe Pacific And those roads ar in better condition tor credits should also be part of deficit Rim and the transitional economies of than the ones in low-income economies. calculations. Eastern Europe and the Commonwealth Real quasi-fiscal deficitsusually reflect may be great. These countries have no Queiroz and Gantam investigate the as- losses in other sectors of the economy and history of command-and-control regula- sociation between per capita income and the need for a resource transfer. So cor- tion of the environment and the relative the magnitude and quality of road infra- recting these deficits may require more efficiency ofregulation maybe important structure. They adopt an empirical ap- than simply eliminating credit subsidies to their capital-constrained economies. proach, directly comparing or correlating by increasing real interest rates to posi- The relative efficiency ofincentive- and acountry's income with selectedvariables tive levels. Eliminating losses at their market-based regulation depends on the associated with existing road networks. source often requires afiscal adjustment, specific nature of the activity to be rega- Cross-section analysis of data Som 98 the need for which may notbe apparent. lated. In some cases it may be greatly countries, andtime-series analysisofU.S. This paper-a productofthe Trade and superior to command-and-control regula- data since 1950, show consistent and sig- Firnnce Division, Europe, Middle East, tion; in others, only marginally so. More- nificant associations between economic and North Africa Technical Department over, tobe effective, incentive-basedrega- development (per capita GNP) and road -is part of a larger effort in the Bank to lationmayrequire greater effort formoni- infrastructure (per capitalength of paved investigate the issues ofinflation andsta- toring and enforcement - effort that off- road network). bilization in EMENAcountries. Copies of sets gains in efficiency. So the choice of The datashow that the per capitastock the paper are available free from the regulatory approach is not always clear of road infrastructure in high-income WorldBank, 1818 HStreetNW, Washing- cut, and some analytical means of distin- economiesis dramaticallygreaterthanin ton, DC 20433. Please contact Luz guishing between options is required. middle- and low-income economies. For Hovsepian, room H9-065, extension 37297 Kopp reviews and recommends a mod- instance, the average density of pavedr (59 pages). eling platform for analyzing regulations roads (knlmillion inhabitants) vaziesfrom designed to control pointsource emissions. 170 in low-income economies to 1,660 in The platform is intended to provide quan- middle-income and 10,110 in high-income 920. Economic Incentives titative information on the efficiency of economies. That is, the average density of and Point Source Emissions: several alternativeincentive-based, mar- paved roads in high-income economies is Choice of Modeling Platform ket-oriented, and command-and-control 59 times that in the low-income group. regulatory policies might adopt rapidly Road conditions also seem tobe associ- Raymond .T Kapp developingand transitional economies. In ated with economic development: The (June 1992) addition to discussing the model, Kopp average density of paved roads in good pays considerable attention to such a condition varies from 40 km/million in- A modelingplatformforquantifyinginfor- model's informational requirements and habitants in low-income economies to 470 mation about alternative regulations for totechniquesfor dealingwith inadequate in middle-income and 8,550 in high-in- conmIzngpointsourxeernission-thatis, data. come economies. for choosing among inaentive-based mar- This paper - a product of the Public The empirical information presented ket-oriented. and command-and-contrl Economics Division, Country Economics can be used as indicatorsa fareas ofweak- regulatorypoliciesthat might adopt rapidly Department- -is part ofa larger effort in ness or strength in a country's stock of developing and transitional economies the department to assess alternative in- road infrastructure. Policy Research Working Paper Series 63 This paper - a joint product of the In- vision that would extend to Central * How should surveys be focused and frastructure Operations Division, West- America any preferences the US. grants designed? ern Africa Department, and the Transport to others (beyond those already provided * What types ofquestions workbestin Division, Infrastructure and Urban Devel- by the Caribbean Basin Initiative). Such surveys? opment Department -is part of alarger a provision, effective between now and, * How can surveys be oriented toward effort to define the macroeconomic link- say, 1995, would provide a mechanism for their target population? ages and impactofinfrastructure. Copies the transition from unilateralism to some * How should surveys be implemented? of the paper are available free from the type of reciprocity in U.S. commercial re- * How should responses be analyzed World Bank, 1818 H StreetNW,Washing- lations with these countries. During this and used? ton, DC 20433. Please contact TWUTD, period, the countries of Central America In this common sense guide, Stone room 810-027, extension 31005(35 pages). would continue to undertake the neces- emphasizes how a carefully designed and sary economic and institutional reforms implemented survey helps you get the to enable them tomeetinternational com- most from a brief session with an entre- 922. Central America petition more effectively. preneur or senior manager. Stone gives at a Crossroads While Central America should do all it examplesofquestions thathavebeenuse- can to get greater, preferential, and more ful in eliciting analytically tractable re- SylviaSaborioandConstantineMichalopoulos secure access for its products - particu- sponses relevant for policy formulation. (June 1992) larly in the main, most dynamic market He gives special emphasistoranked ques- for its nontraditional exports - it must tions, which have proven valuable in fo- Steps the Central American governments recognize that current obstacles to export cusing attention on the constraints on must take fir fuller integration into the growth are related not only to external operations and growth that firms find international economy. market opportunities, butalso to internal most binding. problems that inhibit export supply. He alsoidentifies pitfalls that diminish In the last few years, the countries of This paper was prepared for the Meet- the value ofsurveys andbias theirresults. Central America have taken steps to sta- ing of the Inter-American Dialogue's And he discusses such practical necessi- bilize their economies and to introduce Project on Latin America's Integration tiesas trainingandsupervisinglocal sur- domestic and trade reform aimed at im- into the WorldEconomy,heldinWashing- veyors, identifying firms, and entering proving resource allocation and making ton, DC on December 18-20, 1991. It is to data into an appropriate software pack- domestic markets more competitive. As be formally published by the Inter-Ameri- age the Central American governments move can Dialogue in a volume edited by Win- Finally, Stone cautions against two ex- toward integrating their economies into ston Fritsch, later in 1992. Copies of this tremes: omitting assessments of the pri- the world market, Saborio and Michalo- paper are available free from the World vate sector (thus ignoring the views and poulos suggest that they: Bank,1818HStreetNW, Washington,DC experiences of firms) or using survey re- * Continue to participate fully in the 20433. Please contact Maureen Colinet, sults out of context, and failing to weigh multilateral round of trade negotiations, room H3-063, extension 37044(31 pages). them against othersources ofinformation. because as small, open economies they Omission is the more serious of the two have a great stake in the health of the problems. international trading system. 923. Listening to Firms: The firm-level survey is based on the * Revitalize the Central American How to Use Firm-Level Surveys premise that firms have unique insights Common Market, not as a sheltered re- to Assess Constraints on Private into the problems of private enterprise gional market for inefficient domestic Sector Development becase of their daily encounters with firms but as an expanded base for regional their country's policies and institutional competitiveness and for coordinating Andrew H. W. Stone environment. Surprises found in recent jolicy with the rest of the world. (June 1992) work suggest theimportance ofthese sur- * Seek preferential trade arrange- veysinfocusingastrategyforprivatesee- ments with the United States and possi- Firm-leuel surveys reueal infbrmatioacen- tor developmenton the most constraining bly other countries in the context of the trl to formulating policy advice and features of that environment. Enterprise for the Americas Initiative projects topromotepriuatesectordeuelp- This paper - a product of the Public (EA), if it serves the larger purpose of ment, oftenchallengingconventional wis- Sector Management and Private Sector liberalizing trade - but be leery of par- dom. This common sense guide suggests Development Division, Country Econom- tial, isolated agreements that may divert how to do surveys welL ics Department - was prepared for the more trade than they create. Department's training seminar on 'Pools Mexico's entryinto the North American Firm-level surveys elicit information im- forPrivate Sector Assessment Portions of Free Trade Area (NAFTA) could seriously prtanttoformulatingsoundpolicyadvice the paper have appeared in other CECPS harm Central American interests by di- and designingprqjectstopromoteprivate work. Copies of this paper are available verting trade and investment from the sector development. Drawing an recent free from the World Bank, 1818 H Street region. To temporarily protect the Cen- World Bank experience in eight countries, NW, Washington, DC 20433. Please con- tral American countries from the unin- Stone advises why and how to implement tact Daniele Evans, room NS-057, exten- tended fallout of Mexico's entry into targeted field surveys. He answers six sion 37496 (19 pages plus 9 pages of an NAFTA, Saborio and Michalopoulos rec- questions: annex). ommend the adoption of an interim pro- * Why use targeted field surveys? 64 Policy Research Working Paper Series 924. How Reduced Demand operas promoted small families and 925. A General-EquIllbrlum-Based for Children and Access to Family women withfewerchildren -Colombian Social Policy Model for COte Planning Accelerated the Fertility women's ideal number of children de- d'ivoire Decline in Colombia creased rapidly. Market costs, which were high in the Ngee-Choon Chia, Sadek Wahba, Rafael Rofman early 1960s, decreased rapidly when and John Whalley (June 1992) Profamilia was created. Colombian (June 1992) women already wanted to limit the num- What happened in Colombia shows how a her of children they had, so psychic costs A usefid social policy framework that can well-managed family planning program is for family planning were low. The only generate rich inputs to the Ivorian policy more likely to succeed when the women in thing needed to produce arapid decline in process. a country already want fewer children - fertility wasinexpensive, easily available so that women are motivated to control contraceptive devices. Profamilia and the This paper reports an a general-equilib- fertility. In such a country, intoducing governmenttookresponsibilityforsupply- rium-based social policy model for COte family planning services simply facilitates ing the family planning services and did d1voire -its structure, the data used in and speeds up a fertility decline that would it efficiently. its implementation, andits application to rend to occur anyway, albeit more slowly. Social processes are rarely created by the analysis of tax incidence and policy, Rofman concludes. Profamilia's antipoverty programs. By the early 1960s, Colombia was one of activities facilitated Colombia's Iartility Theauthorsemphasize thatspecialfea- the fastestgrowingcountriesin the world transition, but did not create the social, tires of the Ivorian economy and tax sys- With a total fertility rate of seven children economic, and cultural forces behind the tem are central to any assessment of the per woman and rapidly declining mortal- fertility decline. Governments or distribution consequences of tax policies ity, its population was growing 3.2 percent nongovernmentorganizations can encour- and other social policies in 06te d1voire. a year, arate that would double the popu- age or slow down social processes, but if Because thebases ofindividual taxes tend lation every 22 years. the social climate is unsupportive, indi- to be narrow - the incidence effects by But that population growth rate slowed vidual behavior will not change. socioeconomic group are pronounced, down dramatically in the years 1973-85: The rates of urbanization and educa- while those by income range are milder. to 1.7 percent, or a doubling time of 41 tional improvement have been similar in Urban employees are largely affected by years. This slowdown, caused by a dra- most other Latin American countries so income taxes (through withholding). Ex- matic decline in fertility, was one of the Rofman concludes that there is no reason port food croppers are affectedby the sta- most rapid fertility transitions in the to expect other Latin American countries bilization fund and export taxes. In addi- world. The causes and mechanisms for to resist family planning more than Co- tion, large interhousehold transfers in this phenomenon deserve to be carefully lombia. Indeed, the Catholic church, a C5te d1voire give incidence profiles that studiediftheexperienceistobereplicated bastion of resistance tofamily planning, differ from conventional analysis. The in other countries. is generally stronger in Colombia than reason: the taxes seeminglyborne by one To analyze the fertility change in Co- elsewhere. What places Colombia apart household group have second-round ef- lombia, Rofman uses a framework devel- from the other Latin American countries fects on other household groups through oped by Richard Easterlin - which con- is Profamilia and the attitude of the Co- changed interhousehold transfers. siders how socioeconomic changes affect lombian government, which - while not For the targeted antipoverty programs, the supply ofand demand for children and encouraging the use of contraceptives - the authors show thatwhengeneral equi- the costs of regulation. did not obstruct the efforts of private or- librium effects are taken into account, it Rofman concludes thatfamily planning ganizations to do so. is impossible under a budget-neutral tar- succeeded in Colombia chiefly because This paper - a product of the Popula- geting program to completely eliminate there was already relatively low demand tion, Health, and Nutrition Division, poverty (as traditional analysis would for children when family planning was Population and Human Resources De- suggest). At the same time, small trans- introduced -the average desired family partment - was research funded by the fers generally have a greater relative ef- size was already 11 percentbelowthefer- World Banks Research Support Budget fedtthan larger targetingprograms. This- tility rate in the early 1970s. Surveys under research project "Impediments to has several policyimplicationsforthecast showed that urban women wanted fewer Contraceptive Use in Different Environ- of the programs and the choice of groups children than rural women, and more ments (RPO 675-72). Copies ofthe paper that shouldbenefit.Asin thetaxincidence educated women wanted fewer children are available free from the World Bank, analysis, the authors show that such do- than less educated women. 1818 H Street NW, Washington, DC mestic features as interhousehold trans- So the psychic costs of fertility decline 20433.Please contactOtiliaNadora, room fers play an important role in determin- were already low - perhaps because the S11-219, extension 31091 (69 pages). ing the final outcome ofthe targ, agpro- Catholic church did not have as much in- gram. fluence on personal behavior as expected. The model should be seen as an instra- And cultural patterns did not oppose ment that helps in developing capacities changing and modernizing behavior, but for macroanalysis and in generally en- actuallyencouraged them.Whetheror not hancingtheeconomic debate. Itshouldbe the media promoted changes in social at- transparent enough to enable policy- titudes - Merrick proposes that soap makers to use it efficiently - and at the Policy Research Working Paper Series 65 same time answer some key questions of single-purpose operator such as a mining One generalization holds true in all cir- relevance to the Ivorian economy. evacuation rallway)-although a desire for cumstances a monolithic railway does not This paper - a product of the Poverty better measurement ofperformance might function well in amarketeconomy in com- and Social Policy Division-AfricaTech- still leadto aline-of-businessorganization. petition with privately owned, properly nical Department - is part of a larger The lines-of-business option improves (lightly) regulated competitors - espe- effortin the region to developpoverty-con- accountability and responsiveness to cially trucking. All attempts to commer- scious macroeconomic frameworks in Sub- markets butoperating conflicts and trans- cialize, corporatize, orincrease the role of Saharan Afica. Copies of the paper are action costs increase as the monolith be- the private sector in railway activities available free from the World Bank, 1818 comes divided. Economies in transition, have started with one or another form of H Street NW, Washington, DC 20433. small railways with a restricted number reshaping the railway entity. Solutions Please contactKarol Brown, room J4-285, of customers, or larger railways seeking will vary, but the universal objective asan extension 35073 (8R pages). to departincrementallyfrom amonolithic economy becomes more market-driven is framewbrk will probably find the line-of- to make the railway more market-aensi- business approach the best first step. tive. 926. Options for Reshaping Thecompetitioe access optionintroduces Thispaper-a product ofthe Transport the Railway intramodal competition in selected mar- Division, InfrastructureandUrbanDevel- kets, while maintaining unitary control opment Department-is part ofa larger Neil E. Mayer and Louis S. Thompson over most railway operations. Unless the effort in the Department to analyze and (June 1992) distribution of"franchisesris self-balanc- improve the effectiveness of transport ing - providing clear benefits to all par- enterprises. Copies ofthe paper are avail- Changing transport demands and grow- ticipants - the owning railways are un- able free from the World Bank, 1818 H ingcompetitionfrom trucks, autos, andair likely to permit a serious level ofcompeti- Street NW, Washington, DC 20433. transport are forcing the monoUthic rail- tion in markets they have traditionally Please contact Barbara Gregory, room way to change. Options for change must controlled.Aneedforintramadalrailcom- S10-049, extension 33744(59 pages). be adapted to different national and other petition - either in large countries with circumstances, with a suitable tradeoff well-developedrail systems orinadjacent between efficiencyofproductionandefec- countries withintegratedeconomies, asin 927. General Equlilbrium Effects tiveness in meeting market needs. the European Community - could pro- of Investment Incentives In Mexico mote greater use of competitive access In many countries, the mismatch between solutions. Andrew Peltenstein and Anwar Shah what therailways offer and what custom- The "wholesalef' option should accom- (June 1992) ers wanthas caused significant economic plish an excellent marketing job, but the inefficiency and severe financial strains actual operation would remain in mono- InMeico, reducingcorporatetamesstimu- for the railways and their government lithichands.When the quality ofcustomer lates inuestmentmore than increasingthe owners. The.concept of the railway as a service is paramount (as in container investment tax credit or the employment monolithic entity is so strong in many landbridge services orin certain unit train tax credit does. countries as to be a roadblock against re- applications) or when the rail service is shaping the railway. Yet such reshaping driven by external requirements (as in Mexicohasexperimentedwithseveraltax has already taken place successfully in container dry ports), it may be best if the instruments designed to promote private such countries as Canada, Japan, New railway is a 'wholesaler selling to a "re- capital formation.Amongsuchinitiatives Zealand, Spain, Sweden, the United King- tailer' who relates directly (and more ef- were general and industry-specific tax dom, and the Urited States -and shows fectively) with the customer. credits, employment tax credits, and cor- promise elsewhere. The 'toll rail enterprise' might come porate tax reductions. ' Where incremental approaches are fea- closest to reflectinga theoretical model of Feltenstein and Shah examine the rela- sible, a useful first step in bringing the marketingeffectiveness,yetitwouldgen- tive efficacy of such instruments using a market to the railway is a transition to erate potential operating conflicts and dynamic computable general equilibrium some form of lines-of business strategy, higher transaction costs-and would also model. They carry out model simulations which, like British Rail, could be intensi- call for the greatest administrative capa- using three equal-yield investmentincen- fied in stages. Where incremental ap- bility in the owning government. Where tive scenarios: increasesininvestmenttax proaches have not worked, cannot work, arail service is easily separablefrom other credits, increasesinemployment taxcred- or have reached the limits of their effee- services, or where the service does not its, and an equivalent reduction in the tiveness,acountry should consider the full conflictheavilywith other services, a"toll corporate tax rate. range of options Moyer and Thompoon rail enterprise solution maybe desirable Of the three, they find that reducing explore in this paper. - as with Amtrak, VIA (the Canadian carporatetaxesismosteffectiveatstimu- The monolithic railwsy rates high on Amtrak), and the Japanese Rail Freight lating investment in Mexico. apparent technical efficiency(conflicts are Corporation. Situations in which this ap- Various explanations are plausible for cided by executive fiat and transaction proach might work best- granting track- why reducing tax rates is superior to pro- sts are minimized) but low on market- age rights to Zimbabwe to serve the port viding investment tax credits in Mexico. ig effectiveness. A monolithic railway of Beira in Mozambique and to Russian Mexicohad high inflation and hih nomi- ightbe an appropriate choice for aflly Railways to serve the part of Tallinn in nalinterestrates'withrealinterestrates lanned, command economy(orfor a true Estonia. negativeforcertainyears-soflrms faced 66 Pollcy Research Working Paper Series severe financing constraints. In such a coastal Andhra Pradesh, India. assigned respectively to the federal and macroeconomic climate,firms see reduced Kishor develops a theoretical model that state governments - can improue firms' tax rates as improving their cash flow and incorporates these externalities and ex- compliance and enuironmental agency a signal of an improved public policy cli- amines the conditions neededforeconomi- performance without damaging state rev- mate. cally optimal use of pesticides - as well enue, and perhaps even improve it In a period ofeconomic uncertainty and as of other agricultural inputs in cotton decline, nonrefundable, unindexed tax cultivation. Estache and Zheng make a case for fed- credits on new investments are less valu- Using field data, Kishor tries to quan- eral monitoring of state environmental able than an immediate reduction in tax tifrthelossesin cotton and othercrops due agencies' (SEPAs') performance - be- liability from both old and new capital. to the development of resistant pests. cause ofthe tradeofffor the statesbetween Finally, in an open economy, reducing Under one scenario, the costs ofexternali- the need to raise revenue from taxes on the tax rate increases the demand for all ties could raise the economic cost of cot- local output and the need to limit pollu-. capital rather than new capital alone - ton cultivation 50 to 60 percent. tion. so the relative value of domestic capital After empirically evaluating the taxa- They also show that fines and taxes rises. Accordingly, thepublicincreasesits tion of inputs (fertilizer and pesticides) assigned respectively to the federal and holdings of domestic debt, causing the and the implementationofintegratedpest state governments can improve -firm price of domestic bonds to rise and real management (IPM) practices to address compliance and SEPA's performance - interest rates to fall, stimulating invest- the pest problem, Kishor concludes that andhenceenvironmental quality-with- ment. IPM (which emphasizes reduced use of out damagingstate revenue, and perhaps This paper - a product of the Public pesticides) offers the most feasible and even improving it- Economics Division, Country Economics environmentally benign way to achieve They rely for their analysis on numeri- Department-isoneofaseriesofdiscus- Pareto optimality, especially in the long calpolicysimulationsbasedonananalyti- sion papers prepared for the research term. cal framework designed as a multilevel project "An Evaluation ofTax Incentives Headdressessomeproblemsinmaking Stackelberggame.Thisframeworkrepro- for Industrial and Technological Develop- IPM operational, such as providing effi- duces the hierarchical structure of pollnu- ment"(RPO 675-10),fundedby theBnks cient scouting services. He co*ectures tion control policies in Brazil, where the Research Support Budget. Copies of this that heavy government intervention will federal environmental protection agency paper are available free from the World be needed if IPM practices are to be suc- relies on SEPAs to ensure that federally Bank, 1818HStreetNW,Washington, DC cessfully adopted by farmers. defined minimum ambient standards are 20433. Please contact CarlinaJones, room Even without IPM,long staple cottonis met locally. N10-063, extension 37699 (44 pages). likely to remain an efficient Indian export. The numerical simulations arebasedon But implementing IPM would substan- a case study of the food and the printing tially reduce not only the external costs and publishing industries. 928. Pesticide Externalities, but also the private costs of cotton culti- This paper - a product of the Infra- Comparative Advantage, and vation. structure Division, Country Department Commodity Trade: Cotton in This paper is a product of the Trade I, Latin America and the Caribbean -is Andhra Pradesh, India Policy Division, Country Economics De- part of a larger effort in the region to de- partment. It was funded by the World sign specific reforms that can assist gov- Nalin MKishor Banks Research Support Budget under ernments in decentralized economies, (July 1992) research project 'The Impact of Pesticide such as Brazil or Venezuela, in dealing Immunity on the Production and Trade of with unusual sources of policy failures in Implementing integrated pest manage- Agricultural Commodities: Cotton Culti- the area ofpollution controL Copies ofthe ment in coastal Andhra Pradesh, India, vation in Coastal Andhra Pradesh" (RPO paper are available free from the World. would reduce not only the external costs 676-92). Copies of the paper are available Bank,1818 H StreetNW, Washington, DC but also the private costs of cotton cultiva- free from the World Bank, 1818 H Street 20433. Please contact Antonio Estache, tion. NW, Washington, DC 20433. Please con- room E10-081, extension 81442 (46 tact Dawn Ballantyne, room N10-023, pages). Because thecottonbollwormismigratory, extension 38004 (112 pages). a farmer who controls the pest in his own field creates a positive externality for 930. Participatory Development: other farmers. But because pesticide use 929. Managing Pollution Control Myths and Dilemmas leads to the development of pesticide-re- In Brazil: The Potential Use sistant strains,he also creates a negative of Taxes and Fines by Federal Robert Picciotto externality. These externalities affect a and State Governments (July 1992) wide range of food crops (notably, coarse grains, pulses, vegetables, and spices) as Antonio Estache and Kangbin Zheng Participatory development has potential well as cotton. Because of their extensive (July 1992) as a unifying framework for the develop- (and poorly understood) migratory pat- ment inquiry. But more examples ofsuc- terns, pesticide-resistant bollworms are Federal monitoringofdecentralized (state) cess are needed to beef up the theory, and attacking food crops situated hundreds of environmental management-through a more theory is neededtoilluminateanelu- kilometers from the cotton tracts in system of pollution-based fines and taxes siue development reality. -olicy Research Working Paper Series 67 recent evolution of development Second, institutional development is policymakershold back from strong com- -n,as highlighted popular involve- enhanced by policy reform and should be mitments in their exchange rate policy. in decisionmaking. Yet policy pursued in its own right as part of a The stronger the commitment to an ex- :11ckand stop-and-goimplementation country's development strategy. Achiev- change rate rule, the more costly it is to - been associated with "excessive"re- ing an adequate legal framework, civil deviate from it. They develop a Barro- --vuness to interest groups. service reform, and public information Gordon type of model in which the The paper argues that the success with dissemination should have priority - as policymaker has to decide the degree of -tipatuy development projects re- these eleients help reduce societal trans- commitment under uncertainty. spotty. action costs and risks. They show that even for policymakers * Communication between develop- Third, the institutional aspects ofdevel- with a strong preference for maintaining --it policy professionals and grassroots opment projects and programs should be the fixed exchange rate, there are circum- :titioners leaves much to be desired. given appropriate weight In this context, stances under which they will choose to * The discourse of development eco- priority should be given to the full use of devalue. They may choose to do so, for tics remains dominated by marketmechanisms to concentrate scarce example, when the economy is hit by an roeconomists, while institutional eco- participation skills and resources where adverse shock and the costs of adhering tics remains at the margin of develop- they have the greatest impact - on the to thefixedexchangeratearegreaterthan Lt research. creation and maintenance ofpublic goods. those associated with devaluing. * Thevery concept ofparticipation has Fourth, special emphasis should be Theirmodel makesit possible tounder- been subject to rigorous scrutiny, and placed on the efficient production and dis- stand why manyhigh inflation economies ore systematic approach to participa- semination of knowledge, as well as on have not adopted full dollarization as a appears desirable. telecommunications and transportation wayto stabilize prices. In emphasizing the The focus onparticipatry development infrastructure, since these investments cost ofreneging, they differ from analysts -fies an opening of development eco- alsofacilitateefficientsocial andeconomic who single out the desire to rely on Lics to disciplines other than interaction seigniorage as the main motive for stop- 2xoeconomics. In particular, Copies of the paper are available free ping short afll dollarization. -oeconomicsandbusinessadministra- from the World Bank, 1818 HStreet NW, They argue that strong commitments must join forces under the umbrella Washington, DC 20433. Please contact will be made only once there is a good institutional economics, political Anne Muhtasib, room F13-035, extension chance the policymaker will not renege, - omy shouldbe rediscoveredby devel- 84573 (22 pages). and by then they might not be necessary ent economists, and development - a point they illustrate with examples :tice should be shaped by all the social from Latin American countries. nce disciplines. 931. How Much to Commit to an This paper - a product of the Macro- Toacceleratethisprocess,Picciottoputs Exchange Rate Rule: Balancing economic Acjustment and Growth Divi- tard a transaction-based definition of Credibility and Flexibility sion, Country Economics Department - 'icipation and proposes a cost-benefit ispartofalarger effortin the department roach to the design of participation Alex Culderman, Miguel A. ignel, to understandmacroeconomic adjustment :esses. He links participation to insti- and Nissan Liviatan and financial policies. It was prepared for Dnal development and suggests that (July 1992) a special issue of Revista de Andlisis spread of constructive change from Econ6micoonDollarization. Copies ofthis t to project to programs will not take The cost of reneging is a key reason paper are available free from the World ewithoutthe designafrealistic whole- pdicymakers hold back from strong com- Bank, 1818H StreetNW,Washington,DC igprogramscombinedwithpolicyand mitmentsintheirechangeratepolicy. The 20433. Please contact Raquel Luz, room itutional reform at the macro level. stronger the commitment to an exchange N11-059, extension 39059 (32 pages). y then will individual development rate rule, the more costly it is to deviate ationsfindtheirultimatajustification from it. sectorandcountry.Strategicalliances 932. Interest Rates, Official -ing development agencies - global Policymakers can support a fixed ex- Lending, and the Debt Crisis: ' 1,cal, governmental and nongovern- change rate with various degrees of com- A Reassessment Atal - have to be strengthened to fa- mitment.Aregimein which countries can ate dissemination and to achieve re- devalue unilaterally represents a weaker AsH Demirgagant and Enrica Detragiache s on a larger scale. Visible results in commitment than one in which devalua- (July 1992) roved living standards, expanded eco- tion must be agreed upon with other par- tic opportunity for the world!s poor, ties (as in the European monetary sys- Studies of economic performance among a protected environment will be the tem). Full dollarization, understood here the highly indebted countries during the ' test of global participation. as full replacement of the domestic cur- cebt crisis should control for aoss-coun- Four main recommendations for devel- rency by the U.S. dollar, is an extreme itry differen.- in the burden of int-erat ent policy flow from Picciotto'sreview commitment to a fixed exchanged rate - payments. Some countries had better ac- articipatory development* is indeed a special case ofafixed exchange cess to highly subsidized interest rates. First, participation should be viewed as rate. 'tal complement to macroeconomic Cukierman, Kiguel, and Liviatan argue Demirgfig-Kunt and Detragiache doc- Lstment. that the cost of reneging is a key reason ment and try to explain the sizable cross- 68 Policy Research Working Paper Serles country differences in interest rates on Demirga-Kuntposesthequestion:are 934. Public Hospital Costs and external debt paid by a group of highly debt and equity finance complements or Quality In the Dominican Republic indebted developing countriesin 1973-89. substitutes? The answer also has a bear- They find that Indonesia and Turkey, ing on the banking systems in developing Maureen A. Lewis, Margaret B. Sulvetta, and which are often praised for not reachedul- countries, as the bulk of debt financing is Gerard M. LaForgia ing in the 1980s, paid interest rates sub- provided through financial intermediar- (July 1992) stantially below LIBOR-andavoidedthe ies. interest rate shock of the early 1980s. Whether financing in developing coun- Dominicanpublic hospitalsprouide health Differencesin the default-risk premium tries should be provided through capital care inefficiently, withenormous shortages explain some ofthe variation among coun- markets orfinancial intermediaries is the ofgoods and functioning equipment, with tries, but different degrees of access to subjectofresearch addressing theoptimal excessive personne4 especially physicians, official loans carrying highly subsidized structure of financial contracts. and with fer incentives for, orcontvls on, interest rates played the major role. If debt and equity finance are substi- quality performance The organization In the sample they studied, they found tutes, the cost ofequity would decline with and delivery ofhealth care require basic no evidence that debt at floating interest the emergence of an active securities reform, with more accountability and rates was more expensive than debt at market, and banks would face additional quality contral and betEr physician pay fixed rates. competitionfor theircorporate customers. ment practices. For the period 1981-89, itis possible to But debt and equity finance can also be controlfordifferencesin thecurrencycom- complements since an equity market Measuring costs in public hospitals in position ofdebt, andtheresults are essen- would allow the owner of a closely-held developing countries is hamperedby the tially unchanged. companytoreadilydiversifyriskbytrans- lack of an appropriate costing system, or These results suggest that studies of ferring some of the equity to other indi- ofanysystematiccostaccounting.Invoices economic performance among the highly viduals. Then the firm would be able to for goods and services, prices for inputs, indebted countries during the debt crisis also increase its borrowing. Also from the and patientrecords are generally absent. should control for cross-country differ- lendingside, an active stockmarket would As a result,-"cost measureehave histori- ences in the burden ofinterestpayments. increase the debt offirms, allowing them cally been based on budget figures- the This paper-a product ofthe Debt and to borrow more by improving the quality only available financial data. But budget International Finance Division, Interna- of information available to the banks. allocations bear little relationship to the tional Economics Department - is part Demirgag-Kunt tests which of these resources actually required to provide of a larger effort in the department to scenarios is more likely by analyzing the services to hospital patients. understand the economic relationships capital structures of corporations for a The patient-based methodology de- between developing countries and exter- sample ofcountries with stock markets at scribed by Lewis, Sulvetta, and LaForgia nal creditors in regard to credit-rationing differentstagesofdevelopment.Although circumvents this problem by measuring and debt negotiations. Copies of the pa- the datausedinthisstudyarelimitedand actual hospital resources allocated to pa- par are available free from the World theresults arepreliminary,apositive and tients. Their study was conducted in a Bank, 1818 H StreetNW, Washington, DC very significant correlation exists between single Dominican hospital during a one- 20433. Please contact Rose Vo, room 88- firm leverage and the extent ofstock mar- week periodin April 1989.Their approach 042, extension 33722 (33 pages). ket development. documents and gives prices forgoods, ser- This result supports the view that eq- vices, and personnel time providedby the uityand debt finance are complementary. hospital to emergency patients, inpa- 933. Developing Country Capital Thus, equity markets and financial mar- tients, and outpatients. Structures and Emerging Stock kets are also complementary - so the They used the following to measure Markets existence of active stock markets should quality and efficiency increase the volume ofbusiness for finan- * The qualifications and relative costs AsH Demirg9-Kunt cial intermediaries. of7medical manpower delivering services. (July 3992) Furtherresearchisneededtodetermine * The extent and nature of shortages. if these results hold for individual coun- * Comparisonsofphysicianordersanct Are debt and equity finance complements tries over time. Such research would use actual services provided. or substitutes? Probably complements, firm-level data, additional explanatory * (For selected diagnoses) the specifics which means that the existence of active variables, and different definitions of le- of clinical practices in the hospital, com- stock markets should increase the volume verage. pared with accepted clinicalnorms forthe ofbusiness for financial intermediaries. This paper-a product ofthe Financial Dominican Republic. Policy and Systems Division, Country Theyfoundthataverageandtotalcosts Demirgt-Kuntinvestigates the relation- Economics Department - is part of a of services understate the true costs - ship between stock market development larger effort in the department to under- because of shortages, inappropriate and and the financingpatterns ofcorporations stand the impact of emerging stock mar- underusedpersonnel,andnonflmctioning in developing countries. With an increas- ketsin developing countries. Copies ofthe equipment. Quality ofeare measuressug- ing number of stock markets emerging, paper are available free from the World gest low quality and poor efficiency. the increased market activity could have Bank, 1818 HStreetNW,Washington,DC Norms of medical practice were not fol- an important impact on the capital struc- 20433. Please contact Rose Vo, room S8- lowedin more than 80 percentofthe cases ture of developing country corporations. 042, extension 37664 (40 pages). examined. Rates of completion for diag- -off-y Research Working Paper Series 69 tests were below 50 percent for Stocdngandhedgingdecisions, which are 936. Taxation, Information atient services and between 60 and interdependent, are solved simulta- Asymmetries, and a Firm's percent for inpatient and emergency neously.As aresult ofthese refinements, Financing Choices Aces. The study registered significant the optimal decisionrulesare significantly uthly"saving?eof'$641farnoncomple- different. Andrew Lyon of tests and $824 for nonavailability Several useful results emerge from (July 1992) args. Choes analysis: Policy recommendations of Lewis, * When both output and price risks How the effects of tamation and informa- .ztta, and LaForgiacenter on the need exist, stocks and futures can be combined tion asymmetries influence the firm's fi- form the organization and delivery of to reduce the overall exposure to risks noncial decisions, and how publc policy Ith care as well as physician payment (measuredbytheprecautionarypremium may affit all three. -tices-and togivingmore authority or units of output the producer is willing aspital administrators. To make Do- to pay for eliminating risks). Lyon suveys the effects of taxation and dcan hospitals more efficient, there Inanunbiasedfuturesmarket(futures asymmetricinformation on the financing t be greater authority and account- price equals expected spot price at the ofinvestment. In the absence ofthese two ity for hospital directors and better maturityofthefuturescontract),commod- factors, traditional economic models pre- ntives for improving medical and ity producers should shoi t-hedge (sell fu- dict that funds for investment flow to itgementperformance.Qualityassur- tures contracts) less than the expected projectswiththehighestexpectedmeturn. e needs great improvement if the Do- available supplies, if output and price The form of the investment (for example, dean system is to ensure a basic stan- risks are negatively correlated. And they whether by equity, bank loan, or another d of care. should short-hedg more than the ex- form of debtflnance) is irrelevant. This paper is a product of the Popula- pectedavailable suppliesifthoserisks are In the presence of either taxation or L and Human Resources Operations positively correlated. When the futures information asymmetries, however, nei- ision, Country Department I, Latin pricedeviatesfrom the expectedspotorice therafthesepredictionsnecessar3lyholds. ericanandtheCaribbean.Supportfor (futures price bias), speculative trading Financing may not go toward those prOjeCt was provided by USAID, dominates producers' futures positions. projects with the highestexpected return *ragh the REACH Project, and by The The demandforfuturesishighlysensitive and the form in which the financing is kan Institute. Copies of the paper are tothefuturespricebias, whilethe demand conveyed canaffectthe profitabilityofthe i lable free from the World Bank, 1818 for stocks is not. project to both the provider of funds and itreet NW, Washington, DC 20433- * Itis well-known that commodity-ex- the recipient. 3se contact Patricia Trapani, room 17- porting developing countries face great What are the policyimplications afthe ,extension 31947 (21 pages). price risk and - particularly with agri- effects ofthese factors on the financing of cultural commodities-uncertainoutput investment? as well. The optimal stocking and hedg- * Depending on technological chore- . The Precautionary Demand ing rules Choe derives could have practi- teristics, informational asymmetries can Commodity Stocks cal applications for these countries. result in either overinvestment or Earlier analyses that considered only underinvestmentinaneconomy. Clearly, raJong Choe the hedging problem typically suggest depending on which outcome occurs, y 1992) relatively low optimal hedge ratios (the policy recommendations to correct the proportion ofexpected available supplies inefficiency differ. While persistent ducers'stockholding and hedging de- that is short-hedged); this ratio was also overinvestment is unlikely to character- 2ns are a precautionary behavior insensitive to expected available supplies ize most developing economies, there are inst output and price risk Commod- and to the degree of risk aversion. certainlymany occasions when funds are ixporting developing countries that The optimal decision rules Choe derives applied to projects with low expected re- ,these risks should typically hold small suggest that the optiixal hedge ratio is turns. 4s and hedge a large part of their a- likely tobe much higher than ratios given * Increases in the level of wealth and led supplies. in earlier studies. It depends on initial collateral in an economy can greatly re- endowments, output and price expecta- due the costs ofasymmetric information. e shows producers' stockholding and tions, and the degree ofabsolute riskaver- Increases in collateral reduce the risks 7ging decisions as a precautionary be- sion. facedbylenders. Entrepreneus with poor ioragainstoutput andpricerisks.The This paper-a product of the Interna- projects are less lilelytoundertake them litional view is that producer stocks tional Trade Division, International Eco- when they must risk more of their own heldfortheirconvenienceyield. Choes nomics Department - is part of a larger wealth. Governmentpoliciesthatincrease roach explains recentjust-in-time in- effort in the department to explain com- the ability of individuals to collateralize tory management and allows unified modity price behavior and model the glo- wealth-forexamplebypromotingprop- Ltmentoftheprecautionaryandspeca- bal markets for primary commodities. erty rights and the establishment fale- ve demands for stocks and the use of Copies ofthe paper are availablefreefrom gal system that allows the low-cost trans- tres cntracts. - the World Bank, 1818 H Street NW, ferofoollateral-canincrease the ability -hoe alsoassumes amore sensiblepref- Washington, DC 20433. Please contact ofpotentially successfulprojectstoreceive ice function so that demand functions Sarah Lipscorb, room 87-062, extension financing. Policies thatfacilitate the abil- stocks and futures are nonlinear. 33718 (38 pages). ity of individuals to accumilate savings 70 Policy Research Working Paper Series play arelatedrole. In addition to increas- 937. How Soft is the Budget the economydecentralizes (with decision- ing the collateral of an entrepreneur, the Constraint for Yugoslav Firms? making shifting tolocal governments and ability to earn high rates of return in- enterprises), powerful coalitions emerge creases the opportunity cost of undertak- Evan Kraft and Milan Vodapivec that representspecialinterests, andmany ing projects with low expected returns. (July 1992) new channels ofredistribution may open. * Creating decentralized securities Wheremultipartydemocracyis still devel- markets is likely to be less advantageous Despite the virtual absence of direct gov- oping and property rights are ill designed, whereinformation asymmetries are great ernment subsidies to firms, and the exist- decentralization may thus increase, not Individual providers of funds have an in- ence of open unemployment, Yugoslau decrease, redistribution. centive to free-ride on the information and firms were subjected to massiue, pervasive The authors question the appropriate- monitoring of entrepreneurs provided by redistribution through a soft budget con- ness ofmany analyses of, and conclusions others. Only firms with establishedrepu- straint. Yugoslauia's channels ofredistri- drawn from, the 'Yugoslav experiment." tations may be able to obtain funds in bution differedsignificantlyfromthosein Most studies of the Yugoslav economy these markets. other socialist economies, but the redistri- takeforgranted that anyresidual surplus * Similarly, while competition among bution shared a common driving force - of a firm accrues to those who currently lenders is generally promoted, such com- the pursuit of job and wage security. work for the firm. But evidence that in- petition can also reduce the incentive for come is massively redistributed among individual lenders to lend to entrepre- Do Yugoslavia's channels and pattern of firms casts doubts on the validity of such neurs where information andmonitoring "soft budget" redistribution differ from an assumption and thus on the results of costs are large. Competitors would at- those documented for other Eastern Eu- studies based on it- tempt to "steal" these borrowers away ropean economies? Afterall, Yugoslavia's This paper -a product ofthe Socialist after they were certified as creditworthy. self-management system has been re- Economies Reform Unit, Country Eco- Purther, limited competition allows a garded as a"third way,"a system funda- nomics Department - is part ofalzrger lendertouse the sanction ofdenyingcredit mentally different from those of other so- effrtin the departmentto investigate the as an instrument to influence borrowers cialist economies. The workers' roles as behavior offirms in socialist economies- toactresponsiblyin order toobtain fuire decisionmakersandasclaimantsoffirms' Copiesofthepaperare available free from financing. residual income are inconsistentwiththe the World Bank 1818 H Street NW, * Astheresultofinformationasymme- concept of state paternalism implied in Washington, DC 20433. Please contact tries, certain types of projects are more soft budget redistribution. Sabah Moussa, room N11-017, extension likely to obtain financing at a lower cost Kraft and Vodopivec show that 39019 (31 pages). using equity finance rather than debt. If Yugoslav firms have also been subjected the tax costs of equity are higher than to massive, pervasive redistribution those ofdebt, however, these projects may through a softbudget constraint;in 1986, 938. Health, Goverment, be relatively underfinanced. Tax policy gross subsidies in manufacturing and the Poor: The Case might wish to consider whether the tax amountedto50percent,andnetsubsidies for the Private Sector treatment of equity and debt should be to 15.6 percent ofGDP. In anewapproach equalized or whether tax costs of these to quantifying such redistribution, Kraft Nancy Birdsall andEstelle James projects can be reduced in other ways. and Vodopivec focus particularly on the (July 1992) * Governmentray feel an obligation to redistribution flows produced by holding intervene directlyin creditallocation, but financial assetsandliabilitiesin aninfla- Selectiueuserfeesandprivatizatiocould should do so only where it has a greater tionary environment in which financial be used to reducegovernment spendingon rbility to identify creditworthy recipients claims are generally not indexed. Analyz- health carefortherichand middle classes, than other lenders do. In the absence of ingfirm-level data forYugoslavia!s entire permitting redirection of government any comparative advantage, government manufacturing sector for 1986 show that spending to programs that would benefit attention to the basic infrastructure that such flows - in contrast with those of the poor, thus producing the highest mor- reducesthecostsofobtaininginformation other Eastern European economies - talitygains- and enforcing contracts is likely to better have been a far mare important source of assist the efficient allocation of credit redistribution than formal taxes and sub- Birdsall andJames presentacase for (lim- This paper - a product of the Public sidies. Although Yugoslavi's channels of ited and selective) user charges and some Economics Division, Country Economics redistribution differ significantly from privatization of health care in developing Department-is one ofaseries ofpapers those in other socialist economies, the countries. commissionedforthe researchproject, "An redistribution shares a common driving They demonstrate that - consistent Evaluation of Tax Incentives for Indus- force- the pursuit ofjob and wage secn- with public choice theory - government trial and Technological Development," rity. Producers of energy, food, andheavy actions in the health sector are neither (RPO 675-10), funded by the Banks Re- manufactures, as well as less developed equitablenorefficientindevelopingcoun- search Support Budget Copies of this regions, have especiallybenefitedfromthe tries. In general, they increase the real paper are available free from the World redistribution. income of influential middle and upper Bank, 1818HStreetNW,Washington,DC This analysis for Yugoslavia suggests income groups- despite thefactthatthe 20433. Please contact CarlinaJones, room animportantlessonfortheprocessoftran- greatest mortalitygains would come from N10-063, extension a7699 (46 pages). sition inEastern European economies. As directing health spending to the poor. Vfcy Research Working Paper SerIes 71 Then they discuss why-ifthisimplicit adjustment and broad economic policies. 'resource gap" lies at the heart of donor- 'el of government behavior is correct It is important, they say, to fally inte- sponsored initiatives to involve the private government health interventions will grate existing and expected economic sector in family planning, but there are me less effective than theyhave been. policy into project preparation and project other equallygood argumentsifor doing so. They point out that high mortality in appraisal documents in the social sector- Governments and donors are often un- loping countries is related more to The paucity of robust quantitative in- aware ofhow much the private sector (es- ,rty than it used to be, while pressure formation on the costs and benefits of so- pecially the commercial sector) already 3vernments to finance health carefor cial projects may have perpetuated the participates-andcouldparticipate-in middle class and the rich is increas- false notion that social projects, unlike family planning. because the population is aging and other types of projects, may be insulated Foreit discusses why the private sector costs of handling adult chronic dis- from the effects ofgeneral economic policy. should be involved in planning, how the s are rising. Kaufinann and Wang present an ana- private sector shoulZbe defined, whatthe The inequityandinefficiency ofgovern- lytical framework to suggest the mecha- experience has been so for with private thealth programs reflect the current nisms through which such policies affect sector involvement, and what might be 1ical equilibrium which, unfortu- each stage of a project cycle. They use sta- expected in the future. ly, cannot be easily changed- Oppor- tistical analysis and case studies from a To support family planning in the pri- ties for change, including marginal broad range of sector reports and project vate sector, she recommends that donors kges in the distribution of political documents. (1) expandthe totalfamilyplanningmar- ar, must be recognized and exploited Bivariate statistical analysis of the in- ket to help satisfy existing and future ,never they arise. Information that cidence of uansatisfactory projects shows unmet needs for contraception and (2) mases public awareness ofcurrent in- that social projects are two to three times shift current users from subsidized to ties, fiscal stress, and tactical use of as likely toberated unsatisfactory where more nearly self-supporting outlets - Tyavailable resourcesmayalso create there is restrictive trade, overvalued cur- withoutcompromisingcoverage,equity,or irtunities to alter the equilibrium. rency, a fiscal deficit, and relative price quality ofeare. This paper - a product of the Country distortions.The evidence is even stronger The kinds of private sector acti-. ;ies Lomics Depao;ment - is part of a when data onlyfor education projects are that danors should support dependin I -st ar effort in the department to assess examined, on which contraceptive methods are tobe mplications afgreater involvement of This paper - a product of the Country emphasized Nonelinical systems, for ex- *rivate sector in the delivery of social Operations Division IL, Country Depart- ample, are the most efficient way to dis- ices. It will be included in the forth- mentIll, Europe and Central Asiaregion tribute supplymethods (forexample, oral ing Policy and Planning Implications - was initiated during preparations for contraceptives and condoms), as long as ie Epidemiological Transition (pro- the World Develoment Report 1991 on medical backup is available for women 'ings of a November 1991 workshop), development. Copies of this paper are who suffer side effects or who wish to -i by James Gribble and Samuel available free from the WorldBank, 1818 switchto another method. These systems ton. Copies of thispaper are available H Street NW, Washington, DC 20433. of distribution free up scarce resourcesin from the World Bank, 1818 H Street Please contact Frances Rosenthal, room clinical facilities and the time of limited , Washington, DC 20433. Please con- H2-041, extension 37257 (40 pages). medical personnel fortheresupplyofcon- PRDDR, room N1-051, extension traceptives. lowever,ifsterilization is to 10 (31 pages). be emphasized, a close link with existing 940. Private Sector Approaches hospital infrastructure is necessary. to Effective Family Planning Nonclinicaldistributionfavorscommer- How Macroeconomic Policies cial systems in urban and periurban set- .ct Project Performance Karen G. Fareit tings and community-based distribution e Social Sectors (August 1992) systems (either public or private) where commercial networks break down. Price el Kaufman and Yan Wang Supporingtheparticipationoftheprivate subsidies might be considered in areas '1992) sector in family planning is benefcial be- servedby commercial systems, butwhere cause it can (1) expand the total umi y consumers cannot afford prevailing com- nty's economicpolictes significantly planning market to help satisfy aisting mercial prices. t the performance of investment and fature unmet needs for contracepion Foreit discusses a wide range ofexperi- :=is in the social sectors, especially and (2) skift curent users from subsidized encesinprovidingboth'supplyfmethods ation. to more nearly self-supporting outlets - andclinicalmethods, such as sterilization withoutcompromisingcoveroge, equitk, or (including tubal ligation). Roving steril- Emin andWangfind that a country's quality of care ization camps have proved effective in omic policies significantly affect the Nepal and Thailand, for exmple, where 5rmanceofinvestment projectsin the Even if per-user costs are controlled or demand for the procedure was higl; they I sectors, especially education. Their reduced, the rising demand for family may have backfired in other areas, such "ngs underscore the need to link strat- planning services will faroutstrip govern- as India. Mobile clinic vans have been in the social sectors - even at the ments' and donors' financial resources in tried in such countries as Colombia and et level - to a country's structural most parts of the developing world- This Guatemala, but their effectiveness and 72 Policy Research Working Paper Serles cost-efficiency have not been carefully ant levels of prevalence and sexual activ- Los Angeles, and Mexico City), the efM- analyzed. ity, changes in sexual behavior produce centinstrumentselectedbythis(admit- Among the topics Foreitcover whento similar effects. tedlylimited) exercise are similar:indirect subsidize goods and services, when to in- This paper - a product of the Popula- incentive-based policies. Only Cubatao troduce new subsidized nongovernmental tion Policy and Advisory Service, Popula- differs in that direct non-incentive regu- organization outlets, which regulations tion and Human Resources Department lations are the efficient policy choice. may inhibitthe expansion ofprivate fam- -is part of a continuing effortin the de- But choosing indirect policy instn- ily planningefforts,howtofoster demand partment to produce up-to-date popula- ments is not without its problems. This for private sector family planning goods tion estimates and long-run population categoryisthebroadest one. Forinstance, and services, and how to promote the pri- projections. Copies ofthe paper are avail- while there is only a single direct incen- vate supply of such goods and services. able free from the World Bank 1818 H tive-based price instrument (emissions This paper - a product of the Popula- Street NW, Washington, DC 20433. taxes), several indirect incentive-based tion Policy and Advisory Service, Popula- Please contact Otilia Nadora, room 811- price policies exist including taxes on in- tion and Human Resources Department 219, extension 31091 (57 pages). puts and on complementary and substi- -is part ofa larger effortin the depart- tute products. Indirectpolicies also cannot ment to review effective family planning simultaneously target the incentives to program approaches. Copies of the paper 942. Efficient Environmental reduce waste generation, increase produc- are available free from the World Bank, Regulation: Case Studies of Urban tionefficiency,andreduceoutputtoreduce 1818 H Street NW, Washington, DC Air Pollution (Los Angeles, Mexico pollutionAcombinationofiLndirectpolicies 20433. PleasecontactOtiliaNadora,room City, Cubatao, and Ankara) will then be required to control pollution 811-219, extension 31091(49 pages). But if the regulatory costs of controlling Arik Levinson and Sudhir Shetty additional variables are high they may (August 1992) outweighthe custofmonitoringandenforc- 941. Projecting the Demographic ing a single direct policy. Final]y, indirect Impact of AIDS Once decisions are made-to concentrte regulations may be accompanied by per industry, to rely on private vehicles for verse incentives, such as new source bia-- Rodolk A. Bulatao andEduard Eoas transportation, to subsidize a particular or reduced marginal costs of polluting (August 1992) energy source, or to usea certain environ- Efforts to offset these perverse incentive mental policy - they acquire a certain by regulating additional variables may b- A simple model that simulates the spread permanence. For this reason, it is impor- subjecttosecond-bestproblems:tworegc ofAIDS is used to generate estimates of tant to design policy with an eye toward lations with opposite results can be cost deaths from AIDS. longer-runconcerns. In addressing urban her than no regulation at all- air pollution cost-effectiuely, it is also im- The main lesson Levinson and Shett, A simple model that simulates the spread portant not to wait until the problern as- draw from the cases examined- Once dc of AIDS is used to generate estimates of sume crisis proportions. By dosing op- cisions are made - whether to concen deathsfroimAIDS, whichareincorporated tions, delays in implementing corrective trate industry, to rely on private vehicle- into population projections covering 20 measures will raise the eventual cost of for transportation, to subsidize a partice years. Preliminary results for one coun- environmental protection. lar energy source, ortouseacertain env_ tryare shown-notfirm estimates,asthe ronmental policy- they acquire acertai - model has several arbitrarily set param- Levinson and Shettyreviewthe economic permanence. Capital is invested an eters. principles that should guide the efficient workers are trained under the prevailin- The results suggest that the number of choice oftargetedpolicies for environmen- laws, and these are costly to change. Le infections and deaths could be extremely tal protection. They recommend policy Angeles cannot reverse its emphasis o large, even if transmission of the human instruments along three dimensions: (1) the automobile; Brazil cannot easilymov immunodeficiencyvirus(HIV)is substan- whether they use economic incentives, (2) its industrial center away from Cubata tially reduced. In five years, deaths in a whether they target environmental dam- Mexico cannotquicldy reduce the cancer single country will be in the tens ofthou- age directly, and (3) whether they specify tration in its capital city; and Turke? sands, and after 20 years could be in hun- prices, quantities, or technologies. This development would suffer if energy sub dreds of thousands and still rising. Nev- distinction is helpful in guiding policy sidies were removed abruptly. ertheless, the impact on population size choices because many discussions in the Farthisreason,itisimportantto desig appears small. Bulatao and Bos discuss economics literature on environmental policy with an eye toward longer-run con why these results should not be entirely policies mistakenly claim advantages for cerns. It makes sense, for example, for cit trusted, and what work remains to be incentive-based instruments by showing, ies such as Ankara to begin to enact pol done. forinstance, that directpolicies ofthis sort des to prevent mobile source air pollutio Where HIV is relatively widespread, are less costly thanindirectnon-incentive from worsening over the next decades. changes in sexual behavior, particularly measures. Levinson and Shetty also point out th increases ir condom use, are essential to After analyzing efficient responses to dangers ofignoring intermediate substz reduce the scale of the epidemic. Earlier the air pollution problem, Levinson and tution of pollutants. In places such a changes are more effective than later Shetty come up with somewhat surpris- Cubatao, where air quality has bee changes. But across countries with differ- ingresults. Forthree ofthe cities (Ankara, cleaned up, the improvement may hav Policy Research Working Paper SerIes 73 come at the expense ofwaterqualityorthe porating repayment flows and capital tional Economics Department - is part accumulation of hazardous wastes. losses - and derive a financially sound of a larger effort in the department to This paper - a prodrct of the Office of definition ofburden-sharing. This defini- understand the economic relationships the Vice President, DevelopmentEconom- tion is then applied to a group of severely between developing countries and exter- ics - was prepared as a background pa- indebted countries for which secondary nal creditors regarding credit rationing per for the World Development Report market prices are available. The finding: and debt negotiations. Copies of the pa- 1992 on the environment. Copies of this private creditors made a loss of about 30 per are available free from the World paper are available free from the World percent during the debt crisis, and official Bank, 1818 HStreetNW, Washington, DC Bank, 1818 H StreetNW, Washington, DC creditors avoidedabsorbinga comparable 20433. Please contact Rose Vo room S8- 20433. Please contact the World Devel- burden only if, on average, the implied 042, extension 33722 (31 pages). opment Report Office, room 7-101, exten- prices of their debt stocks were signifi- sion 31393 (56 pages). cantly higher than market prices. To assess burden-sharing, the unob- 944. How Public Sector Pay and servable implied prices of official debt Employment Affect Labor Markets: 943. Burden-sharing Among need to be estimated. The authors Byst Research Issues Official and Private Credtors analyze how, in a seniority-based corpo- rate debt model, information on these Gail Stevenson Ash Demirgag-Kunt and Eduardo Fera6ndez- implied prices can be recovered by look- (Auggst 1992) Arias ing at the differential impact of various (August 1992) stocks of debt on the market price. They Policy reform has focused on the refrm of analyze the validity and drawbacks of this arge inefficient public sectors because of Official creditors - especially model for the sovereign debtcaseandcon- their cumulative negative effects on eco- multilaterals-haveabsorbedmoreofthe clude that seniority sharing rules are nomic growth and competitivenes The burden ofthe debt crisis thanprivate credi- probablynotappropriate. They then show slow progress in restructuring the public tors have. Official creditors are not neces- that implied prices are still identified sector in many countries highlights the sadly weakerorlesssenior, butforthe sake under more general sharing rules, which need to address - more forcefully a3d of nonfinancial objectives, they may be allows us to relax that assumption and more subtly - ho public sector policies unwilling (rather than unable) to exercise still be able to derive relevantinferences. affect the labor market their substantial enforcement power A suitable multicreditor debt valuation model, dependent on the stock of private Structurally, the public sector has amore Demirgag-KuntandPerndndez-Arias ana- debt and the debt shares ofvarious credi- impartant economic role to play in devel- lyze how the burden of the debt crisis has tors, is then derived and estimated. oping countries than in industrial coun- been sharedbyvariousclassesofcreditors. The empirical estimations show weak tries, particularly in how it affects labor Given the rising share ofofficial debtin the effects of the official debt stocks on the markets. total debt of developing countries, official market price and suggest that the implied Evidence from many developing coun- creditors have a growing need to develop a prices of official creditors are lower than tries shows thatpublic sector pay, employ- burden-sharing indicator. the market price, especially for multilat- ment, and performance are hurting the This paper represents thevery firststep eral creditors. This finding implies that labor markets' ability to allocate workers in this direction. So, its analysis narrowly official creditors have, relative to private among sectors and skill requirements. In focuses only on financial profits. Noinfer- creditors, absorbedalarger burden, espe- many countries, the civil service and the ence should be made regarding the over- ciallymultilaterals.Butitdoes not imply public sector wage bill have grown to all performance ofofficial creditors, whose that official creditors are weaker or less unsustainablyhighlevels. The public see- evaluation requires the assessment of seniar-officialcreditors may be unwilling, tor is so big thatinterventionsin the sec- theirnonfinancial objectives. Similarly, no rather than unable, to exercise their sub- tor-with-orwithoutspllovereffectsinto inference should be drawn regarding the stantial enforcement power for the sake the nonpublic sector -make it more dif- solvency of multilaterals, which is essen-. of nonfinancial objectives. Two qualifica- ficult for wages and employment to re- aally determinedby external guarantees. tions to the findings on implied prices: spend to shifts in demand and supply. Extensive further research is required to First, the "single collateral assumption Nonwagebenefits are seldom-relatedto shed light on these areas and to eventu- ofcorporate debtmaynotbe applicableto productivity, so they can be particularly ally derivethe-relevantpolicy conclusions. sovereign debt, The evidence may also be distorting. At the same time, along-term The authors briefly review the relative consistent with undiscounted official im- drop in real civil service wages and the performance of external creditors during plied prices ifofficial creditors have inde- compression of wage ranges have caused the debt crisis in terms of exposure, net pendent enforcement mechanisms not critical shortagesofmanagerial andtech- transfers, and arrears. They argue, how- available to private creditors. Second, the nical workers in the civil service. The re- ever, that a meaningful measure of bur- class of admissible sharing rules used for suiting skill imbalances in the rest of tt1 den-sharing needs to go beyond those ob- identification generalizes the seniority domestic economy reduce international servations and consider the capital losses rules but may still exclude the relevant competitiveness in some countries. that creditors have made on outstanding sharing rule- Policy reform has focused on the reform debt stocks. So, they develop a financially This paper - a product of the Debt and of large, inefficient public sectors because sound measure ofrate ofreturn - incor- International Finance Division, Interna- of their cumulative negative effects on 74 Policy Research Working Paper Series economic growth and competitiveness. more responsive to the client public. By fort in the department to help countries Policies to adjust relative prices from introducing complex financial reporting develop sound practice for civil service nontradables toward tradables have led to systems, managers have increased au- reform. Copies of the paper are available some movement of employment out of the tonomy, some functions are spun off into free from the World Bank, 1818 H Street public sector, but significant rigidities re- semi-autonomous agencies operating on NW, Washington, DC 20433. Please con- main an increasingly commercial basis. tact Daniele Evans, room N9-057, exten- Workers are attracted to the public sec- By contrast, other industrialized coun- sion 38526 (53 pages). tor because of complex economic and so- tries, such as Singapore, have retained cial incentives that are difficult to change more traditional, largely centralized civil - and the relationship between public service structures, pursuing only incre- 946. Retraining Displaced Workers: sector interventions and the underlying mental improvements in specificaspects of What Can Developing Countries political and economic forces is an impor- CSM. Learn from OECD Nations? tant areafor research. The slow progress Nunberg speculates aboutwhatis likely in restructuring the public sector in many toworkbestin developingcountryadmin- Duane E. Leigh countries highlights the need to address istrations: (August 1992) more forcefully and more subtlyhowpub- * Centralized civil service management lic sector policies affect the labor market models provide the best starting point for Job retraining prugrams should be inde- This paper - a product of the Educa- most developing countries because decen- pendent oftheformal educational system, tion and Employment Division, Popula- tralized agency systems require technologi- should be linked to employers (so trainees tion and Human Resources Department cal and human resources beyond their ca- get marketable skills), should be short- - is part of a series of state-of-the-art pabilities. Some better-endowedcountries term and job-oriented, and should be in- studies of employment and labor market could use certain agency-type features se- stitUtionalized, not temporary. issues andreform programs. Copies ofthe lectively. Such administrations could es- paper are available free from the World tablish strategic plans to move toward a The governments ofmostindustrialcoun- Bank, 1818 HStreetNW, Washington, DC fuller agency system as their institutional tries provide financial support for adult 20433. Please contact Cynthia Cristobal, capabilities increase. training prqwrams intended to retrain room S6-035, extension 33640 (33 pages). * Developingcounties face trade-oflsin displaced workers. Leigh draws lessons choosing which CSM functions should be fromtheexperienceofsixindustrialcoun- strengthened first. Two functions - per- tries (Australia, Britain, Canada, Japan, 945. ManagIng the Civil Service: sonnel establishment control and staff re- Sweden, and the United States) onhowto What LDCs Can Learn from cruitment -are essential for civil service design and implement such retraining Developed Country Reforms performance and should get top priority programs in low-income developing na- * SeniorExecutiveServiceshaveproved tiorns and middle-income countries. Barbara Nunberg difficult to design and implement in ad- By retraining, he means both improv- (August 1992) vanced countries, but many flaws can be ingjob skillsandremediating deficiencies corrected in adapting them to developing in basic education. These are the lessons Centmlized civil service management countries, where there is often an urgent he emphasizes: models provide the best starting point for need to groom higher-level staff * Training programs should be inde- most developing countries because decen- * Assuming minimal, essential levels pendent of the educational system, with tralized agency systems requirc techno- ofpersonnel establishmentandbudgetairy its rigid ties to degree requirements and logicalandhuman resources beyond their control, unified pay and classification academic schedules. capabilities. Some better-endowed coun- could be relaxed in developing countries, * Linkstoemployersmustbe developed tries could use certain agency-typefeatures following the lead of increasing numbers andmaintainedsothattraineeshavemar- - selectively, moving toward an agency sys- ofadvanced countries thathave done this. ketable skills on completing the program. tem as their institutional capabilities in- * Given the urgency of other CSM * Training programs should be de- crease. tasks, lower priority shouldbe assigned to signedtominimize trainees4forgone earn-- reform involvingperformancepay, theben- ir.gs basic education should be relevant Nunberg examines current civil service efits of which have yettobe demonstrated to the jobs the trainees might seek. management(CSM) practices in advanced in the public sectorsofdevelopedcountries. * Externalprovidersofeducationmust countries to provide gui dance for develop- The management requirements and costs be made accountable-but with care; the ing country governments that face the ofinstalling performance pay systems can system of accountability should also en- dilemma of how to recruit, retain, and be considerable and employee resistance sure that the needs of displaced workers motivate appropriately skilled staff at may subvertsuch efforts. But performance- most likely to sufferlong-term unemploy- affordable costs, given a limited human "latedromotion systems, even ifimper- ment are met resource base. fectly implemented, can help move devel- * Not all displaced workers require Advanced country administrations ait oping wuntry civil service values toward relatively expensive retraining; some may following two distinct paths to improvi9 stwa&rds of competence and merit. need only inexpensive job-search assis- CSM. Some countries, such as the United this paper - a product of the Public tance services. Kingdom, are engaged in sweeping Sector Management and Private Sector * Apermanent,institutionalizedtrain- 'managerialist" reforms to dontrate Development Division, Country Econom- ing system is prelerable to short-term in- civil service functions and mak them ics Department - is part of a larger ef- tervention. Pallcy Research Working Paper Serles 75 This paper - a product of the Educa- ber ofjobs placed) and qualitatively (how - extending to ten years. tion and Employment Division, Popula- good they are), depends on the private Mukheijee identifies and compares tion and Human Resources Department sector's willingness to increase hiring. cross-country information about 3ome of - is part of a larger effort in the depart- This paper - a product of the Educa- the factors that influence differing mar- ment to improve labor policies for manag- tion and Employment Division, Popula- ket perceptions ofBulgaria, Czechoslova- ing the social costofeconomic adjustment tion and Human Resources Department Ida, Hungary, Poland, and Romania. Copies ofthe paper are available free from - is part of a series of state-of-the-art Among factors discussed: the World Bank, 1818 H Street NW, studies of employment and labor market * The importance of the former Soviet Washington, DC 20433. Please contact issuesandreformprogramsinthe depart- umbrella. Cynthia Cristobal,room S6-035, extension ment. Copies of this paper are available * Indicators of relative indebtedness. 33640 (52 pages). free from the World Bank, 1818 H Street * The flow of funds to the region, by NW, Washington, DC 20433. Please con- source, from 1989 on. tact Cynthia Cristobal, room S6-035, ex- * Thematurityofcommercialdebtand 947. Strategies for Creating tension 33640 (31 pages). especially the magnitude of short-term Transitional Jobs during Structural debt. Adjustment * The identity of 'other private cradi- 948. Factors Affecting Private tor, and factors that affect the Pmount Stephen L. Mangum, Garth L Mangum. and Financial Flows to Eastern Europe, ofp-ojectfinanceandfbreigndirectinvest- Janine Bowen 1989-91 ment available. (August 1992) * Thesetapofemergingfmancialinsti- Mobn Mukherjee tutions. Work relief is critical to any structural (July 1992) * Long-term commercial flows-espe- adjustment program, so long as the shills cially bond finance (access to the Euro- needed to proide public works match the Data and factors that influence market bond market for medium- and long-term skills held by the (mainly) manual work- perceptions ofthe relativecreditworthiness funds). ers needed Women and displaced white- ofthe different countries participating in Theregionis notwell known Zolenders collar workers may be better served by Eastern Europe's economic transforma- thatmightbeabletomeetitsmanyemerg- public service employment or subsidized don. ing needs for financing. And the few sta- private employment. tistics available may be doubtful or mis- Despite acommon heritag ofinstitutions leading in the context of a market Mangum, Mangum, and Bowen review and arrangements for economic planning economy. Mukheijee bases her observa- world experience with creating transi- and trade clearing, and their almost si- tions largely oninterviews withpeoplein tional jobs through public work relief, multaneous adoption ofreform, the coun- commercial ban"As and investors active in 'lic service employment, and subsi- tries participating in Eastern Europe's Central and Eastern Europe. All data ed private employment economic transformation differ greatlyin have been provided by those sources and They argue that work relief is a critical economicperformanceandmarketexpec- bycountry reports issued by the Institute aponent of any structural a4tustment tations of performance. of International Finance. The latter is a Agram, solongas the workreliefprojects Mukhejee examines those differences major source of figures used by private re consistent with the capabilities ofthe as the region's economic transformation lenders when they assess a borrower's targeted workforce. The effectiveness of nears its third anniversary, focusing on prospects. public works depends on timeliness, fi- the underlying factors that drive private This paper is a product of the former nancing, providinggoodmanagers, choos- capital flows - from both commercial Financial Advisory Services group in the iqg high-priority projects, and matching lenders and foreign investors. Cofinancing and Financial Advisory Ser- the skill needs of the project with the skills Improved creditworthiness - or the vices Department Copies ofthe paperare of the targeted workers. ability bo attract voluntaryprivate-sector available free from the World Bank, 1818 Public works and work relief tend to finance for successively longer periods, H Street NW, Washington, DC 20433. n*nvide transitional jobs mainly for male with fewer guarantees required - is a Please contact Kamar Yousus, room H9- nual workers. Women and displaced major signal that the economic reforms 055, extension 33102 (26 pages). white-collar workers maybe better served are beginning to take hold. by public service employment or subsi- Mukherjee examines the different dized private employment. stages on the road to creditworthiness at 949. The Impact of Formal Finance Public service employment isrelatively which she finds the Eastern European on the Rural Economy of India z--ytoadministerandquicktoimplement Qountries. Hungary and Czechoslovakia =-4 disband, but it is difficult to focus (CSFR) are the only countries that can Hans Binswanger and ShahidurKhandker r=-graphically, rarely leaves anything issue medium- to long-term sovereign (August 1992) yvrmanent behind, and expands the pub- bonds held by private investors (the ulti- ie tpayroll - at least temporarily. mate test of creditworthiness, by some India's supply-led approach to agricul- Subsidized private employment is eas- standards). In Hungary, maturities on the tural credit paid off in nonfarm growth, targeted andis compatiblewithefforts mostrecentlyissueddeutschemarkbonds employment, and rural wage. The impact -rivatization. Its chiefweaknessisthat nowextendaslongas sevenyears; private ofexpanded credit on agricultural output success, both quantitatively (in num- placements ofyen are even more favorable has been modest, and the benefts ofagri- 76 PolIcy Research Working Paper Sedes cultumrl incomeexeed the costs ofthepro- But overall, rural credit and expansion 950. Service: The New Focus gram only if optimistic assumptions ar of the rural financial system have had a In International Manufacturing made about repayment rates on farm positive effect on rural wages. Creating and Trade credit. nonfarnjobs has apparently added more to total employment than the substitution Hans Jargen Peter. India has systematically pursued a sup- of capital for labor has subtracted it in (August 1992) ply-led approach to increasing agricul- agriculture. Sc, wages have risen even for tural credit. Its objectives have been to agricultural workers, albeit modestly. Logistics management (to improve asset replace moneylenders, to relieve farmers The supply-led approach to agricultural productivity and respond more quickly to of indebtedness, and to achieve higher credit that has been pursued for three uolatile changes in customer preferences) levels of agricultural credit, investment, decades has clearly benefited currentbor- enables many organizations to conduct and output. rowers and farm households formerly in- their business withminimalinventories- a India's success in replacing moneylend- debted to moneylenders. It has also by outsourcing intermediate production to era has been outstanding. Between 1951 spurred fertilizer use and investment in enterprises in countries where factor costs and 1971 their share of rural credit ap- agriculture. It has been less successfulin are lower. Developing countries can capi- pears to have dropped from more than 80 generating viable institutions - and has talize on these trends only iftheysubstan- percent to 36 percent. (It may have failed to generate agricultural employ- tially improve their infrastrucure, fiber- dropped to as low as 16 percent by 1981, ment. alize their regulations, and master mod- but that estimate is disputed.) The policy's costs to India!s government era logistics management techniques. Still, institutional credit is far from have been high as portfolio losses associ- reaching all farmers. Only about a quar- ated with poorrepaymentultimatelyhave MBior breakthroughs in communications tarofcultivatorsborrow, andnomorethan to be borne by the government or one of technologies in the 1980s made it possible 2 percent take out long-term loans. Most its institutions under optimistic assump- to monitor all phases ofmoving a product small farmers have little access to credit, tions. The benefits of the agricultural in- from raw material sourcing through pro- and long-term credit goes mostly to large come are at bestno more than 13 percent cessing through delivery to the customer. farmers. higher than the cost to the government of Close monitoringrevealedmajorinefficien- Overall, farm debt has probably not the extra agricultural credit. If assump- cies in the traditional set-up ofmaterials increased sharply in real terms, as formal tions about the cost ofsupplyingthe credit acquisition, production,and distribution- credithas primarily substitutedfor credit and about repayment rates are less opti- especiallylargeinventoryholdings.Atthe from other sources. Moreover, with the mistic, the social costs -and the costs to same time, patterns of customer demand rapid growth of commercial banks in the the government of providingthe credit- begantoshiftmorerapidlypartlybecause 1970s, the system mobilized more depos- wouldhave exceeded the benefits in agri- of better communication networks. its than it lent in rural areas in 1981. Of cultural income. The need to reduce costs and become course, enhanced deposit services are a The expansion of commercial banks to responsive to volatile changes in customer useful service forthe rural population, but rural areas paid off in nonfarm growth, preferencesforcedbusinessestosubstan- onemust ask whathas been the impact of employment, and rural wages. The ques- tially restructure their corporate prac- heavy rural credit and better financial tion is: Could these benefits have been tizes. With domestic factor costs rising, services on agricultural investment, pro- achieved without imposing agricultural manufacturers outsourced intermediate duction, and rural incomes. credit targets on the commercial banks production to foreign enterprises in coun- Binswanger and Khandker's economet- and credit cooperatives? Or did the com- tries with lower wages and merchants ric results suggest that the rapid expan- mercial banks expand only because they sought cheaper supply sources - devel- sion of commercial banks in rural areas were forced to lend to agriculture? The opraents thatheld promise for developing has had a substantially positive effect on authors could not answer these questions countries. rural nonfarm employment and output. with the data at hand. Many developing countries have been The availability of better banking facili- This paper - a product of the Agricul- unable to take advantage of structural ties appears to have overcome one of the tural Policies Division, Agriculture and changes in world manufacturing and obstaclestolocatingnonfarmactivitiesin RuralDevelopmentDepartment-ispart trade because they have been unable to rural areas. of a larger effort in the department to deliverthequalityofproduction,fastturn- Expanded rural finance has had less of analyze rural credit policy. The research around, and reliability of delivery man- an effect on output and employment in wasfundedby the Research Support Bud- facturingbusinesses needto keep up with agriculture thanin the nonfarm sector. The get under research project "Agricultural changing market demand- effect on crop output has not been great, Investment, Financial Intermediation, Anew management approach - logis- despite the fact that credit to agriculture and Socioeconomic Mobility' (RPO 673- tics management-is needed to cut busi- has greatly increased the use of fertilizer 35). Copies of the paper are available free ness costs and to be responsive to rapidly and private investment in machines and from the World Bank, 1818 H Street NW, changingmarkets. Logistics management livestock There has been more impact on Washington, DC 20433. Please contact orchestrates materials acquisition, pro- inputs than on output, so the additional HansBinswanger, room 14-049, extension duction, and marketing to reduce inven- capital investment has been more impor- 31871 (53 pages). tories (the heaviest burden on corporate tant in substituting for agricultural labor performance) to aminimum. Effective lo- than in increasing crop output. gistics management enables many orga- Policy Research Working Paper Series 77 nizations to conduct their business with and Tarr consider several more trade lib- a means of encouraging exports in a sec- less than a week's worth of supplies. eralization options available to the Turk- tor that may otherwise rely only on the Such a radical change requires major ish government. They conclude that uni- highly protected domestic market. The corporate restructuring and the develop- formity of tariffs and export subsidies authors show that in Turkey high export ment of strategic alliances with service would substantially improve Turkey's subsidies in sectors with high tariffs are providers. Outsourcing of production is welfare. particularlycounterproductive-because projected to continue growing, and the Although the'Ramsef optimal import at the multisector level the distortion in- search for less costly supply sources will taxation would call for non-uniform im- troducedbythe export subsidy (by encour- continue. port taxes inversely proportional to the aging too many resources into the pro- Developing countries can capitalize on elasticity of import demand in each sec- tected sector) dominates the reduction in those trends - but only if they substan- tor, the observed dispersion of the tariff the overall anti-export bias. tially improve their infrastructure, liber- structure in Turkey is inconsistent with Turkey's proposed policy of harmoniz- alize theirregulations, and begin to apply optimal departures from uniform protec- ingits tariff tothe European Community's moderlogisticsmanagementtechniques. tion. In fact in Turkey uniformity common external tariff would yield only f they don't, their outlook is not promis- achieves an extremely high proportion of small welfare changes, which would be ing. the benefits of full trade liberalization smalllosses as the European Community Thispaper-aproductofthe Transport because, in the absence ofa general anti- interprets harmonization.Why? Because Division,InfrastructureandUrbanDevel- export bias, the principal distortion re- harmonizingtoECtariffswllrequirelow- opment Department -is part ofalarger main-ingin the trade regime derives from ering Turkish tariffs from already low effort in the Department to establish an dispersion ofthe tariff and(especially the) levels, in the presence ofexport subsidies effective framework for helping develop- export subsidy structure. almost as large as the existing average ing countries adust to changing logistics Like Turkey, an increasing number of effective tariff rate. But harmonizing to management practices in international developing countries - includinZ Chile, the EC tariffstructure can be beneficial if markets. Copies ofthe paperare available Indonesia, Mexico, and Poland-have in at the same time export subsidies are re- free from the World Bank, 1818 H Street recent years undertaken extensive trade moved or reduced. NW, Washington, DC 20433. Please con- liberalization. It is no longer clear that This paper - a product of the Trade tact TWUTD, room 510-027, extension these economies retain an anti-exportbias Policy Division, Country Economics De- 31005 (28 pages). in their trade regime. Perhaps the most partment-ispartoftheBanksresearch important policy conclusion the authors on 'The Impact of EC 1992 and Trade reach is that one must be wary of advo- Integration in Selected Mediterranean 951. PIecemeal Trade Reform catingpiecemeal reform ofteriffs or export Countries (RPO 675-64)," funded by the In Partially Liberalized Economies: subsidies alone. In Turkey, piecemeal Research Support Budget Copies of the An Evaluation for Turkey across-the-board tariff reductions do not paper are available free from the World always improve welfare; they must gen- Bank, 1818HStreetNW,Washington,DC Glenn W. Harrison, Thomas F. Rutherfrd, erally be coordinated with reductions in 20433. Please contact Dawn Ballantyne, and David G. Tarr export subsidies to ensure improved wel- room N10-023, extension 38004 (34 pages (August 1992) fare. The authors counterfactuallyassume text plus 34 pages appendices). that Turkey's tariffs are at the 1985 level Given Turkey's alreadyextensi vetrade ib- (abouttwice the 1989 level ofthe authors' eralation, a move to uniform external benchmark model) -which reintroduces 952. Unit Costs, Cost- incentives would bring mostofthe benefits an anti-exportbias. In this case, piecemeal Effectiveness, and Financing offull trade liberalization. Moreover it is tariff reduction to the 1989 level is ben- of Nutrition Interventions ?t enough to have piecemeal reform of eficial. -7*riffs or export subsidies alone. Harmo- In Turkey, even small export subsidies Susan Horton nhing Turkey's already low tariffs to the are notalwaysbeneficial, despite therule (Angust 1992) European Community's tariff structure of thumb that small export subsidies are vil improve Turkey's welfare only if Tur- a welfare-enhancing offset to the anti-ex- Relative unit coats and cost-effectiveness 1y at the same time removes or reduces port bias ofimpart tariffs. Why? Because for different nutrition interventions are export subsidies. exportsubsidiesin Turkeyarehighly dis- reported hem. The main impact of nutri- persed, and piecemeal reductions in the ion interventionsassessedisnotthereduc- 1urkey undertook a major liberalization export subsidies reduce that dispersion. tion of mortality but the improvement in :f trade policy in the 1980s. Import quo- When the authors counterfactually im- quality of life for survivors. tas have virtually disappeared, the Turk- pose uniformity of tariffs and export sub- ;%q lira was made convertible, and tariffs sidies, they resurrect the rule of thumb Horton summarizes whatis known about -7e generally lower. Those changes and that small export subsidies are bene:;cial unit costs, the cost structure, cost-effee- Lhe export subsidies thatremain have,on as a piecemeal policy for offsetting the tiveness, and financing of eight nutrition ihe whole, removed the anti-export bias anti-exportbias. interventions maternal and child health rn Turkey's external incentive regime. Policymakers in developing countries (MCH) feeding, school feeding, nutrition Using a 40-sector computable general have occasionally appliedexportsubsidies education, the promotion ofbreastfeeding, ;uilibrium model, Harrison, Rutherford, in individual sectors with high tariffs as targeted food subsidies, micronutrient 78 PolIcy Research Working Paper Seres supplementation, micronutrientfortifica- 953. The "Pedigree" of IEC systemashavebeen unfledinrecentyearg, tion, and growth monitoring. Amongitems Conversion Factors for Per Capita fewer and fewer official exchange rates that she reports: GNP Computations for the World have diverged significantly from the rate * Mass media nutrition education cam- Bank's Operational Guidelnes at which transactions take place. paigns and the promotion ofbreastfeeding and Atlas Hee's analysis underscores the direct cost about $1-$5 per beneficiary; face-to- implications for Bank operations and face nutrition programs costmore($23 per Michael Hee analysis of a systematic and documented beneficiary in the Dominican Republic). (August 1992) approach to the choice of conversion fac- * Fooddistributionprogramsofdiffer- tors that underpin the Banks Atlas per ent types have fairly similar --sts. For Overview of sources, methods, adjust- capitaincome estimates -which can af- distributing about 1,000 caloriesaday per ments, and manipulations of alternative feet eligibility for borrowing and country beneficiary per year: $75 for untargeted conversion factors for the Bank's Atlas per ranking by income group. foodrations, $64 for targetedfood rations, capita income calculations. The use of alternative conversion fac- $74for MCH and school feedingprograms, torsis thus ofsome practical importance, and $134 forhighly targeted feeding pro- Per capitaGNP-calculatedaccordingto both to the Bank and to other interna- grams. Micronutrient interventions cost the Bank'sAtlas method-is the Banks tional organizations considering the use from $0.04 to $4 per person-year of pro- main criterion for classifying countries to of Bank classifications in allocating tection; supplementation is more expen- determine theireligibilityfarvariousben- concessional assistance. sive than fortification. eficial borrowing terms. Itis also abroad Thispaper-aproductofthe Socioeco- * Medium-sized feeding programs criterion for distinguishing countries by nomic Data Division, International Eco- (100,000 to 500,000 beneficiaries) are the income group (low, middle, lower-middle, nomics Department -is part of a larger least expensive. There is little difference upper-middle, and high). effort in the department to systematize in cost between programs operated by In principle, the Bank adopts the offi- theuseofofficialandotherexchangerates nongovernment organizations and those cial annual average exchange rate (line rf for calculating per capita income. Copies operated by governments. The more ex- in the Fund7sInternationalFinancialSta- of the paper are available free from the pensive programs are notnecessarily less tites) as the preferred source for ex- WorldBank, 1818HStreetNW,Washing- cost-effective, but may include more change rates for calculating per capita ton, DC 20433. Please contact Estela complementary inputs. GNP. But where this rate is clearly inap- Zamora, room S7-136, extension 33706 (47 * The cost per death averted was about propriate - when the calendar year rate pages, including appendix tables). $1,500 for both a targeted supplementary does not coincide with the fiscal year na- feeding program in Tamil Nadu and a vi- tional accounts data, for example, when tamin A capsule distribution scheme in countries maintain dual or multiple ex- 954- How OECD Policies Affected Bangladesh- change practices, or when distortions in Latin America In the 1980s * The cost perchildremovedfrommod- the trade and payments system make the erate and severe malnutrition ranged official rate an unreliable link between Chris Allen, David Cazzie, T. G. Srinivasan, from $33 (Tamil Nadu) to $331 (targeted relative prices of traded goods - the and David Vines food subsidy, Philippines) to $493 (face-to- Banks International Economics Depart- (August 1992) face nutrition program, Dominican Re- ment (IEC) uses an alternative exchange public). rate (conversion factor). Latin America's adjustment problems in * Nutrition expenditures seem to ac- Hee briefly explains how these alterna- the late 1980s cannot be attributed tofail- countforabout 10 percent ofhealth spend- tive exchange rates are calculated, the urnes ofG-3 (U.S., German, andJapanese) ing, both for donors and for individual rationale behind them, and the footnoting fiscal coordination because G-3 fiscal im- countries (Chile is an outlier with 35 per- features of the Banks Economic and So- balances imposed little cost on Latin, cent). cial Database that make these calcula- America. But concerted G-3 monetary con- Impact data on these topics are scarce, tions more transparent to users of the tractioniaresponseto the secondoil shock and these estimatesshouldbeinterpreted data. imposed heauy costs on Latin America; cautiously. He finds that the single most often used without it, Latin American GDP would This paper - a product of the Popula- source is the official annual average ex- have been 5 percent higher in the 1980s. tion, Health, and Nutrition Division, change rate -for about 85 percent of the Population and Human Resources De- cases in 1990. Fiscal year conversion fac- Allen, Currie, Srinivasan, and Vines as- partment-is partofalargereffortin the tors are used in about 10 percentofcases. sess the effects of OECD monetary and department to quantify the costs of mal- Technically, fiscal year conversion fac- fiscal policies on Latin Americabymeans nutrition and its alleviation. Copies ofthe tars are official quarterly exchange rates of simulation ,tudies using the LBSI paper are available free from the World recast to the fiscal year timeframe. Thus, NIESR Global Econometric Model and a Bank, 1818HStreetNW, Washington, DC official exchange rates shown in the Inter- new empirical model of Latin America. 20433. PleasecontactOtiliaNadora,room national Financial Statistics account for The Latin American model pays special S11-219, extension 31091 (66 pages). 95 percent of the countries for which IEC attentionto the supp!y-side determination preparescomnparable percapita estimates. ofnatural rate ofoutput and to the effects As trade and exchange systems become of asset accumulation- The Latin Ameri- more liberal, and as multiple exchange canmodelanditspropertiesarepresented Policy Research Wodng Paper Series 79 by both empirical simulations and by of five years, but continues to remain de- pend on fiscal policiesin the OECD coun- means of a simple analytical representa- pressed 0.3 percent bythe end of10 years. tries. Ithasbeenarguedforexample, that tion. This model of Latin America is used The simulated effects of G-3 monetary expansionary policies in the OECD coun- in conjunction with the Global Economet- and fiscal policies, with the shocks con- tries lead to increases in commodity ric Model to study the macroeconomic structed to reflect their actual sizes in the prices. Alogoskoufis and Varangis show interactions between Latin America and early 1980s, suggest thatLatinAmerica's that it is not sufficient to establish the rest of the world, adjustment problems in that period can- whether policies are expansionary or The assumption in policy simulations is not be attributed to G-3 fiscal imbalances contractionary; one must define the policy that G-3 exchange rates are forward-look- that arose because offailures ofG-3 fiscal mix to know what impact it has. ingwhile Latin America pegs its currency policy coordination. But concerted G-3 Previous studies have used partial equi- to the U.S. dollar. It is postulated that monetary contraction in response to the librium models to examine the link be- Latin American fiscal policy adjustments second oil shock imposed heavy costs on tween macroeconomic policies and com- targetabaselinecurrentaccountbalance, Latin America; without it, Latin Ameri- modity prices. In those studies asin this in the face ofexternal shocks. The simu- can GDP would have been 5 percent one, the main channel oftransmission of lation results reflect a number ofimpor- higher in the 1980s. monetary and fiscal shocksis the interest tant international links, which can be This paper- a product of the Interna- rate. quantified as multiplier properties of the tional Economic Analysis and Prospects Alogoskoufis and Varangis use a gen- linked system of models. Division, International Economics De- eral equilibrium model of the simulta- A permanent 5 percent contraction in partment-is part ofalargereffortin the neous determination of the relative price the US. money supply induces acontrac- department to trace international link- of commodities and the real world inter- tion of about the same order in Latin ages from policies in the industrial coun- est rate. The model's logic suggests that American GDP and capital stock. This is tries to growth performance in the devel- OECD fiscal expansion increases the real caused by higher U.S. interest rates and oping countries. Copies of the paper are interestrate andreduces the relativeprice diminished Latin American competitive- available free from the World Bank, 1818 ofcommoditiesto equilibrate world labor, ness in third markets, reinforcing the fall H Street NW, Washington, DC 20433. product, and asset markets. in U.S. demand. Please contact Jacquelyn Queen,room S8- Econometric estimates based on re- Similarly, a combined monetary con- 035, extension 33740 (25 pages). ducedform equations, usingannual data traction in G-3 countries on a permanent since the 1950s, cannot reject the hypoth- footing - a contraction like the one in esis that higher fiscal deficits are associ- 1978-80 (U.S, 5.2 percent, German, 119 955. OECD Fiscal Policies ated with a lower relative price of com- percent, andJapanese, 1.7 percent) hurts and the Relative Prices modities. The estimates suggest that Latin America. Latin American GDP re- of Primary Commodities when the fiscal deficit ofthe G-5 rises one mains depressed by 4 percent and capital percentage point of GDP the relative price stock by 5 percent even after 10 years. The George Alogaskoufis and Panos Varangis of commodities drops about 2 percent. effects of negative income and interest (August 1992) WhentheU.S.deficitrisesbyonepercent- rates emanating from G-3 countries are age point of GNP, the relative price of mutually reinforcing. Here is evidence that macroeconomicpoli- primary commodities drops about 3 per- U.S. fiscal expansion equal to 1 percent cies in the OECD countries have been re- cent. ofbaseline GDP, sustained overfive years, sponsible for at least part ofthe little-un- This evidence provides good reason to transmits negatively to Latin America, derstood decline in primary commodity believe that macroeconomic policies have where GDP falls 0.6 percent in the short prices over the past decade. Higher fiscal been responsible for at least part of the run and remains depressed by 0.3percent deficits seem to be associated with lower little-understood decline in primary com- even after 10 years. The negative effects commodity price& modity prices over the past decade. of higher interest rates and diminished This paper-a product of the Interna- competitiveness dominate the positive Nonfuel primary commodity prices fell tional Trade Division, International Ec- effects (which areshort-lived) ofexpanded more than 30 percent in real terms be- nomics Department -is part of alarger LS. demand for Latin American exports. tween 1984 and 1990, even though global effort in the department to analyze the Similarly, G-3 fiscal spending shocks, economic growth was reasonably strong. effects ofmacroeconomic policies on com- which are gradually built up over five The collapse of international commodity moditymarkets.Thestudywasindedby years, then reversed the next two years, agreements, rapid increases in supply for the Banks Research Support Budget un- Lave a mild negative effect on Latin some crops, and agricultural policies in der research project "Commodity Prices American GDP. The G-3 fiscal shocks industrial countrieshavebeenresponsible and the Macroeconomic Policy Mix in In- administered were set to their actual for some of the price decline. But all dustrial Countries" PO 676-76). Copies magnitudes relative to baseline GDP, as nonfuel primaries - agricultural and of the paper are available free from the -!servedin 1980-85(U.S.expansionof3.5 nonagricultural - experienced a sharp WorldBank, 1818HStreetNW,Washing- mercent but contraction in German and declinein real prices. Thatcalls foramore ton, DC 20433. Please contact Dawn Japanese spending of4.4 percent and 3.5 general explanation. Gustafson, room S7-047, extension 33714 vercent, respectively). Latin American Alogoskoufis and Varangis investigate (31 pages). :DP is lower than baseline GDP by 0.5 how the relative price of(nonenergy) pri- wercent when the shocks peak at the end mary commodities and manufactures de- 80 PolIcy ResearCh Working Paper Series 956. Regression Estimates 957. Carbon Taxes, flexible instrument for avoiding large of Per Capita GDP Based the Greenhouse Effect, unexpected costs. on Purchasing Power Parities and Developing Countries This paper - a product of the Office of the Vice President, DevelopmentEconom- Sultan Ahmad Anwar Shah and Bjorn Larsen ics - is one in a series of background (August 1992) (August 1992) papers prepared for the World Develop- ment Report 1992. The Report, on devel- How the Bank uses regressions to fillgaps A universal case cannot be made for na- opment and the environment, discusses in purchasing power parity based on esti- tional carbon taxes. Nevertheless, such the possible effects of the expected dra- mates of per capita income tares makeeminentsensefor many devel- matic growth in the world's population, opingeountries-oathegroundsofequity, industrial output, use of energy, and de- The estimates of gross national product efficiency, ease of tar administration, and mand for food. Copies of this and other - (GNP) percapitain U.S. dollars published an improved local environment, even ig- World Deveiopment Report background in the World BankAtlas are used through- noring the potential benefits from control- papers are available free from the World out the world for comparing relative lev- ling global carbon emissions. Bank, 1818 HStreetNW, Washington, DC . els of income across countries. The Atlas 20433. Please contact the WorldDevelop- method of calculating per capita GNP is Shah and Larsen evaluate the case for mentReportoffice,roomT7-101,extension designed to smooth the effects offluctua- carbon taxes in terms of national inter- 31393 (68 pages). tions in prices and exchange rates. With ests.Theyreach the followingconclusions: this method, local currency values are * Aglobalcarbontaxinvolvesissuesof converted to U.S. dollars by a form of av- international resource transfers and 958. EC Bananarama 1992: erage exchange rates. would be difficult to administer and en- The Sequel - The EC Since exchange rates do not measure force. Itisthusunlikelytobeimplemented Commission Proposal relative purchasing powers of currencies in the near future. in domestic markets, the Atlas estimates * National carbon taxes can raise sig- Brent Barrell and Maw-Cheng Yang can often show changes in the relative nificantrevenues cost-effectivelyin devel- (August 1992) ranking of two countries from one year to oping countries and are not hikelytobe as the next even if there are no changes in regressive in their impact as commonly The Commiss ion's proposal for unircat ic real growth rates butifthere are changes perceived. Such taxes can also enhance of the banana market would impose big inexchangerates that are notinlinewith economic efficiencyifintroducedas arev- costs on EC consumers and banana pm- relative price changes. enue-neutral partial replacementfor car- ducers in a number of developing coun- Improved estimates can be obtained if porate income taxes or in cases where tries. Alternative options exist that would purchasing power parities (PPP) rather subsidies are prevalent The welfare costs allow the Community and suppliers in all than exchange rates are used as conver- of carbon taxes generally vary directly developing countries to benefitfrmaunifi- sion factors. But PPP-based estimates of with the existing level of energy taxes, so cation. Vested interests in marketing are per capita income - usually associated a carbon tax should be an instrument of blockingeonsiderationofsenuilepolicie, with Irving Kravis of the University of choice for countries such as India and Pennsylvaniaand with the UN's Interna- Indonesia, which have few or no energy Some EC countries give preferredmarket tional Comparison Program - have yet tax. access and high prices to bananas from tocoverall countries andall yearsneeded * Acarbon tax can significantlyreduce selected developing countries or EC re- in the Atlas- local pollution and carbon dioxide emis- gional suppliers. This preferential status Attempts have been made to fill the sions. Cost-benefit analysis shows coun- is regarded as aform of aid to these coun- gapsbyshort-cutestimates usingregres- tries with feworno energytaxes substan- tries, most of which are developing small- sion techniques or by using a reduced set tially gaining from carbon taxes in terms island economies. EC marketers of ba- ofinformation. In an attempt to fill these of an improved local environment. nanas from these preferred suppliers aLso gaps, theWorldBankhas usedregression * A carbon tax of $10 a ton produces benefit because of the high retail prices.. estimates of its own and published them very small output losses for Pakistani Nonpreferred suppliers - mainly devel- in the World Development Indicators. industriesanalyzedinthispaper,andthe oping countries of Latin America - are Ahmad describes how the Bank makes output losses are fully offset by health hurt by the policies because access is de- these estimates- benefits from reduced emissions of local nied or restricted and the lower demand This paper-a product of the Socioeco- pollutants - even ignoring the global depresses the world price for bananas. nomic Data Division, International Eco- implications of a reduced greenhouse ef- The Community'scommitmenttoestab- nomics Department -is part ofalarger fect. lish asingleunifiedEChananamnarketon effortin theDepartmentto improve inter- * Tradable permits are preferable to December31, 1992 provides a timely op- national comparability ofnational account carbon taxes where the critical threshold portunitytoreform existing distartionary aggregatesandprice structures. Copies of of the stock of carbon emission beyond trade policies. The recently announced the paper are available free from the which temperatures would rise exponen- proposal of the Commission of European World Bank, 1818 HStreetNW,Washing- tially is known. Given our current igno- Communities to regulate banana trade ton, DC 20433. Please contact Elfrida rance on the costs of reducing carbon within a unified market relies on quotas O'Reilly-Campbell, room 87-125, exten- emissions and the threshold effect, a car- to control imports. The proposal is ex- sion 33707 (22 pages). bon tax appears to be a better and more tremely complicated. It is designed to se- Policy Research Working Paper Serlas 81 verely restrict competition and to main- keters. But this is contrary to the objec- nections (that is, households that buy tain the advantages of selected groups. tives ofunification, which are to seek gains water from vendors) to be $40. Borrell and Yang update their earlier from increased competition and trade. In short, the total cost borne by the ur- analysis of world banana trade to reflect This paper - a product of the Interna- ban poor over four years is equivalent to the market in 1993. They evaluate the tional Trade Division, International Eco- thecostofprovidingthemwithpermanent implications of the Commission's proposal nomics Department - is part of a larger water and sewerage facilities. Providing alongside existing and alternative poli- effortinthedepartmenttounderstandthe those facilities would relieve the urban cies. They find that current policies cost implications for developing countries of poor of devoting (directly and indirectly) EC consumers about $1.6 billion annually changes in the industrial countries' trade an average 23 percent of their income to to transfer a net benefit of $0.3 billion a policies. Copies ofthe paper are available meeting their water needs. year to preferred suppliers. So,itcostsEC free from the World Bank, 1818 H Street This paper- a product of the Office of consumers about $5.30 to transfer $1.00 NW, Washington, DC 20433. Please con- the Vice President, DevelopmentEconom- of aid to select developing countries or tactAudreyKitson-Walters,room S7-053, ics - is one in a series of background regions. Additionally, every dollar of aid extension 33712 (22 pages). papers prepared for the World Develop- reaching preferred suppliers costs other ment Report 1992. The Report, on devel- developing country suppliers $0.32. EC opment and the environment, discusses marketers are the main beneficiaries. Of 959. Waterborne Diseases In Peru the possible effects of the expected dra- the $5.30 cost toEC consumers, over $3.00 matic growth in the world's population, is collected as excessive marketing mar- Sheila Webb and Associates industrial output, use of energy, and de- ginsbyprotectedimportersandwholesal- (Augustl1992) mand for food. Copies of this and other ers. About $1.00 is lost in outright waste. World Development Report background Several plausible versions of the The cost ofconstructingeasy-access water papers are available free from the World Commission's proposal are modelled. At faeilities (a standpipe less than 1,000 Bank, 1818 H Street NW, Washington, best they are found to be slightly less meters from each house) and latrines isan DC 20433. Please contact the World De- costly than existing policies and at worst, estimated $30 per capita. In Lima's peri- uelopment Report office, room T7-101, considerably more costly. A 3.5 percent urban areas the cost ofnot providing ther extension 31393 (17 pages). reduction in the quota allocation is esti- is about $40 per capita. Providing those mated to lead to a 30 percent increase in ficilitie would relieve the urban poor of the cost of the proposal. devoting (direct ly and indirectly) aa aver- 960. Agricultural Pricing Borrell and Yang conclude that the age 23 percent oftheir income to meeting and Environmental Degradation Commission's proposal for a unified EC their water needs. banana policy appears to be little more Edward B. Barbier and Joanne C. Burgess than a way of replacing existing The cholera epidemic in Peru brought to (August 1992) distortionary national policies with an lightthe miserable stateoflocal water and almost equally distortionary single policy sanitation conditions. Webb discusses the Changes in pricingpolicies are nt enough and market The only difference: the costs relationship between waterborne diseases to encourage poor farmers to reduce re- would be borne by consumers in all EC and water and sewerage conditions in source dagdation. Other approaches are countries rather than consumers in only Peruvian peri-urban areas, or pueblos also needec such as providing better re- some countries. Worse still, costs could jovenes. search and extension aduice, improving increase. Markets that now gain the ben- These diseasesare associated withpoor property rights and managemet andes- efits ofmostly open and competitive mar- livingconditions. In 1989, only 52 percent tablisking more secure tenure or access keting such asGermany would face closed of the population had access to piped wa- rights. Just because we do not always and uncompetitive conditions. ter, and only 39 percent to sewerage. understand the economic and social fac- F For developing countries exporting ba- About 52 percent of schools lack light, tar deermining inentive effects does not nanas, the proposal offers little. At best water, and sewerage. In ima, 2 million mean they do not exist conditions maybe no worse than they are people dailyeatmeals from streetvendars now. At worst the policy could hurt Latin who lack access to fresh water or toilet Thelinkbetweenagriculturalpricingand American suppliers even more than cur- facilities-90 percentafa sample of their land degradation is often difficult to rent policies and introduce considerable food was fecally contaminated analyze empirically. Our understanding confusion about the level of support to Webb estimates the per capita costs of of how agricultural supply responds to preferred suppliers. Under the providing in-house water and sewerage changing prices in developing countries Commission's proposed quota system aid facilities in urban areas to be $150 in ur- is incomplete. Even more incomplete is will notbe well targeted. Amore efficient ban areas and $180 in rural areas. The ouranalysisofsubsequentimpactsonthe way ofachievingtheEC'said commitment cost ofoonstructing easy-access waterfa- resource base sustaining agricultural is through a small tariff of about 17 per- cilities(astandpipelessthan 1,000meters production. Yet available evidence sug- cent, used to fund a system of well-tar- from each house) and latrines in urban gests that some important effects do ex- geted deficiency payments or direct aid. and rural areas is an estimated $30 per ist, and much further analysis ofthem is The only reason for choosing the capita. warranted. Commission's proposal over simpler, tar- In contrast, she estimates the annual The social, economic, and environmen- if-based options seems to be to maintain per capita cost borne by urban households tal relationships that determine the often the vested interests ofprotected EC mar- without in-house continuous water con- countervailing effects ofprice changes on 82 Policy Research Working Paper Sedes land use and management are extremely mand for food. Copies of this and other * The global character of many pollut- complex. Not enough is know about: World Development Report background ants is becoming more serious. Today, * Farning systemsin developingcoun- papers are available free from the World even leaving aside the issues of global tries. Bank, 1818 H Street, NW, Washington, warming and ozone depletion, there is * Open-access use and common prop- DC 20433. Please contact the World De- evidence of serious regional environmen- erty resource rights. uelopment Report office, room 7-101, tal effects of acid rain and of marine or * Land tenure regimes and security. extension 31393 (17 pages). riverine pollution. * Access to technology and other farm- * "International trade" in polluting ing systems information. activities adds a relatively new element. * The distribution of wealth and in- 961. Economic Development Developing countries may suffer not only come. and the Environment: Conflict from theirown pollution butalsofrom irm- * Coping strategies for variable cli- or Complementarity? portedpollution,asenterprisesshifttheir matic, economic, and social conditions. more polluting activities from countries All these factors influence how rural Wilfred Beckerman with strict controls to countries in which households respond to price changes in (August 1992) environmental considerations do nothave terms of managing land and natural re- a high priority. sources, and often they may override the On the whole, there is a strong positive * Today, thefastgrowthofautomobile incentive effects ofpricechanges. Changes relationship between income level and traffic means that emissions of carbon in pricing policies will then be less effee- environmental quality, and developing monoxide or nitrous oxides have become tive in "correcting" resource degradation countries may be exFacted to improve en- a serious problem; in the past, the chief than other approaches to dealing with its uironmentalqualityastherincomeries form of urban pollution was dense sulfur underlying causes. Such approaches in- But new factors may change the usual dioxide, or smoke. cludeprovidingbetterresearchandexten- pattern: new pollutants, cross-border en- This paper-a product of the Office of sionadvice,improvingpropertyrightsand uironmental effects, tradc in polluting theVicePresident,DevelopmentEconom- management, and establishing more se- activities, and the growth of automobile ics - is one in a series of background cure tenure or access rights. traffic- Consequently, developing countries papers prepared for the World DeveLop- At the same time, it is wrong to assume are unlikely to replicate precisely theenmi- ment Report 1992 The Report, on devel- that poor farmers - even those in re- ronmentalhistories ofdeveloped countries. opment and the environment, discusses source-poor regions far from major mar- the possible effects of the expected dra- kets - are totally isolated from agricul- Although, in the course of development matic growth in the world's population, tural markets. Virtually all subsistence some features of the environment in de- industrial output, use of energy, and de- households require some regular market veloping countries may get worse, in the mand for food. Copies of this and other income for cash purchases ofagricultural longer run they will be able to reverse World Development Report background inputs and basic necessities; many small trends in more common forms of air pol- papers are available free from the World farmers provide important cash and ex- lutionandtoattainlevelsofwatersupply BRank, 1818 H Street, NW, Washington, port crops. So changes in market prices and sanitation essential toan acceptable, DC 20433. Please contact the World De- often significantly affect the livelihoods of healthy standard ofliving. On the whole, velopment Report office, room T7-101, rural groups. says Beckerman. thereisastrongpositive extension 31393 (42 pages). Clearly, the economic incentives emerg- relationship between income level and ing from these impacts will affect farmerd' environmental quality. decisions to invest in land management In the developed countries, effective 962. Do Markets Underprice and improvements.Justbecause we do not measures to combat urban air pollution Natural-Resource Commodities? always understand the economic and so- were introduced only whenithadreached cial factors determining these incentive almost intolerable levels in many cities. MargaretE. Slade effects does not mean they do not exist. This does not mean that as countries de- (August 1992) Nor should the complexity of the links velop they will replicate precisely the en- between price changes and resource man- vironmental histories of developed coun- Not systematically, except for the environ- * agement - which sometimes appear tries.The path ofenvironmental pollution mental externalities associated with the counterintuitive-deterfurther analysis in the developing world today will prob- production and use of natural-resource of the role of agricultural pricing in land ably differfrom that of the pastin atleast commodities - especially mineral com- degradation- four respects: modities, which cause the most pollution This paper- a product of the Office of * Changes in technology, relative the Vice President, DevelopmentEconom- prices, patterns of output, and policies Slade examines the efficiency and equity ics - is one in a series of background mean that although traditional pollutants of a mazket allocation of exhaustible re- papers prepared for the World Develop- have been broughtundercontrol in many sources andassesses thebehaviorofscar- ment Report 1992. The Report, on devel- (mainly developed) countries, the world is city measures, such as relative price and opment and the environment, discusses faced with newer pollutants, or with "old" rental rates. She finds little evidence of the possible effects of the expected dra- pollutants that, on account of their scale scarcity or impending shortage. Indeed, matic growth in the world's population, or accumulation, have acquired new sig- the evidence points to falling prices and industrial output, use of energy, and de- nificance. rents for many commodities. Policy Research Working Paper Series 83 Domarkets send the wrongsignals?Are 963. Growth and Welfare Losses higher when constraints are imposed on resource commodities systematically from Carbon Emissions amiual emissions rates rather than on underpriced?Herconclusionsarenotcom- Restrictions: A General total additions to the accumulation of pletely optimistic. Equilibrium Analysis for Egypt greenhouse gases. Slade's analysis reveals many market Conventionalbackstop technologies for failures, any of which would result in in- Chairle.Blitzr,RS.-Eclkm,SupribmLahir, maintaining output and consumption - appropriate resource commodity pricing, andAlexanderMweeraus cogeneration, nuclear power, and gas- But, with one exception, she finds no sys- (August 1992) poweredtransport-aremore significant tematic tendency to underprice. The ex- than unconventional "renewable" tech- ception concerns the environmental exter- To achieue a specified reduction in the nologies, which cannot compete for cost nalities associated with the production accumulation ofgreenhousesgases in the This paper -a product of the Office of and use ofnatural-resource commodities. atmospheri, it is far better to allow for fler- the Vice President, DevelopmentEconom- 'Similarexternalitiesleadtounderpricing ibilityin thetimingofadjustmentpolicies ics - is one in a series of background and overuse of all commodities. Mineral than to impose aparticulardeodhAne. his papers prepared for the World Develop- commodities, however, are responsiblefor lesson applies to all countries- rigidly im- ment Report 1992. The Report, on devel- -a large fraction of the pollution that is posed limits on emissions controls entail opment and the environment, discusses currentlygenerated,sotheirunderpricing unnecessary economic costs. the possible effects of the expected dra- is particularly significant. matic growth in the world's population, The market failures associated with Blitzer, Eckaus, Labiri, and Meeraus as- industrial output, use of energy, and de- common-property and environmental re- sess the economic efTects on Egypt, under mand for food. Copies of this and other sources can cause market prices to be various conditions, of restricting carbon World Development Report background lower than shadow prices or marginal dioxide emissions. They use their model papers are available free from the World values. Theycannot,however,causerela- to assess the sensitivity ofthese effects to Bank, 1818 H Street, NW, Washington, tive resource prices to fall, Slade argues. alternative specifications: changes in the DC 2043. Please contact the World De- Falling prices would be associated with a level or timing ofrestrictions, changes in uelopment Report office, room T7-101, relaxation of environmental standards the rate of discountof future welfare, and extension 31393 (40 pages). andamoveawayfroimfll-social-costpric- the presence or absence of alternative ing. The tendency, however, is toward technologies for generating power. increased awareness of environmental They also analyze a constraint on accm- 964. Toxic Releases damage and increased willingness to pay mulated emissions of carbon dioxide. by Manufacturing: World for its associated costs. Their model has a time horizon of 100 Patterns and Trade Policies Nevertheless, the prices ofmany nato- years, with detailed accounting for every ral-resource commodities have fallen in five years, so they can be specific about RobertE. B Lucas real terms. Factors causing prices to de- differences between short- and long-run (August L992) crease are not associated with market effects and their implications. failure, and therefore do not support in- However, the results reported here Wouldfreraderesultingramterandmore terference with the market mechanism. cover only a GD-year period - and are rapid environmental degradation for de- Indeed,saysSlade,innovationsthatlower intended only to compare the results of elopingcountries?Lessprotectionoftheir mining and processing costs, discoveries generic, "what if? questions, not as fore- domestic industrial chemical industries that increase resource stocks, and the casts. In that 60-year period, the model would reduce the pollution-intensity of provision oflower-cost substitutes are all economysubstantiallydepletesitshydro- their manufacturing sector -but merely features ofefficiently operating markets. carbon reserves, which are the only relocating firms that emit globally dan- This paper- a product of the Office of nonproduced resource. aging toains clearly misses the point - the Vice President, DevelopmentEconom- The authorsfndthatwelfare losses due ics - is one in a series of background tothe imposition ofannual restrictionson Little evidence exists on the distribution papers prepared for the World Develop- the rate of carbon dioxide emissions are across countries oftoxicreleasesbymanu- ,ment Report 1992. The Report, on devel- substantial-rangingfrom 4.5 percentfor facturing,oronhow thosepatterns change opment and the environment, discusses a 20 percent reduction in annual carbon through time. the possible effects of the expected dra- dioxide emissions to 22 percent for a 40 A number of studies have asked matic growth in the world's population, percent reduction. The effects of the an- whetherenvironmental controlsimposed industrial output, use of energy, and de- nual emissions restrictions are relatively intheindustrializedeconomiesare divert- mand for food. Copies of this and other nonlinear. ing investments in pollution-intensive World Development Report background The timing afthe restrictions is signifi- activities offshore. These studies reach a papers are available free from the World cant. Postponing them provides a longer broad negative conclusion: direct invest- Bank, 1818 H Street, NW, Washington, period for adjustment and makes it pos- ment does notappear tobe stimulated by DC 20433. Please contact the World De- sible to continue delivering consumption such regulation, in part because the cost velopment Report office, room T7-101, goods in a relatively unconstrained man- of emission controls is generally a tiny extension 31393 (26 pages). ner. fraction of operating costs. The form of the emissions -izt**ictions Butdirectinvestmentreflects onlypart is alsoimpartant.Welfarelossesaremuc of what may be happening to world pro- 84 Policy ResearCh Working Paper Series duction patterns. Technology transfers mand for food. Copies of this and other It is also important to develop better may occur with no simultaneous direct World Development Report background appraisal methodologies and tohold those investment, and production may readily papers are available free from the World preparing initial project appraisals ac- shift toward a different global distribution Bank, 1818 H StreetNW, Washington, DC countable for their appraisals. If post- without either direct investment or tech- 20433. Please contact the World Develop- project evaluations do not capture the nology transfer. mentRepart office, room T7-101, extension most significant environmental costs, Lucas presents the evidence on the 31393 (25 pages). analysts conducting appraisals early in world distribution of manufacturing pro- the project's life are unlikely to worry duction according to pollution density - aboutbeing caught outby their unfounded using data from the World Bank Indus- 965. Coping with the Disappointing optimism or their disregard for environ- trial Pollution Projections Team. He then Rates of Return on Development mental consequences. examines thevalidity ofthe claim thatfree Projects That Affect The good news is that in policy reform trade would result in greater and more the Environment and structural adjustmentthe movement rapid environmental degradation for de- is toward eliminating blatant risk-seek- veloping countries. He finds that: WilEam Aseher ing and making government institutions * The onus is on the higher-income (August 192) accountable for the results of their own countries to contain the emissions oftheir actions. Although the conditionalities increasingly pollution-oriented mix of The fundamental political economy of imposedbyinternationalfundinginstitu- manufacturing industries. early commitment tograndiose projects of tions can be helpful, the primary respon- * The global trendhas been toward an uncertain environmental consequence has sibilityfor designing and selectingappro- increasingly emission-intensive pattern of notbeenovertr ed. Projects with environ- priate projects that have an environmen- production, in relation to both manufac- mental impacts often have unacceptably tal impact stilllies with the governments turing and to GDP. This trend has been low rates ofreturn; governments and in- of the developing world. remarkably constant over three decades ternational agencies frequently fail to re- This paper - a product ofthe Office of and shows no signs of slowing. ject projects of this type More realistic the VicePresident, Development Econom- * The upward trend in emission-inten- evaluations will help. It is important to ics - is one in a series of background sityofmanufacturingproductionbasbeen hold those responsible for appraising a papers prepared for the World Deve&p- faster amonglower-income nations. If pol- project accountable for their appraisals. ment Report 1992 The Report, on devel- lution restraints on given industries are opment and the environment, discusses progressing more rapidly among the Lending institutiond initial appraisals the possible effects of the expected dra- wealthiercountries, this disparitywouldbe oftenignore the true costs ofenvironmen- matic growth in the world's population, even sharper than the Bank data suggest- tal impacts, and many development industrial output, use of energy, and de- * Developing countries that produce projects arelaunched despite returns that mand for food Copies of this and other coal, crude oil, or natural gas also have are often below the cost of capital and all World Development Report background more pollution-intensive manufacturing too often actually negative. papers are available free from the World sectors, based on the availability of those Most environmental impacts are nega- Bank, 1818 H Street, NW, Washington, raw materials. It may be doubted that tive, soapprovingaprojectwithalow true DC 20433. Please contact the World De- fostering such industries always reflects rate ofreturnis notonly afinancial waste velopment Report office, room 77-101, a comparative advantage. Petrochemical buta gratuitous stress on the ecosystem. extension 31393 (23 pages). industries in the coal-oil-gas-producing Ecosystems typically have alow tolerance countries are often substantially protected for such impacts, solow-yielding projects or subsidized. entail serious ecosystem opportunity 966. Trade and the Environment: * Among all developing countries, im- costs_ A Survey of the Literature portprotectionstimulatesalarger chemi- Ascher explores why projects with en- cals industry and thus more emission-in- vironmental impacts so often have lower- Judith af Dean tensive manufacturing. One might guess than-anticipated rates ofteturn, and what (August1992) that less protection of local industrial can be done to remedy the situation. chemical industries would decrease the Many observers are optimistic because At best, trade barriers are a second-best pollution-intensityofthe developing coun- there is more environmental awareness muznsofreducingenvinrnmentaldamage- tries industry. But merely relocating than there was in the 1970s and early Any case for more gradual liberalization firms that emit globally damaging toxins 1980s and environmental screening is oftrade should be basedonestimates ofthe clearly misses the point. more a part of project evaluation. But, costs of maintaining barriers versus the This paper - a product of the Office of says Ascher, attention to environmental benefits ofdelayed environmental damage. the Vice President, DevelopmentEconom- risk has not yet provoked the structural ics - is one in a series of background changes in government institutions that The recent revitalization of concern for papers prepared for the World Develop- would allow forthe development of incen- environmental quality has generated ment Report 1992. The Report, on devel- tives that give proper weight to environ- many questions about the interaction be- opment and the environment, discusses mental risks. The fundamental political tween trade and the environment. Most the possible effects of the expected dra- economy of early commitment to grandi- of these questions have to do with the matic growth in the world's population, ose projects of uncertain environmental impact of environmental regulation on industrial output, use of energy, and de- consequences has not been overturned. trade patterns and gains from trade. If a Policy Research Working Paper SerIes 85 tradeoff is perceived, it is often argued standards, to prevent the use ofsuch stan- Trends, and by the World Bank under that some intervention becomes appropri- dards as nontariff barriers. grant no. BB676-65M. Copies of the paper ate: either a specific trade policy or the This paper - a product of the Office of are available free from the World Bank, establishmentofan international environ- the Vice President, DevelopmentEconom- 1818 H Street NW, Washington, DC mental standard. its - is one in a series of background 20433. Please contact Margaret Stroude, Present GATT policy then becomes an papers prepared for the World Develop- room 18-159, extension 38831 (34 pages issue of debate. Should GATT revise its ment Report 1992. The Report, on devel- plus 19 pages of appendix). rules to accommodate the specific trade opment and the environment, discusses measures suggested? How can GATT en- the possible effects of the expected dra- sure that the environmental objective is matic growth in the world's population, 968. Blomass not a disguise for a trade barrier? Should industrial output, use of energy, and de- GATT establish some international envi- mand for food. Copies of this and other David 0. Hall ronmental standard with procedures to World Development Report background (Angust 1992) ensure compliance? papers are available free from the World The importance given to trade liberal- Bank, 1818 H Stree, NW, Washington, Localinvolvementandcontralisaprereq- 'ization and exchange rate policy reformas DC 20433. Please contact the World De- uisitefor the success oflNomass programs, pert of adjustment for development has velopment Report office, room T7-101, and there is noshort-cutto theirlong-term raised another set of questions: Is there a extension 31393 (27 pages). planning and development. direct link between the removal of trade barriers andenvironmental degradation? In the last century, biomass fuels - Ifso, how should liberalization strategies 967. Transition Problems mostly wood - provided most of the incorporate this cost? Should trade policy in Economic Refomi: world's energy. Today biomass in all its beusedtomeetenvironmental objectives? Agriculture In the Mexico-U.S. forms (wood, dung, and agricultural and Dean surveys the literature on the main Free Trade Agreement forestresidues) supplies about l4 percent questions being debated in both of these of our energy - most of it in developing areas. Among her conclusions: Santiago levy and Sweder van Wjubergen countries, wherebiomassis the mostcom- * More stringent regulations in one (August 1992) mon energy source. Biomass provides country are thought to result in reduced more thanaquarterof China's energy, for competitiveness and perhaps industrial How fast should Meican agriculture be example. flight and the development of pollution incorporatedintotheNorthAmericanFree Rural areas in most developing coun- havens. The many empirical studies that Trade Agreement? What policies should tries depend heavily on biomass for en- have tried to test these hypotheses have characterize the transition? orgy. A dearth ofbiomass energy usually shown no evidence to support them. indicates other developmental and envi- * Countervailing duties or aninterna- Levy and van Wijnbergen use Mexican ronmental problems. The difficultyin try- tional environmental standard have no agriculture as a case study to analyze the ing to ameliorate such problems is that place here. Both concepts ignore the real- transition problems that arise in most bioenergy may not be a priority for local location of resources that must occur if major economicreforms.Theyfocus on the communities, which have more pressing externalities are tobe efficientlyincorpo- implications for policy design of the ab- problemsorareunabletotakethelonger- rated into costs. They also ignore the fact sence of efficient capital markets; on the term view toward-rehabilitatingtheirbio- that standards should be based on local welfare costs ofreforming only gradually; mass resources. calculations of marginal costs and ben- on incentive problems created by trade But outside energy experts tend to fo- efits. Only if an exporter's standards are adjustment policies; and on theredistribu- cus on one aspect of biomass use to the below what is locally optimal would a tive aspects of policy reform in the pres- exclusionofallothers,andthereforemany 'countervailing duty be justified. ence ofrealistic limits on available inter- biomass energy projects and programs * Subsidies are likely to be trade bar- vention instruments. fail. Hall presents case studies showing riers in disguise and should generally not They emphasize that adjustment that local involvement and control is a -beaccommodated.Theyarenotusuallyan should focus on increasing the value of prerequisite for the success of such pro- efficient means of achieving an environ- assets owned by the groups affected, and grams. mental objective and may hinder the effi- not ondirectincometransfersorprograms There is an enormous untapped poten- cient allocation of resources away from targeted tooutputorothercharacteristics tial for biomass, and bioenergy systems pollution-intensive industries. controlled by the beneficiaries. That is, may be less irreversibly damaging to the * Imposing a tariff when pollution they contend that adjustment should be environment than conventional fossil fu- spills over national boundaries can be no targeted to improving what people have, els.Bioenergysystemsproducemanybut more than a second-best policy. If the tar- as opposed to what people do. mostly local and relatively small impacts iffis based on damage to the victim coun- This paper - a product of the Country on the environment and their impact is try alone, it will not reduce trade in the Operations Division 1, Country Depart- more controllable. polluting product enough; if it maximizes mentTI, Latin America and the Caribbean There isno short-cut,however, to long- the welfare of the victim, it may reduce - was partially financed by the OECD term planning and development of bio- trade in the product too much. Development Center as part of their re- massenergysystems.Andthebarriersare * There seems tobe a casefor establish- search project on Developing Country mar economic, social, and technological. ing some international code of product Agriculture and International Economic Modernizing biomass technologies, for 86 Policy Research Working Paper Serle? example-sobiomasscanbeusedforliq- moreexpansionarymacroeconomicpolicy, H Street NW, Washington, DC 20433. nid fuel, electricity, and gas (in addition the value added in manufacturing grew Please contact Rose Matenda, room J11- to its traditional use aSb a heat source) - from 4.5 percent ayearin the 1970s to 7.9 217, extension 35055 (41 pages). involves land use issues thatmakeimple- percent a year in the 1980s. Meanwhile, mentation of biomass projects more diffi- gradual depreciation ofthe currency since cult than projects involving more central- 1985 has encouraged exports and brought 970. Political Models ized energy resources prices in India closer to world levels. of Macroeconomic Policy But both traditional and modernized The faster growth ofoutputandproduc- and Fiscal Refom biomass energy systems need developing tivity in the 1980s is a welcome change to produce preferred forms such as heat, from India's earlier stagnation. But dete- Alberto Alesina electricity, and liquids. Biomass energy riorating macroeconomic balances have (August 1992) should be modernized more rapidly, and brought India to a balance of payments at the same time traditional biomass fu- crisis. Two forces affect the success of stabiliza- els should be produced and used as effi- Changes in tariffs and other instru- tion in both democratic and dictatorial ciently as possible -bothin a sustainable ments have more than compensated for systems: (1) the policymakers' incentive to manner. relaxation of the import regime. Foreign retain power and (2) society'spolariration This paper - a product of the Office of trade has contracted relative to domestic and the degree of social confict. the Vice President, DevelopmentEconom- output, despite some relaxation of quan- ics - is one in a series of background tity restrictions and attempts to increase Alesinaexplainshowrecent developments papers prepared for the World Deuelop- exports. The main reason for this decline in political economics improve ourunder- meat Report 1992. The Report, on devel- has been the increase in import prices standingofmacroeconomiepolicy-espe- opment and the environment, discusses relative to domestic output because ofin- cially the timing, design, andlikelihood of the possible effects of the expected dra- creasing tariffs, large real devaluations stabilization's success through monetary matic growth in the world's population, (especially after 1986), and rapidly ex- and fiscal reform. industrial output, use of energy, and de- panding domestic demand, which have Alesina reviews the literature on politi- mand for food. Copies of this and other made thedomesticmarketmore attractive calbusinesscyclesandemphasizesseveral World Development Report background than exports. issues involving the relationship between papers are available free from the World Policy reform has led to faster growth the timing of elections and the timing of Bank, 1818 H Street, NW, Washington, ofmanufacturingoutputandproductivity, macroeconomic policies and outcomes. DC 20433. Please contact the World De- but the main force behind faster growth He also addresses how models can be velopment Report office, room T7-101, hasbeenincreasedpublicspendingfueled useful in studying nondemocratic sys- extension 31393(31 pages). bygrowingfiscal deficits.Anotherimpor- tems. Twoforces Ere crucial factorsin both tent variable has been a more accommo- democratic and dictatorial systems, al- dating import policy sustained by large though they may manifest themselves 969. Imports, Exports, external borrowings. This pattern of differently:(1)thepolicymakers'incentive and Industrial Performance growth is not sustainable because of sig- to retain power and (2) society's polariza- In India, 1970-88 nificant internal and external debt stocks tion and the degree of social conflict. that have accumulated over the last de- Alesina then analyzes why economic M. Ataman Aksoy and Helena Tang cade. Macroeconomic and trade policy stabilization is delayed, even when it is (August 1992) must change significantly to shift the obviousthatsoonerorlaterastabilization economy to a more export-oriented path program will have to be adopted. Some Macroeconomic and trade policies must -both to overcome the foreign exchange points made in the paper follow: change significantly to shift India's shortages and to rely more on external Certain institutional characteristics economy toa more export-orientedpath- demand for industrial output. make quick and successful stabilization' both to overcome foreign exchange short- Aksoy and Tang argue that the manu- more orless likely. The more unequal the ages and to rely more on external demand facturing sector is highly responsive to distribution of stabilization's costs, the for industrial output High elasticities in relative price changes. Pessimism about more likely that stabilization will be de-. the manufacturingsectorindicatethat the elasticity has pervaded Indian layed. An increase in the cost of postpon- economy would also respond favorably to policymakingbuttheyshowhighelastici- ingstabilizationreducesthe delay. Politi- changes in incentiue& ties, indicating that the economy would cal institutions that make it easier for respond favorably to changes in incen- small interestgroupsto"vetoPlegislation in the 1960s and 1970s, India's policy of tives. make delay more likely. encouraging self-sufficiencybyrestricting This paper - a joint product of the If political and economic resources are imports wascomplementedbyzegulation Southern Africa Department, Country unequally distributed, and it is obvious ofall facets ofthe industrial environment. OperationsDivisionandSouthAsiaCoun- whichgroupisstrongerandhasresources Still, India developed alarge, diversified tryDepartmentfH(India), Country Opera- to wait longer, a "war of attrition" ends manufacturing sectar. In 1977-78, the tions, IndustryandFinance Division-is immediately, as there is no uncertainty policy environment began to change - part of alarger study of India's trade re- about who will winit. Delayismorelikely with a relaxing of import controls and gime undertaken by the South Asia Re- wheninfarmationaboutwhowillbearthe restrictions thathas continueduntil now. gional Office. Copies of this paper are cost of delays is uncertain or unevenly With reform of industrial policies and a available free from the World Bank, 1818 distributed. Policy Research Working Paper Series 87 Delay is also more likely when there is To shed light on this controversy, at every level, in every country, argue agreement about the need for fiscal change Vodopivec explores both theoretically and Bates and Moore. That impact may be buta political stalemate about distribution empirically how productivity is affected more serious in developing than in devel- - about how the burden ofhigher taxes or when workers determine relative pay dif- oped countries as developing countries spending cuts should be allocated. ferences democratically (by referendum). depend more on natural resources and Stabilization usually occurs when there The median voter model suggests that this lack the economic strength to withstand is political consolidation. The burden of kind of decisionmaking process produces environmental consequences. stabilization is sometimes unequal, with an egalitarian wage structure. Using al- At the same time, areliable energy sup- the politically weaker group (often the ternative assumptions about worker in- ply is vital to economic growth and devel- lower classes) bearing a larger burden centives, Vodopivec formalizes and em- opment. Energy consumption and eco- (often regressive measures). pirically tests two competing views about nomic growth have been somewhat If itis in the interest of the current gov- howan egalitarian wage structure affects delinked at high income levels, but in- ernment to do nothing for fear of failure productivity in a sample of Yugoslav creasedenergyconsumption(especiallyof because ofgovernment incompetence, the firms. He finds that democratic electricity)is inevitable withhigherGDP. public may have no incentive to vote for decisionmaking about pay - if divorced Greaterenergyefficiencyin developing the opposition because the opposition may from substantive participation ofworkers countries and Eastern Europe is a high- also do nothing; the crucial factor here is in other areas - decreases productivity. priority way to mitigate the harm to the how aware the government is of its own One implication of this finding for environmentofgrowing energy consump- incompetence and thus its reasons for not policymakers, particularly in Eastern tion, say Bates and Moore. They outline attempting reform. Europe and the former Soviet republics, four advantages of greater energy effi- Successful stabilization usually comes is that programs designed to allow work- ciency after several failed attempts, and the suc- ers to participate in pay decisions mustbe * It requires measures that are in the cessful program is often very much like consistent with the workers' general in- economic self-interest of those regions. one that failed volvement in decisionmaking. If partici- Political obstacles make these measures Research for this paper - a product of pation is limited to decisions about pay, difficult, but there are well-established the Transition and Macro-Adjustment or if external control is imposed on techniquesforaddressing concerns about Division, CountryEconomics Department intrafirm wage differentials (which has low-income consumers (such as direct in- - was funded by the World Bank's Re- effects on wage distribution similar to come support or "lifeline" rates). search Support Budget for the research those of worker participation), the result- * It will help conserve the world sup- project "Political Economy of Structural ing compressed wage structure islikelyto ply of nonrenewable (especially fossil) fu- Adjustment in New Democracies" (RPO produce negative effects on productivity. els. 676-37). Copies ofthis paper are available This paper - a product of the Transi- * It will encourage appropriate fuel free from the World Bank, 1818 II Street tion and Macro-Adjustment Division, switching. NW, Washington, DC 20433. Please con- CountryEconomicsDepartment-is part * It addresses everylevel ofconcern,up tact Raquel Luz, room N11-059, extension of a larger effort in the department to in- to the global effects of global warming. 39059 (36 pages). vestigate the labormarketintransitional Any strategy to make energy use and economies. Copies of the paper are avail- production more efficient must rely more able free from the World Bank, 1818 H extensively than before on markets that 971. The Effects of Democratic Street NW, Washington, DC 20433. are allowed to function with less govern- Determination of Wages: Please contact Sabah Moussa, room N11- ment interference. The crucial compo- Theory and Evidence from 017, extension 39019 (26 pages) nents of such a strategy (also crucial to Self-Managed Finns economic development generally) are: * More domestic and external compe- - Milan Vodopivec 972. Commercial Energy Efficiency tition. (August 1992) and the Environment * The gradual elimination of energy pricing distortions. Should workers participate in Robin W. Bates and Edwin A. Moore * The reduction ofmacroeconomic and decisionmaking about pay? Democratic (September 1992) sectoral distortions (for example, in for- decisionmaking about pay - if divorced eign exchange and credit markets). fl-om substantiveparticipation ofworkers Greater energy efficiency in developing * The reform of energy supply enter- in other areas - decreases productivity- countries and Eastern Europe is a high- prises-reducingstate interference, pro- priority way to mitigate the harm to the viding more financial autonomy and a Some assert that when efficiency requires enuironment ofgrowing energy consump- greater role for the private sector. cooperation, effectiveness is increased by tion. Any strategy to make energy use and * Consumer incentives to select more an egalitarian pay structure resulting production more efficient must rely more efficient lights, space heating, and so on. from workerS participation in decision- extensivelythan before on markets that are Bates and Moore are not convinced of making about pay. But it can also be ar- allowed to function with less government the need for nonmarket approaches be- gued that equalizing pay reduces the interference. yondthose geared to correct externalities, morale ofhighly productive workers, and provide essential information, support thus more than offsets the positive effects The production and use of energy create basicresearch and development, and pos- of cooperation. serious, extensive environmental affects sibly promote pilot projects. 88 Policy Reseach Working Paper Sodas They also conclude that a government toward normalizing the Eastern Euro- 1logon, room S7-033, extension 33732(51 is far more likely to take action to reduce pean countries' trade patterns pages). an environmental externality if it cap- First, proportionally less of the Eastern tures benefits within its own national European economies' trade will be with boundaries that exceed the cost of the each other, especially with the former 974. How Minilateral Trading action. Reducing the large difference be- Soviet Union. Second, Western Europe Arrangements May Affect tween energy prices and economic costsin will be their major trading partner but the Post-Uruguay Round World developing countries and Eastern Europe their trade with (especially imports from) is a more immediate issue than carbon Japan and North America may increase C. A. Primo Braga and Alexander Yeats taxes. dramatically (from a small base). Their (September 1992) The developed countries, sayBatesand exports to and imports from developing Moore, have an indispensable role to play countries may also change dramatically. Fears about how the further spread of free in improving energy efficiency in the de- The volume of Eastern European trade trade areas will affect world trade volumes veloping countries and Eastern Europe. is in line with the low income of these may be exaggerated - while the dangers They can encourage the flow of efficient economies. In the long run manufactures ofthese blocs becoming hostile to each other technology, they can increase conven- trade will increase four- to sixfold, once may have been underestimated. "Man. tional aid, and they must accept a greater Eastern European income levels catch up aged" trade is a far mare likely outcome. share of the burden of protecting the glo- with industrial country levels. Until in- bal commons. comes in Eastern European and former One issue dominating recent discussions This paper -a product of the Office of Soviet economies increase significantly, on free trade areas and other minilateral the Vice President, DevelopmentEconom- labor-intensive goods are likely to domi- associations (preferential trade arrange- ics - is one in a series of background nate their exports to market economies, ments)is whether such arrangements will papers prepared for the World Develop- and sophisticated goods their imports. detract from further multilateral trade ment Report 1992. The Report, on devel- Erzan, Holmes, and Safadi contend liberalization on a most-favored-nation opment and the environment, discusses that, since the end of the Cold War, the basis. But for much of this debate empiri- the possible effects of the expected dra- West has successfully improved the East- cal information has been lacking on: matic growth in the world's population, ern European countries' access to West- * The global importance ofminilateral industrial output, use of energy, and de- ern trade, and that the Eastern European arrangements that have been, or are be- mand for food. Copies of this and other countries should now enjoyequal orfavor- ing, concluded. World Development Report background able treatment. Czechoslovakia,Hungary, * Therelative size ofother majorbilat- papers are available free from the World andPoland, in particular,maybecomethe eral tradeflows not affectedbyminilateral Bank, 1818 H StreetNW, Washington, DC "most favored outsiders'in the European arrangements, and their suitability for 20433. Please contact the World Develop- Economic Space, the largest single mar- such arrangements. ment Reportoffice, room T7-101, extension ketin the world. * The global importance of Europe in 31393 (59 pages). One short-term effect of the Eastern this process. European countries' improved outlook * The possibility that other sorts of maybethat developingcountries thatrely arrangements-such as"managed trade 973. How Changes In the on manufacturesfor export revenuesmay initiatives (arrangements specifying Former CMEA Area May Affect have tougher times in major Western quantitative trade targets) - are a more International Trade in markets.But the emancipation ofEastern likely threatasfaras tradeflows notpres- Manufactures European and former Soviet economies- ently covered by free t&ade area arrange- and the pent-up demand for consumer ments are concerned. Relik Erzan. Christopher Holmes, goods likely from deprived populations- Braga and Yeats argue that this lack of and Rued Safadi should provide important opportunities relevant data has led to several miscon- (September 1992) for the dynamic developing countries. ceptions about the movement toward The former SovietUnion wasnotalarge minilateralism. In particular, theirstatis- Western Europe will be the major trading market for developing countries-except tics suggest that fears about how the fur- partner of the Eastern European and for India and Yugoslavia and to a lesser ther spread of free trade areas will affect former Soviet economies, but their trade extent Algeria and Egypt. Countries such world trade volumes may be exaggerated with Japan, NorthAmerica, and develop- as India that did supply the former Soviet - while the dangers of theseblocs becom- ing countries will also expaneL Eastern Union with manufactures may soon have ing hostile to each other may have been Europe's greater access to Western markets to seek alternative markets. underestimated. may conflict with the export interests of This paper - a product of the Interna- Using data recently compiled by the other developing countries. tional Trade Division, International Eco- United Nations, Braga and Yeats show nomics Department - is part of a larger that the global importance of minilateral Erzan, Holmes, and Safadi give a long- effort in the department to analyzs the arrangements is now far greater than is term perspective on how changes in the impact of EC92 and changes in Eastern often recognized. Almost half of world former CMEA area will affect interna- Europe on global trade patterns. Copies trade is affected by these arrangements. tional trade in manufactures. They show of this paper are available free from the But major trade flows not covered by that expandingEastern European exports World Bank, 1818 H StreetNW,Washing- minilateral arrangements are dominated to the West should be viewed as a step ton, DC 20433. Please contact Grace by important country-specific problems. Policy Research Wiking Paper SerIes 89 In particular, problems relating to high- Patient flow analysis (PPA). A self-ad- This paper - a product of the Popula- technology trade between Asian newly ministered time-and-motion diagnosis tion Policy and Advisory Service, Popula- industrialized countries (NICs), Japan, that allows computerized documentation tion and Human Resources Department and the United States, as well asbetweon ofpatientflow and personnel useinbealth -is a backgroundpaperproduced for the Asian NICs, Japan, and Western Europe, service clinics. Using relatively "best practice paper on effective family are sufficiently important to hinder the unobtrusive data collection, PFA seeks to planning programs. Copies of this paper formation of additional free trade areas. get a representative snapshot of a pro- are available free from the World Bank, This suggests that fears about the spread gram and its dysfunctions, replicating a 1818 H Street NW, Washington, DC of such arrangements may have been ex- "typical" clinic session. Data are later di- 20433.Please contactOtiliaNadoraroom aggerated. agnosedandremedies proposed forbottle- 811-219, extension 31091(32 pages). Braga and Yeats's tabulations and necks and inefficiencies. analysis of the 'discriminatory' trade aining and uisit (T&V). A managerial barriers applied to these flows indicate approach for dealing with geographically 976. Strategic Management that "managed" trade is a far more likely scattered outreach programs. The four of Family Planning Prog rams outcome. main principles ofT&V: focus on afewkey * This paper - a product of the Interna- tasks, frequent in-service training and Cynthia P. Green tional Trade Division, International Eco- supervision,regularityandpredictability, (September 1992) nomics Department - is part of a larger and face-to-face communication. The T&V effort in the department to evaluate the model focuses on what workers should be Program management-speciallyhogis- influence ofchangesin external conditions doing with their time in the field to meet tics management - remains the Achilles on developing countries trade and growth client needs. A goal of T&V: to enable all hea offamily planning programs. prospects. Copies of the paper are avail- clients to name their worker and the day able free from the World Bank, 1818 H ofthe week s/he visits, andidentify afew Programmanagementhasreceivedinmf- Street NW, Washington, DC 20433. themes from theirmostrecentencounter. ficient attention among family planning Please contact Jean Jacobson, room 87- Actiuity planning. The antithesis of leaders, possibly because of the medical/ 035, extension 33710 (31 pages). T&V, activity planning calls for abandon- demograpbicbackgroundafmanyleaders, ingrigid time-place-movement schedules a focus an other program priorities (such and specific messages and replacing them as sheer survival), the pressure to expand 975. Techniques for Improving with a fluid work scheduled adapted ti- programsrapidly,andlimiteddonorinter- Client Relations In Family local conditions. Workers must be well- est in the subject. Planning Programs trained in collecting data, listening and As programs grow in complexity, the building rapport, and communicating problems resulting from weak manage- George B. Simmons, Sara Koerber, with conviction. The qualityofthe worker- ment systems become more obvious, and and Ruth Simmons client relationship is all-important. A organizations are compelled to introduce (September 1992) weakness is that if the workers have no rational systems. The more successful objective they lose control ofthe exchange family planning programshave paid close Forr techniques for improving clientrela- with clients. attention to key aspects of management tions that should be part of systemic Training and worker empowerment and have striven to continually improve c.ange- not applied like bandaids - to Training by itself is not enough for sys- their systems. make fim-ilyplannZing services more efic- temic change - training for what? But According to the principles of strategic the. training can serve as an entry point into management, there is no single "best" organizational development when it is solution to the various problems organi- Demandforchildrenanddemandforcon- rooted in methodologies that help to de- zationsface.Eachorganizationmustwork traceptives are not independent of the velop the participanes technical and in- outaresponse appropriate toagiven situ- system of srpply. And client transactions terpersonal skills and ability to innovate. ation. But managers should know more are the major means for lowering costs. But training must be accompanied by aboutpossibleoptionsandtheireffective- Family planning workers, providers of changes in the system ofsupply that sup- ness in other settings. In family planning, services and mass media campaigns, are ports andfacilitates innovation and qual- a dearth of research an options - com- the harbingers of new ideas and new de- ity of care. pounded by the fact that many programs livery systems that could modify the de- Techniques to improve client relations do not eolleetbasic information aboutpro- mand for fertility regulation and patterns can address either the client-provider in- gram inputs and outputs -makes it dif- of contraceptive use. terface directly or the system of underly- fliculttoanalyze whichprogrameworkand Simmons, Koerber, and Simmons de- ing determinants. It is important to ask why. scribe four broad techniques for improv- basic questions: Is the idea to"fix" a single Logistics management is the Achilles ing client relations, emphasizing their worKer-client dysfunction or is it to pro- heel of family planning programs. Many potential as entry points into program vide a continuous program for modifica- programs experience depleted supplies of development (systemic change). These tion and growth? Who will be affectedby contraceptives in demand and oversup- techniques are presentedasasamplingof the change? Who or what will be respon- plies of others. Lack of contraceptives not -peience that can be brought to bear on sible for initiating and overseeing the only leads to pregnancies but erodes cli- dysfunctional client relations. Among ex- course ofaction? What are the short- and ent trust in the service provider and un- =-ples described- long-run goals of intervention? dermines staff morale. Measures to im- 90 Policy Research Working Paper Series prove logistics management are readily reevaluate their old policies andformulate each system, such as conditions for eligi- accessible. What is lacking is a commit- new ones. bilityandeoverage,methodsoffinancing, ment from high-level managers to intro- The structural differences among avail- form72s for benefits and contributions, duce the needed changes. able models for providing old-age security and provisions for indexing and early re- Staff development also merits more at- involve: tirement. The study will also propose tention from managers, as high-caliber * The link between benefits and costs reforms for existing public plansthathave staffcan make abig difference in program to each individual, which is closely tied to become financially nonviable. performance.Managersdonotalwayshave the plan's objectives (for example, savings This paper - a product of the Public flexibility about staffrecruitment, promo- and insurance versus redistribution). Sector Management and Private Sector tion, and retention, but they should strive * Whether theschemeisfundedlargely Development Division, Country Econom- for as much leverage as possible. Little in advance or whether it is financed on a ics Department - is part of a larger ef- research has been done on the impact of pay-as-you-go basis. fort in the department to investigate the training, so managers should assess the * How much the scheme relies on complexissuesrelatedto oldagesecurity' relative effectiveness and costs of different private or public management. arrangements. The research was funded approaches.The keyfactor seems tobe the The choice between these models has by the Banks Research Support Budget relevance of the training content to the broad implications for the operation of under research project "Income Security. individual's job responsibilities. labor and capital markets, the fiscal sys- for Old Age" (RPO 677-45). Copies of this This paper -a product of the Popula- tem, and thus the level, growth, and dis- paper are available free from the World tion Policy and Advisory Service, Popula- tribution of GNP. Bank, 1818EStreetNW, Washington,DC tion and Human Resources Department James examines her working hypoth- 20433. Please contact Daniele Evans, - is a background paper prepared for a esis, thatasystembuilton several pillars roomN9-057,extension37496(56pages). review of effective family planning pro- is preferable to any single methodfor pro- grams. Copies of the paper are available viding old-age security -a mixed strat- free from the World Bank, 1818 H Street egy is the best way to accomplish many 978. How Restricting Carbon NW, Washington, DC 20433. Please con- goals with minimum costs, including Dioxide and Methane Emissions tact Otilia Nadora, room S11-219, exten- evasionary, distortionary, and uncer- Would Affect the Indian Economy sion 31091 (46 pages). tainty costs. Of four pillars, * One mandates savings andannuities, CharesR.litzer,RS.Eckaus,SupriyaLabiri, so that people are required to set aside and Alexander Meerans 977. Income Security for Old Age: resources during their working years to (September 92) Conceptual Background take care of their needs when they are and Major Issues older. This pillar also ensures against The economic effects on India of restrict- such individual risks as uncertain longev- ingearbon dioxide and methane emissions Estelle James ity. would be profound. Would compliance (September 1992) * One redistributes income to old with international agreements for emis- people who did not earn enoughwhen they siaon restrictions be more likely if they re- A system far old-age security should prob- were young to build an adequate cushion quired annual, ruther than cundatiw, ably combine different approaches: man- of savings. This nillar may also ensure reductions? dated savings andannuities;aredistribu- more broadly agnast such group risks as don of income to old people who did not unexpectedly high inflation or unexpect- India and China between them contain earnenoughwhen theywereyoungto build edly low rates of return in the economy. about 40 percent of the earths people. an adequate cushion ofsavings;flscal in- * One provides fiscal incentives for They are at an early stage of economic centives for nonmandatory savings and nonmandatory savings and annuities, development,andtheirincreasinglymas- annuities (including taxincentiwsfrjob- such as tax incentives far job-based pen- sive energy requirements will depend* based pension plans); and an informal sion plans. heavily on coal, a potent source of carbon system of purely voluntary personal sau- * One consists of purelyvoluntaryper- dioxide,apowerfulandlong-lastinggreen- ings and finmily arrangements. sonal savings and family arrangements, house gas. a continuation of the informal system of India also has important sources and A large and growing proportion of the old-age security that remains important uses of hydroelectric and nuclear power, world's population is old; the elderly ar, in most countries even after formal sys- petroleum, and natural gas. Agriculture often poor and many countries face huge tems are in place. still produces about30 percentofits gross fiscal burdens because of promises they The mix of these pillars will vary from domestic product, and about 72 percent of have made to give their older citizens in- country to country, depending on their thepopulationlivesinruralareas-with come security. objectivesandeconomic conditions. James their large animal populations and sub- Thesegovernment old-age security poli- evaluates the impact of different mixes on stantialforestacreage.Indiahasvastcit- cies havebeen debatedin developed coun- the distribution ofcosts and benefits and ies and an industrial sector that is large tries for years; more recently they have discusses the difficulties of making the in absolute terms, although itrepresents also become a matter of cancern in devel- transition from one system to another. only 30 percent of the economy. oping countries. James identifies the is- She outlines a forthcoming study that The model developed to analyze the sues countries should consider as they will analyze important design features of economic effects of constraints on green- Policy Research Working Paper Series 91 house gas emissions is a multisectoral, 979. Economic Growth it directly - to "delink" it from economic intertemporal linear programmingmodel, and the Environment activities, so to speak - by introducing driven by the optimization of the welfare environmentally superior technologies of a representative consumer. A compre- Dennis Anderson and practices. hensi ve model was built not to project the (September 1992) * Reducing population growth would future at a single stroke but to begin to help relieve environmental pressures in answer questions of a "What if?" form. Addressing environmental problems effi- urban and rural areas, but these effects The results strongly suggest that the ciently should be viewed as a means of would be small in relation to two other economic effects on India of such con- raising economic growth and living stan- measures: reducing waste andinefficiency straints would be profound. dards in developing countries, not ofreduc- andintroducingenvironmentally superior The implications of different forms of ing them -contrary to the standard his- technologies and practices. emissionsrestrictions-annual, cumula- torical and contemporary view in indus- * For the most part, environmental 'tive,andradiativeforcing-deservemore trial countries. policiessucceedbecause ofcertainbehav- attention. Cumulative restrictions - or ioral responses they may cause -in per- better still, restrictions on radiative fore- Anderson argues that efficient solutions ticular, a range ofsbstitutions and tech- .ing - are closely related to public policy to environmental problems are a means nological and managerial changes that on greenhouse effects. Such restrictions ofimprovingacountry's economic growth give rise to environmentally in-Offensive also provide significantadditional degrees prospects and that policies to improve practices. of freedom for the economic adjustments economic growth prospects will help en- * The evidence that pollution has a required. They do this, in part, by allow- vironmental problems be addressed. disproportionately higher impact on low- ingthe postponement of emissionsrestric- Among other points he makes: income groups is overwhelming. tions, which is not permitted by annual * The costs of avoiding pollution or This paper-aproduct of the Office of constraints. Ofcourse, the question arises environmental damage areoftenless than the Vice President, Development Econom- whether a country,havingbenefited from the costs of incurring iL The costs of in- ics - is one in a series of background postponing a required reduction in emis- curring such damage take many forms, papers prepared for the World Develop- sions, would then be willing to face the including the impact ofair and water pol- ment Report 1992. The Report, on devel- consequences in economic losses. lution on health and amenities, the loss opment and the environment, discusses Might there be a genuine preference- of time and output caused by urban con- the possible effects of the expected dra- albeit an irrational one - for taking the gestion, thehealthimplications ofhazard- matic growth in the world's population, losses annually? Would compliance with ous wastes and poor waste treatment and industrial output, use of energy, and de- international agreements for emission disposal practices, and the decline in pro- mand for food. Copies of this and other restrictionsbe more likelyiftheyrequired ductivity of soils and forests that rasults World Development Report background annual, rather than cumulative, reduc- from unsustainable agricultural and far- papers are available free from the World tions? Monitoringrequirements wouldbe estry practices. Bank,1818HStreetNW,Washington,DC the same in either case;if effective moni- * With exceptions, environmental 20433. Please contact the WorldDevelop- toring were carried out, it would detect problems cannot be addressed by market mentReport office, roomT7-101, extension departures from cumulative or radiative forces alone. In some instances, the costs 31393 (80 pages). forcing constraints just as easily as depar- of environmental damage may be borne tures from annual constraints. wholly or partly by agents other than This paper - a product of the Office of those responsible for the damage. Some 980. The Environment: A Now the Vice President, DevelopmentEconom- sort of tax. law, regulation, or framework Challenge to GAIT? ics - is one in a series of background for negotiation will be required to bring papers prepared for the World Develop- about a convergence of private and social Piritta Sorae ment Report 1992. The Report, on devel- interests in reducing damage in an eco- (September 1992) opment and the environment, discusses nomically desirable way. the possible effects of the expected dra- * When policies are not in place, eco- Clarification of the GATT rules would Enatic growth in the world's population, nomic growth mayintensify environmen- undoubtedly help counter increasingpres- industrial output, use of energy, and de- tal damage and eventuallyberetardedby sures to use trade instruments as a form mand for food. Copies of this and other it. By contrast, when the right policies are ofenvironmentalpolicy-andwould help World Development Report background in place, not only may such damage (and redirect attention toward the true causes papers are available free from the World its impact an growth) be reduced to low of enuironmental damage Bank, 1818HStreetNW,Wasbington,DC levels, but economic growth may help to 20433. Please contact the WorldDevelop- achieve environmental improvements - Wil environmental issues challenge the mentReport office, room T7-101, extension through, for example, raising the finance General Agreement an Tariffs and Trade 31393 (40 pages). for water and sanitation facilities or for (GATT)? Callsforanewround ofmultilat- the maintenance of forest and wildlife eraltradenegotiationsontheenvironment reserves. have multipLied. Environmentalists have * The most effective way to reduce en- kept up pressure to modify the GATT. In- vironmental damage from economic ac- dustries with higher environmental costs tivities and their expansion is to address may seek protection from imports. 92 Policy Research Working Paper Serles But the GATT, as a trade forum, is not the possible effects of the expected dra- scale firms can have both stabilizing and the right place to discuss environmental matic growth in the world's population, destabilizing macroeconomic effects, for solutions, contends Saran. Focusing on industrial output, use of energy, and de- example. If it means getting rid of loss- trade will only distract attentionfrom the mand for food. Copies of this and other making public enterprises, it could save true causes of environmental problems. World Deuelopment Report background scarce government resources. But if the Legitimate environmental policies conflict papers are available free from the World resultingoutputandunemploymentcasts little with GATT rules because the source Bank, 1818 H StreetNW,WashingtonDC are socially unsustainable, pressure may of most environmental problems is not 20433. Please contact the WorldDeuelop- mount for the government to cnme to the trade but prices that do not reflect envi- ment Report office,roomTT-101, extension enterprises' rescue. ronmental cost, subsidies to environmen- 31393 (42 pages). * The shift from an economy with con- tally damaging activities,or unclear prop- tralled prices to one in which most prices erty rights. aemarket-determinedgenerallyinvolves Furthermore, the GATT imposes few 981. After Socialism and DIrigIsme abighilkeinpricelevels.ChileandMexico constraints on the setting of domestic - Which Way? illustratethestubbornnessoftheinflation standards and environmental policies, so that may follow. there is no environmental need to modify Andres Solimano * China, Korea, and Chile represent the GATT Onthecontrary,bylimiting the (September 1992) countriesthatcarriedonteconomicreform use of trade measures, which make for under authoritarian governments that poor environmental policies, GATT rules No universally valid blueprint exists for postponed political reform to gain politi- support good environmental practice. By how to reform an economy, but certain cal legitimacy from the fruits of consoli- restricting unilateral recourse to trade patterns haveemergeeL Thispaperreiems datedeconomcreform.Incountrieswhere sanctions, GATTrulesrespect sovereignty aternative strategiaforreformandtheir economicandpoliticalreformare pursued andhelpeontainpower-basedabuse ofthe performance in mixed and post-socialist simultaneously(asinEasternEuropeand trading system. economies. Russia), fragile democracies with a frag- In anumberofareas,however,therules mented party system and weak social in- aresrbjecttowide-ranginginterpretation Solimano identifies fundamental eco- stitutionsandgovernmentsdonotprovide and wouldbenefitfrom clarification. This nomic changes in the last 20 years that the most favorable political environment applies especially to GATT's relationship have influenced the emergence of a new for implementing and consolidating com- with international agreements and also, paradigm on economic reform. The new plexandpainfuleconomicreforms.Under in some cases, to the unilateral use of arthodoxyoneconomicreformemphasizes these conditions, governments are bound trade sanctions. Industries and policy- smaller government, trade liberalization, to face the dilemma of either postponing makers also call for clearer rules for the business deregulation and privatization, economicreform to avertapolitical crisis application ofenvironmental policies with macroeconomic austerity, and the role of or to backslide in democratization to ap- trade effects. Any attempt at unila- free markets for resource allocation and ply painful economic policies -both un- teralism should be avoided- growth. savory choices. Acloserlook reveals some anomalies in After describ7ng diverse country expe- Thispaper-aprodectoftheTransition the GATT with regard to environmental riences in economic reform, Solimano and Macro-Adjustment Division, Country policy-, these maymeritfurther discussion. summarizeshis findings on keyaspectsof Economics Department - was presented GATT rules on border aUustment may the design of economic reform programs. at the conference, Economic Refarm* Re- encourage the use of indirect policies, Among many findings: cent Experiences in Market and Socialist since these can be extended to competing * Shock treatment (as opposed to the Economies, held July C-8, 1992 in El imports. Indirect policies can lead to en- gradual approach) requires a strong gov- Escorial, Spain. Copies of this paper are vironmental costs being passed on to im- ernment with broad social support, as the available free from the World Bank, 1818 porters, or to double taxation of environ- costs of the policies are paid upfront and H Street NW, Washington, DC 20433 mental costs. Legitimate policies may be the benefitsmay take time toaccrue. If the Please contact Sebah Moassa, room N11- left outforlack of specific reference to the program involves protracted social hard- 017, extension 39019 (50 pages). environmentinArticle XX.GATT subsidy ship, political support will begin toevapo- rules may constrain burden-sharing op- rate and pressure will build for a reversal tions for environmental policies. of reform. 982. Microeconomics Clarification of the GATT rules would * Important choices must be made of Transformation in Poland: undoubtedlyhelp counter increasingpres- about the sequence of macroeconomic A Survey of State Enterprise sures to use trade instruments as a form adjstment and consolidation and strut- Responses ofenvironmental policy-andwouldhelp tural reform. Implementing tax reform redirect attention toward the true causes and converting quotas to tariffs improve Brian Pinto, Marek Belka, of environmental damage. the fiscal budget, so they contribute to and StefanKrajewld This paper- a product of the Office of macroeconomic stabilization.Butprema- (Sepember 1992) theVicePresident,DevelopmentEconom- ture financial liberalization, before the ics - is one in a series of background budget is balanced and real interestrates Managers are typically the inspirtion and papers prepared for the World Develop- are at a reasonable level, may lead to fi- moving force behind change. Workers' ment Report 1992. The Report, on devei- nancial crisis, as happened in Chile in Cormcilspayatbestafacfitatingrole.To opment and the environment, discusses 1982-83. Massive privatization of large- get firms to make necessay changes, it is Policy Research Working Paper Series 93 essential to change the incentive structure and product redesign. vested interests. Other arms ofla-in- at the firm leveL * Nominal and real wages both dis- eluding intellectual property, company, played remarkable flexibility. Employ- foreign investment,andcontractlow-re State enterprise behavior andreform have ment reduction has lagged output redue- less problematic. emerged as key issues in the emerging tion partly because partial indeation of market economies of Eastern Europe be- wages to inflation has keptreal wageslow Hungaryisin the midst ofafimdamental cause of the size of the state manufactur- and partly because of the natural reluc- transformationtowardamarketeconomy. ing sector as measured by its share in tance of worker-controlled SOEs to shed Although it was formerly in the forefront GDP, exports, and tax revenues. The dif- labor. So, thereisclearpossibilityofmuch of efforts to reform socialism, after 1989 ficulties experienced by Polish state- higher transitional unemployment once the goals of reform changed from market owned enterprises (SOEs) in adjusting privatization and commercialization get socialismtocapitalism,astheoldCommu- and responding to the new economic en- underway on a large scale. nistregimelostpowerandtheideaafwide- vironment have led to fiscal imbalance, * The hard-currency export boom in spread private ownersbip gained accep- deteriorating portfolios of commercial 1990 was motivated more by slack domes- tance. The legal framework -the frnles banks, andburgeoninginterfirmpayment tic demand than higher export profitabil- afthegame'-isnowbeinggearidtoward -arrears. ity. encouraging, protecting, and rewarding Pinto, Belka, and Krajewsld examine The main qualitative change is a defi- entrepreneurs in the private sector. the economic and behavioral reactions of nite attitudinal shift in favorofprofits and Gray, Hanson, and Heller describe the a significant sample of Poland's largest marketingin contrast to the old exclusive evolving legal framework in Hungary in SOEs to the macroeconomiereformsintro- emphasis on production targets. But there several areas, including constitutional, duced as part of the "big bangin Janu- is aserious principal-agent problem, with real property, intellectual property, ca- my 1990. They track the evolution ofout- managers serving at the pleasure of the pany, foreign investment bankruptcy, put, costs, and profits, and examine wage workers' council and no obvious owner contract, and anti-monopoly law. These setting behavior, enterprise debt dynam- stressing long-term viability consider- areas of law serve to define property ics, and enforcement of the "micror hard ations in decisionmalking. rights, the means ofemchangingthem, and budget constraintby banks. They conduct The paper concludes by discussing the therulesforeampetitivemarketbehavior. a firm-level analysis of the export boom microeconomics oftransformation needed In essence, theyform the bedrock of ale- and its causes and document the evolving tocomplementthelargelymacroeconomic gal system for a market economy. tax burden on enterprises. Their findings big bang. The importance of addressing In Hungary as in the other countries of are basedon asurvey of 75large SOEsin firm-level managerial incentives and Central andEasternEurope, defiingreal manufacturingduringJune 1989 -March empowering managers is emphasized in property rights and creating the condi- 1991-six months priortoand 15months the transition to eventual privatization- tions for free and fair competition are following the big bang. This paper is a product of the Europe perhaps the most contentious and con- Some of the main quantitative conclu- and Central Asia Region. An earlier ver- fusedareasinthe currentlegallandscape sions were: sion of this report war distributed under - largely because they tread so heavily * The high nominal interest rate on the title, 'Microeconomic Response to the on existing vested interests. working capital (from 50 to 72 percent for Economic Transformation Program: Evi- Otherareasflaw-indi l themonth ofJanuary L990alone)inhibited dence from the Largest Polish SOEs" property, company, foreign investment, borrowing and motivated firms to pay off [State-Owned Enterprises]. Copies ofthe and contractlaw-are less prolematic. zloty loans, leading to a squeeze on work- more recent paper (supported by the Re- This paper - a product of the Transi- ing capital. The huge decline in-real wages search Support Budget under research tion and Macro-Adjustment Division, led toa demandshock, witnessed byrising project RPO 676-58) are available free CountryEconomicsDepartment-ispart finished goods inventories. Consequently, from the World Bank, 1818 H Street NW, of a larger research effort in the depart- the initial, unexpectedly large, decline in Washington DC 20433. Please contact ment on the economic implications of le- outputcouldbeexplainedbyacombination Sina Husain, room H11-113, extension galreformin Central andEasternEurupe. of nominal interest rate shock and stan- 37139 (42 pages). Copiesofthepaperareavailablefreefrom Aard demand considerations. the World Bank, 1818 H Street NW, * High profits in 1990 were temporary, Washington, DC 20433. Please contact stemnmingfrominflationarygainson once- 983. Legal Refonn for Hungary's RebeccaMartin,roomN1-054,extension off inventory sales, devaluation gains on Private Sector 39065 (45 pages). enterprise dollar accounts, and implicit input subsidies from CMEA trade. Cheryl W. Gray, Rebecca J. Hanson, * Banks were lax in enforcing credit- and hjmhaelHener 984. Bariers to Portfoflo worthiness, leading to an adverse selec- (October 1992) Investnents in Emerging tion problem marked by loans going Stock Markets mainly to "bad" Eirms. Defining rem property rights and creating * State-owned enterprises tend to be theconditionsforfreeandfaircompetition ASH DemirgGpKunt and HarryHiziga myopic, with considerable short-run pres- and efficient exit offirms are perhaps the (October 1992) sure on wages that works to the detriment most contentious and confused areas in ofrestructuringinvestments essential for Hungary's current legal landscape - The capdalgaine withholding tax leaed reducing energy and material intensity largely because they tread so heavily on on foreign portfolio investors increaser 94 Policy Research Working Paper Series required pre-tax rates f return in devel- to prevent them from being higher than ments, when regional integration was oping countries, increasing domesticfrms anticipated. viewed as an extension of import-substi- cost ofcapital and discouraging physical This paper-a product ofthe Financial tution industrialization at the regional investment Dividend withholding taxes Policy and Systems Division, Country level. do not have this effect since foreign inves- Economics Department - is part of a In a discussion of the welfare econom- tors can obtain offsetting tax credits. larger effort in the department to under- ics of preferential trading arrangements, stand the impact of emerging stock mar- they show that apreferential approach to Demirgati-Kunt and Huizinga examine to kets in developing countries. Copies ofthe trade liberalization may not increase wel- what extent features ofthe international paper are available free from the World fare. Forasmall country,unilateral trade tax system and indicators of transaction Bank, 1818HStreetNW,Washington,DC liberalization will be superior to a prefer- costs affect the requiredrates ofreturn on 20433. Please contact Rose Vo, room 88- ential approach unless the world divides emerging stock markets. 042, extension 37664 (27 pages). into trading blocs with mutually high They show that the capital gains with- barriers - in which case, a preferential holding tax levied on foreign portfolio in- approach ensures market access. vestorsincreasesrequiredpre-taxrates-of 985. Regional Integration, In a discussion of the welfare econom- return. As countries generally do not in- Old and New ics of trading blocs, they note that the dex their capital gains taxes, it follows move to a few trading blocs may make a that inflation increases the capital gains Jaime de Melo, Claudio Montenegro, cooperative solution more likely-at the tax base, as well as the required rate of and Arvind Panagauiya same time increasing the rewards ofnon- ret:rn on equity. (October 1992) cooperative behavior if bargaining fails. Dividend withholding taxes instead With an empirical evaluation, de Melo, appear not to increase the required pre- Regional integration arrangements are Mantenegrq,andPanagariyashowthat- tax equity returns significantly. The dif- more likely to be a stepping stone toward after controlling for differences in invest- fering results for capital gains and divi- afreerworldtradingsysteraifGATrules ment-countriesthatintegratedgrewno dend taxes reflect the fact that foreign are strengthened - and if developing faster than their comparator group. But investors generally can receive domestic countries enter into arrangements with human capital contributes significantly to tax credits only for foreign withholding developed rather than other developing growth, suggestingberiefiltsfromregional taxes paid on dividends. countries. integration arrangements that emphasize The return on equity is part of the issu- cooperation. ing firm's cost ofcapitaL So, capital gains After lying dormant for two decades, re- And there is evidence ofcatch-up, sug- withholding taxes imposed on nonresi- gional integration is on the rise- Recent gesting benefits for the least-developed dents increase the cost of capital for do- initiatives suggest thattthe world trading members of the new wave of arrange- mestic firms and discourage physical in- system maybe movingtowardthreetrad- mentsthatempbasizeNorth-Southmem- vestment. Private investment levels have ing blocs dustered around Japan, the bership. tended tobe lowindevelopingcountriesin European Community, and the United In short regional integration arrange- the 1980s. The cost of equity finance in States. ments are more likely to be a stepping developing countries has gained in impor- Some view this development as a move stone towardaroer world trading system tancein thelast decade, as these countries' toward a less fragmented world trading if GATT rules are strengthened, and if access to international lending capital has system; others, as a threat to developing countries enter into arrange- been limited duing most of the decade. multilateralism. For atypical developing ments with developed rather than other What do these findings imply for the country,theissueiswhethertoenterinto developing countries. design of tax policy in relation to foreign a regional integration arrangement or to This paper - a product of the Trade portfolio investment in developing coun- choose unilateral trade liberalization. Policy Division, Country Economics De- tries? The existence offoreign tax credits Two questions must be asked: Is a pref- partment-ispartofalargereffortinthe7 for dividend taxes paid suggests that a erential approach likely to enhance eco- department to understand new regional- country should tax capital gains more nomic efficiency? And are substantial ism in trade policy- The research was lightly than repatriated dividends-as do benefits attainable more easily through funded by the Banks Research Support. Greece, Pakistan, Portugal, and Venezu- regionalism or through unilateral trade Budget under research project "New Di- ela. Each of these countries has positive- liberalization? mensions in Regional Integration7 CRPO dividend withholdingtaxesbutno capital De Melo, Montenegro, and Panagariya 677-12). Copies ofthis paper are available gains taxes imposed on nonresidents. address these issues first by reviewing free from the World Bank, 1818 H Street Colombia and India do the exact opposite: past and recent regional integration ar- NW, Washington, DC 20433. Please con- they tax capital gains far more heavily rangements. They note that recent ar- tact Dawn Ballantyne, room N10-023, than dividends. Despite what appears rangements are occurring in a more lib- extension 37947 (47 pages). optimal, the trend in developingcountries eral trading environment than those in is toward lower dividend withholding the past, and that developing countries taxes, with little change in the average are now seeking integration with devel- level of capital gains taxation. Oped country partner3 (for example, It also appears desirable for developing Mexico with the United States). So the countriestoindextheircapitalgainstaxes context is different from past arrange- Policy Research Worlking Paper SerIes 95 986. The Administration plify taxes to minimize ambiguity, ease represent about 60 percent of Latin of Road User Taxes administration, reduce administrative America's population. In Developing Countries cost, and lower the compliance cost, and Brazil, Colombia, andMexicoarefacing (4) to improve tax enforcementbyimprov- an important declineinmortalityandfer- Roy Bahl ing tax collection, record-keeping, liabil- tility rates. New health problems have (October 1992) ityassessment, and identification ofthose arisen related to rapia urbanization and liable to pay the tax. industrialization-forexample, irjuries, The causes oftaxavoidance, oftaxevusion, * Transport fuel pricing needs to be accidentalintoxication andpoisaning, and and of the failure to reach full revenue bettercoordinated, andrate structures - the occupational and noncommunicable potential from road user taxes lie within especially for sales tax, excise tax, and conditions (such as hypertension and dia- taxstructuresandadministrations-and import duty-couldbeloweredandmade betes) affecting an aging population. At those are the areas that need reform. more uniform. In some countries there is the same time, these countries arenotfree scope for raising fuel tax and the annual of old health problems - of many infec- After studying the problems of adminis- licensetax, provideditisaccompaniedby tious and parasitic diseases - although tering road user taxes in 19 developing better enforcement Evidencefound in the their mortality rates are declining. countries, Bahl reports the following, case studies for this paper have not sup- That is, old and new health problems among other things: ported an incentives argument: that tax- coexist while wide social disparities per- * There is no single, correct structure payers will be more inclined to payif they sist in these developing Latin American for road user taxation since the various seeadirectbenefitbetween tax and spend- countries. The epidemiological diversity charges may play different roles in differ- ing. and thespeedofchangein diseaseprofiles ent national revenue systems. This paper-aproductoftheTransport makes the health transition in many de- * All effective tax administration re- Division, InfrastructureandtUrbanDevel- velopingcountriesmorecomplexthanthe quires a solid, uncomplicated tax struc- opmentDepartment-ispartofalarger situation developed countries faced. ture departmental project on pricing, cost re- Mostof these countries also have inad- * The substantial revenue potential of covery, and efficient resource use in the equate health infrastructure and are un- road user taxation rests on a growing tax road sub-sector. The reportis based on a likely to be able to afford to develop them base. Despite this, road user taxation series ofcase studies carried outin Argen- inthe nextdecade or so.Andmostgovern- remains an underused source of public tina, Bolivia, Ghana, India, andYugosla- ments are being pressed to adopt the finance in developing countries. via- drawing also on studies carried ont therapeutic medical model to deal with * Tax evasion and avoidance narrow in Indonesia, Nepal, and Tanzania. Cop- noncommunicable conditions. the tax base, cost governments revenue, iesofthis paper are availablefreefrom the Bobadilla and Possas arrive at seven and compromise the efficiency and redis- World Bank, 1818 H StreetNW, Washing- main conclusions about the implications tribution objectives ofa tax system. Eva- ton, DC, 20433. Please contact TWUTD, ofthe epidemiological transition farhealth sion may occur by nonfiling, roomS10-027,extension31005(46 pages). policyindevelopingLatinAmericancoun- underreporting, or smuggling. It gener- tries: "y increases with the tax rates (particu- * The transition offers an empirical 'y the marginal tax rates) and de- 987. How the Epidemiological framework for strategic planning for the 3,ses with a greater probability of de- Transition Affects Health Policy health system, allowing policymakers to -Ion and with a more severe penalty. Issues in Three Latin American anticipate future trends and causes of ^ -nidance is the result of loopholes in a - Countries mortality and anticipate disease sce- system that enable a taxpayer to re- narios. e liability by adjusting the consump- Jose Luis Bobadilla and Cristina de A.Possas * Since more diseaseisexpectedamong i or composition of received income, or (October 1992) the adult and elderly populations, the nahingdifferentinvestmentorproduc- health system's mission shouldberevised -- choices. How con developingLatinAmericancoun- withmore emphasis on disease prevention * The problems of evasion and avoid- tries design realistic strategies for prevent- andcontrol andlesson satisfying demand. emustbeapproached simultaneously. ing and controlling noncommunicable * Existinginequitiesinthegeographi- tax administration narrows the pos- conditions and inJuries before they reach cal distributionofhealthresourcesandin lity for successful evasion, the result thepeak rates observed indevelopedcoun- the quality of care between health insti- y be an increase in avoidance. tries - and at the same time maintain tutions should be corrected to avoid * The four main types of road user effirts to reduce the "unfinished agenda" greater epidemiological polarization. rges are (1) fuel tax, (2) sales tax, ex- in hath services? * The health care model should be re- - tax, and import duty, (3) annual li- formedto strengthenthe technical capac- se and vehicle registration charges, Bobadilla and Possas focus on healthy itytoprovidepreventiveandcurativeser- T (4) tolls. policy issues associated with health re- vices at the firstlevel ofcare(health cen- * Action shouldbe taken underall four form needed to meet the health needs ters) to control the dualburden of disease. 7n reform options (1) to keep rate lev- arising from the demographic and epide- * Efficiencyandqualityofcare need to as low as possible, (2) to broaden the miological transitions. They illustrate besubstantiallyimprovedtoaccommodate base, limit exemptions, and move to- these policy issues by analyzing: Brazil, the greater demand for clinical services, -rda single uniform tax rate, (3) tosim- Colombia, and Mexico, whosepopulations especially those provided at hospitals. 96 Policy Research Working Paper Series * Criteria for setting priorities in the Within a time period, the use of effi- 989. The Indian Trade Regime health sector musthe defined, soresources ciency gains andlosses as aguide to policy can be allocated among competinghealth or project evaluation assumes that the M. Ataman Aksoy needs and socioeconomic groups. prevailing distribution of income is so- (October 1992) * These countries need to strength cially acceptable, since it is that distribu- their ability to analyze the health status tion which "weight? the measures of will- Refbrmingexportpoliciesalone-without of populations, to evaluate the health ingness to pay. reforming India's import and taxsystems system's performance, and to design cost- Between time periods, the use of an- - will produce only marginal improve- effective interventions to deal with other efficiency concept - the discount ments. The whole system needs rational- noncommunicable diseases. rate -biases the outcomes of evaluation izing. This paper - a product of the Popula- infivorofthe present, and againstfuture, tion, Health, and Nutrition Division, generations where future costs and ben- Despite attempts to liberalize India's in- Population and Human Resources De- efits are both distant and significant- port trade regime, the structure ofimport partment - was presented at the Work- But economic valuation is useful in sev- licensing is still restrictive and complex shop on Policy and Planning Implications eral contexts, says Pearce. Project and and for most products, the licensing sys- of the Epidemiological Transition in De- program appraisal cannotbe comprehen- tems probably offers no more protection veloping Countries, organizedbythe Com- sive or adequate without it. National en- than tarifis do. For most products, trade mitteeonPopulatinoftheNationalAcad- vironmental policy priorities will be bet- restrictions are probably redundant as emy of Science, November 20-22, 1991, in terinformedifeconomic values arelcnown protection Washington, DC. Copies of this paper are with some degree of certainty. The entire Reforming export policies alone - available free from the World Bank, 1818 objective of sustainable development al- without reforming India's import and tax H Street NW, Washington, DC 20433. mosteertainlycannotbeinterpretedwith- systems - will produce only marginal Please contact Otilia Nadora, room 811- out some idea of the value of environmen- improvements. Problems in the export 219, extension 31091(20 pages). tal services and assets. administration can be resolved only by Empirical work on valuation remains making changes in four areas: limited, even in the developed world Itis * Theimportlicensinguystemmustbe 988. Economic Valuation fairly new in the developing world, al- rationalized to eliminate import restric- and the Natural World though many project evaluations have tions on inputs and components. The in- used some form of indirect valuation. Its portregime inflictsheavy administrative DavidPearce importance for the development process costs on the Indian economy. Imports of (October 1992) isthatrevealed economicvalues for envi- raw materials and other inputs essential ronmental conservation and environmen- for production are delayed, leaving down- Economic valuation can help improve de- tallyimprovingprojects and policiesbave stream producersidle when domesticsp- cisions about protecting the environment. often been found to be large. plies are interrupted (which happens of- By imputing values to unpriced goods, it Valuation demonstrates that there is an ten). The export regime is still not ratio- can makepublicchoices morecost-efficient economic case for protecting the environ- nalized for smaller producersM indirect and thus allow limited publicinwmeto be ment, and can help improve decision- exporters, and firms that rely on domes- optimally spent making. In so doing, it could make public tic suppliers. choices more cost-efficient, thus allowing * Tariffs and excise taxes mustbe con- Economic valuation is controversial limited public income to be optimally solidated around two to three slabs and largely because its purpose has not been spent. the quantitative restrictions in interme- clearly conveyed to non-economists, says This paper-a product ofthe Office of diate and capital goods must be elimi- David Pearce. The purpose ofvaluation of the Vice President,DevelopmentEconom- nated so firms can be compensated acen- the natural world is to elicit measures of ics - is one in a series of background rately for their tax burdens. The system' humanprefrencesfor, or against,environ- papers prepared for the World Develop- that exists is far too complex. mentalchange.Asaprocedure,itthusfaces ment Report 1992. The Report, on devel- * The absolutelevel oftariffson inputs two immediate limitations, he argues. opment and the environment, discusses must be reduced to administer the duty-. First, economic values are not the same the possible effects of the expected dra- free import schemes efficiently. High tar- as "Intrinsic" values-valuesn! things matic growth in the world's population, iffsencourageleakageofduty-freeimports rather than values "of' things. Economic industrial output, use of energy, and de- into the domestic market and abuse of valuation makes no claim to measure in-: mand for food. Copies of this and other high drawback rates (incentives). trinsic values, although through the con- World Development Report background * Tariffs and taxes on capital goods ceptof"existence"valueitmaybe capable papers are available free from the World must be reduced to reduce the costs of ofcapturinghuman perceptions ofintrin- Bank, 1818 H Street, NW, Washington, investment. Tariffs in India-especially sic value. DC 20433. Please contact the World De- onkeyintermediate products (metalsand Second, measuring preferences focuses velopment Report office, room T7-101, chemicals) and capital goods -are high on efficiency gains and losses from envi- extension 31393 (63 pages). and getting higher fast. The high cost of ronmental change. It says little about the basic inputs increases the cost of produc- distribution ofcosts and benefits within a tion, leads to uneconomic import-substi- time period or between time periods. tution which causes pressure for more Policy Research Working Paper Series 97 protection, and requires an elaborate, positive profit margin would triple, from When the industrial world was develop- cumbersome system to compensate ex- 20 percent to 63 percent. ing, it was tie tobenefitfromcheap nata- porters. High tariffs and excise taxes on Among import-substituting projects ral-resource commodities. Is it fair to ex- capital goods damage Indian competitive- that are not candidates for export under pect countries that are trying to imitate ness, adding 10 to 15 percent to the cost the present trade regime, under the pro- this pattern to pay more? of production and severely handicapping posed new regime half would be candi- Unfortunately there are not reliable exporters. datesforexportifthey wouldprocure their estimates of the effects ofenvironmental The excessive tariffs do not fulfill their inputs at international prices. protection costs on production, consump- primary purpose of providing protection Lowertariffswouldfulfill their primary tion, revenues, and foreign exchange. and incentives; they are aimed mainly at purpose more effectively providing pro- Slade explores these issues for the energy generating revenues. Public revenues tection andincentive signals.The function and nonfuel-mineral markets, sectors re- should be generated through more effi- of generating public revenues, another sponsible for much of current industrial cient instruments, especially taxes. critical issue in India, should be fulfilled pollution. This paper - a product of the South not through tariffs but through more effi- Using a model, she examines the con- -u Country Department III-is based cient andprotection-neutral instruments sequences of the developing world adopt- x larger study ofIndia7s trade regime - in particular, direct taxation (income ing the environmental standards of the undertakenbytheDepartment. Copies of tax) and nontariffindirect taxation (neu- industrialized world. She assumes: all Lie paper are available free from the tral excise taxes, MODVAT, and prefer- producers incur clean-up costs; most ad- World Bank, 1818 H StreetNW, Washing- ablythe value-added taxon consumption). justment is made through changes in on, DC 20433. Please contact Rose This paper - a joint product of the pricesandquantities,notthroughaltered Matenda, room J11 -21 -,tension 35055 Southern Africa Department and of the trade patterns; and the industrialized '22 pages). IndustzyandEnergyOperationsDivision, worldincreasesits environmental expen- Middle East and North Africa Country ditures by the same fraction as the devel- Department I- is part of a larger study oping world. S.JLProtection and Industrial oflndia?straderegimeundertakenbythe Slade finds that increased revenue re- Siructure In India South Asia CountryDepartment. Cop- sources will more than compensate the ies ofthe paperare availablefree from the average developing country for the costs M Ataman Akcy and Francais M. Ettori World Bank, 1818 HStreetNW, Washing- of pollution control, so no assistance or -ober 1992) ton, DC 20433. Please contact Rose intervention would be required. This as- Matenda, room J11-217, extension 35055 sumes, however, that capital markets are b--ing India's industrial incentive (51 pages). perfect, whichisfarfromthe case inmany 'wme transparent requires making tar- developingeountries.Thesenimperfections unifnmly low and eliminating all constitutethe greatestobstacletosuccess- . nitativerestrictions on imports. Tar- 991. Environmental Costs ful environmental regulation. rnust beusedonly toprovideprtecion of Natural Resource Commodities: Loans orsubsidiesfromNorthtoSouth incentive signals, not to raise reu- Magnitude and Incidence should be considered, says Slade. Devel- es. oping country producers should be given Margaret E. Slade access to credit in dollars, prices of im- .ctive protection rates in India are so (October 1992) ported pollution-abatement equipment _h and vary so greatly that anything could be reduced, or aid could be tied to rt of low uniform tariffs and the com- What would happen to resource prduc- the installation andmaintenance ofenvi- 'e elimination of quantitative restric- ion, consumption, and reuenue if the de- ronmental capital. is would not make the industrial incen- ueloping countries adopted the environ- Slade finds that environmental protee- scheme transparent, asitneedstobe. mental standards set by the industrial tion costs are small. Compliance costs of Aksoy and Ettori produce evidence to countries, while at the same time the in- roughly three percent of product prices w that there is ample scope forreduc- dustrial countries increased their spend- lead to changes in export revenues ofless tariffs and quantitative restrictions ing on enuironmental protection by the thanonepercent.Theprincipalreasonfor I that most industries could coexist samefraction as the developing countries? this result is that mineral commodity de- :h much less protection than they now The carrying capacity of our natural en- mandand supply areinelasticin thelong e. vironmentisanimportantunpricedinput run. By eliminating all surcharges oninputs to production.Aconsensusis growingthat As for the incidence of environmental iffsonimportedinputs, price differen- users should pay for the environmental costs, an environmental 'ta" is on aver- -s onlocal inputs, nondeductible excise damage that they cause. Although most age progressive, becauselow-income coun- - M) - even without correcting for the people can accept this policy in principle, triesaretypicallynetexpartersofmineral cts of high investment costs - most many are concerned with the magnitude commodities, whereas high-income coun- jects (including import-substitution and incidence of its associated costs and tries are net importers. Jects) would earn from current inter- the disruptions that would be created This paper- a product ofthe Office of lonal prices a positive profitmargin on during a transition period. Of particular the Vice President, DevelopmentEconom- r marginal as well as full production concern is the burden that mightbe placed ics - is one in a series of background -s. The proportion of projects with a on the economies ofdeveloping countries. papers prepared for the World Develop- 98 Policy Research WorkIng Paper Series ment Report 1992. The Report, on devel- countries and their trade relations with determinants in Africa. Ajayi addresses opment and the environment, discusses world partners, the author argues that too this problem and, using several concepts, the possible effects of the expected dra- much was expected from regional integra- provides -hands" or a 'range" for capital matic growth in the world's population, tion -especially the integration ofgoods flight in Nigeria. Asignificant proportion industrial output, use of energy, and de- markets. of capital flight can be estimated from mand for food. Copies of this and other Benefits that theoretically could have recorded data in the balance of payments World Development Report background been derived from regional integration and debt statistics -butthese estimates papers are available free from the World went unattainedfor complex reasons, fore- are only as good as the data are reliable. Bank, 18181 HStreet NW, Washington, DC most among which is the disparity in the Significant amounts of capital flight, 20433. Please contact the World Develop- partnerse economic development and the relative to external debt, took place be- ment Reportoffice, room T7-101, extension ensuinguneven distribution ofgainsfrom tween 1970 and 1989. Trade-faking was 31393 (26 pages). regional integration. This disparity pre- an important vehicle: exports were* vented any meaningful step toward inte- underinvoiced to the tune ofaboutUS$8.1 grating Sub-Saharan African markets. billion and imports were overinvoiced 992. Regional Integration Poroutan argues that despite arenewed about US$6.0 billion. In Sub-Saharan Africa: interest in regionalism in the world, it Econometricanalysis showsthe culprit Experience and Prospects remains unlikelythatregional integration tobe domestic macroeconomic policy-in as pursued in Sub-Saharan Africa so far the form of inf lation, exchange rate mis- Faezeh Fomutan will succeed any more in the future. Re- alignment, fiscal deficit, and the lack of (October 1992) gional integration in Sub-Saharan Africa opportunities for profitable domestic in- can bear gradual fruit only if costly pro- vestments -combined with the relative The emphasis of regional integration in tectionist and distortionary policies are attractiveness of foreign investments Sub-SaharanAfrica should shiftfrow the abandoned for more market-oriented, Eliminatingdistortionsintheeconomy integration of goods markets to the re- transparent, balanced economic policies. could minimize substantially externally gionalcoordi nationofmacroeco.omicand The disparity among Sub-Saharan Af- held foreign claims and minimize capital microeconomic policies, the harmonization rican countries that has hindered the lib- flight Among things thatneed to be done: of administmte rules and regulations, eralization ofgoods marketsis unlikely to * Ensure that the nation's currency is and the joint provision of public goods. disappear in the short run, Foroutan ar- not overvalued. Such steps are likely to make Sub-Saharan gues, so the emphasis in Sub-Saharan * Establish an integrated, unified tar- African markets morvattractiveto domes- Africa should shiftfromtheintegration of iff structure to reduce the rewards for tic and foreign investors and to improve goodsmarketsto the coordination ofmac- trade-fAking. economicgrowth. roeconomic and microecononic policies, * Establish fiscal discipline, to main- theharm,! izationofadrministrativerules tain macroeconomic stability and reduce After independence, every Sub-Saharan andregulations, andthejointprovision of inflation. African country, without exception,joined public goods. Such steps are likely to make * Ensure a positive real rate of inter- one ormoreregional integration schemes. Sub-Saharan African markets more at- est-high enough to attra-tfundsbut not Regional integration would have enabled tractive to domestic and foreign investors so high as to stifle investmentinitiatives. the subcontinent to attain economic and to bring about economic growth. * Adoptarealistic exchange rate deter- growth and prosperity by allowing indi- This paper - a product of the Trade mined by market forces. vi dual countries to overcome the barriers Policy Division, Country Economics De- * Foster attitudinal changes that con- ofdesperately small size and poorhuman partment-is part of alargereffort in the tribute positively to honest government. and physical capital endowment - thus department to understand new Tegional- This paper - a product of the Office of breaking away from the colonial pattern ismin trade policy.Copiesofthepaperare theDirectorWesternAfricaDepartment. of trade, often characterized by a heavy available free from theWorldBank, 1818 - is part ofa larger effort in the depart- reliance on an undiversified and vulner- H Street NW, Washington, DC 20433. ment to examine the issues of debt, able structure of exports. Please contact Dawn Ballantyne, room macrostability, and resource flows in the Despitemanyattempts,andtheinvest- N10-023, extension 37947 (42 pages). region. Copies of the paper are available ment of many scarce resources, to create free from the World Bank, 1818 H Street multinational institutions, Sub-Saharan NW, Washington, DC 20433. Please con- African markets remain surprisingly iso- 993. An Economic Analysis tact Nga Lopez, room J6-288, extension lated from each other. Production and of Capftal Flight from Nigeria 34555 (78 pages). exports in most of these countries show few basic structural changes. Their S. Ibi Ajayi growth record - especially in the past (October 1992) decade - has been abysmal. Foroutan's objective is to analyze the Eliminating distortions in Nigeria's reasons for the huge gap between expec- economy could minimize externally held tations and reality and to evaluate re- foreign claims and capital flight. gional integration's prospects in Sub-Sa- haran Africa. Considering the economic Unlike LatinAmerica, there havebeen no characteristics of Sub-Saharan African detailed estimates of capital flight or its 1cy Research Working Paper Series 99 -. Textiles and Apparel ments is open to question. The competi- arrangements. Copies of the paper are NAFTA: A Case of tiveness of Mexico's apparel industry in available free from the WorldBank, 1818 tstralned lberalization non-NAFTAmarketswilldependtosome H Street NW, Washington, DC 20433. extent on the international competitive- Please contact Rose Vo, room 88-042, ex- Trey Bannister and Patrick Low ness of the U.S. textile industry. tension 37664 (48 pages). )ber 1992) This paper-a product of the Interna- tional Trade Division, International Eco- -paper examines the changes Mexico's nomics Department - is part of a larger 996. StrategIc Management 'le and clothing industry is likely to effort- in the department to analyze the of Population Programs under NAFTA effects of trends toward growing region- alism in international trade. Copies ofthe Michael H. Bernhart nister and Low examine the changes paper are available free from the World (October 1992) . Mexico's textile and clothing indus- Bank, 1818 H Street NW, Washington, DC slikelytoface underthe NorthAmeri- 20433. Please contact Aban Darnwala, Although descriptions of strategic plan- Free Trade Agreement (NAYTA). room S7-042, extension 33713 (43 pages). ning and management may be reduced to y compare pre-NAFTA and probable a hzandful ofprescriptions, the practice is >NAFTA scenarios for Mexican ex- often messy and frustrating - especially s.The U.S. clothingandtextileindus- 995. Recent Experience with to managers accustomed to more precise is likely to remain among the most Commercial Bank Debt Reduction disciplinessuchas medicineorcualuation. ected of U.S. industries, so this is es- Butthegainsare widely acae making -ally a comparison oftwo protection- Stjn Clnessens, Ishac Diwan, itincumbentonconscientious managers to -ituations, not of protection and free and Eduardo Feraindez-Arias embark on this often difficultandfractioAs e. - (October 1992) process Bannister and Low trace how current -a and tariff restrictions on U.S. im- An analysis ofthe five recent debt-reduc- Formal strategic planning and manage- sfromMexicowillbereplacedbyrules tion agreements shows that the menu ap- ment appear to contribute to organiza- igin designed to protect U.S. indus- proackachieveddebtreductionatsubstan- tionaleffectiveness.Bernhartsurveysthe Mexican textile and clothing exports dially lower costs than a comparable mar- literature on strategic management in enjoy greater access to the US. mar- ket-basedoperatica. But indirect benefits, privatelfor-profit orgnizations and ap- if most inputs originate in North or efficiency gains associated with debt plies lessons from thatlterature to popu- ica. reduction,are necessary to maketheopera- lation programs. Under the triple transformation re- lion benefit the debtor Few would argue that popuabon pro- ement, for example, a cotton shirt- grams would not benefit from strategic Id have to be made in the NAFTAre- Claessens, Diwan, and Fernandez-Arias planning and management, but it would from yarn and fabric of NAFTA ori- review the case for market-based debt beinadvisabletoinitiate theprocesswhen Mexican compliance with this rule reduction and concerted debt reduction. theorganizationisfacedwithashort-term Id not prove onerous. Proximity and They explain the new menu-based ap- crisis; during or immediately before a ,-standing production-sharing ar- proach to debt reduction and discuss why change in leadership; or whenimplemen- -ements have made Mexico heavily it may be preferred to market-based and tationisunlikely. Public sectorprograms -ndent on U.S. inputs. Roughly 53 concerted debt reduction. seem tobave the latitude to manage stra- eant of Mexican textile and apparel Inareviewofthefiverecentdebt-reduc- tegically. orts to the United States fall under tion agreements, they find that the menu Models available for adoption include luction-sharing programs, with an approach indeed achieved debt reduction life-cyclemodels,strategicissuesmanage- age 69 percent ofvalue added ofU.S. at substantially lower costs than a com- ment, stakeholder analysis, and portfolio 'In. Only 15 percent of input require- parable market-based operation. By one analysis. The model selected may be a ts for the other 47 percent of trade is measure, the five countries may have function of (1) who will use it (life-cyclel >rted into Mexico - only 8 percent saved more than $8 billion. evolutionarymodelsmaybewell-suitedto i non-NAFTA countries. Even a menu-based approach to debt theplanningneedsofdonors);(2)thepres- what about future trade? Bannister reduction,however, is unlikely to directly ence of challenges to the survival of the * Low estimate that these Mexican benefit the debtor financially. They find program or to key components ofit(stake- rts to the United States will increase that the debtors suffered financial losses holder analysis would find ready applica- modestly-partlybecauseofthelow equal to a few percent of their GDPs. In- tion in those circumstances); and (3) the Tofprotection already associated with direct benefits, or efficiency gains associ- relative success and stability of the pro- luction-sharing arrangements. Rules ated with debt reduction, are necessary to gram (portfolio analysis may help a pro- igin will not restrict trade expansion. make the operation benefit the debtor. gram balance its activities in a stable ne additional costs to the Mexican can- This paper -a product of the Debtand environment whereas strategic issues arofadoptingrulesoforigin under the International Finance Division, Interna- management is useful in responding to a TA are small. tional Economics Department - is part dynamic environment). )w much investment from outside of a larger effort in the department to It is important to marshall top-level nAmeica will be attracted to Mexico understand thecostsandbenefitstocoun- support, designate who will do the leg 'r stringent input-sourcing require- tries of debt and debt service reduction work, analyze the organization's history 100 Policy Research Working Paper Series and current situation, assess internal panel ofIndonesian manufacturing estab- veloped and devdaping market economies strengths and weaknesses and external lishments for 1981-88. Their sample was Not, however, in the transitional socialist threats and epportunities, and summarize not representative, but their evidence countries, wherestructuralchangeis likely critical issues facing the program. Then shows that economic reform had a favor- to bring far greater changes inrailfreight a strategy may be developed. able effect on the performance of smaller activity than in road transport. Among the available approaches are: (1) firms. scenario developments (useful for a pro- Liberalization helped reallocate domes- Decisions about investments in the long- gram that senses a need to change its tic credit toward smaller firms to a level lived assets of transport infrastructure approach to clients); (2) critical issues roughly proportionate to their contribu- require some assumptions about prospec- analysis (useful for refining successful tion to value-added. Moreover, otherfirms tive long-term demand from services us- programs); and (3) a goal approach (use- were successful in replacing expensive ing that infrastructure. To improve the ful for programs with diffuse, ill-defined domestic credit with cheaper foreign basis for such predictions, Bennathan,* objectives). There are no short-cuts, it is credit, releasing some domestic credit to Fraser, and Thompsonestimatedthelong- argued.Astrategicplantypicallycontains establishments that lacked access to it. run determinants of domestic freight (1) a mission statement that describes the Nominal and real interest rates rose to transport, using single-equation regres-. social need tobe addressed, whatis unique very high levels, but real returns to capi- sions on a cross-section of data from "de- about the organization, what its values tal assets remain high andhave increased veloped! (high-income), "developinglow- are, and who the principal stakeholders substantially for small and medium-size income), and former socialist economies. are; (2) a statement of the population to exporting establishments.Forall groups. Theyalso sought answers to two related be served and goals for service delivery higherrates offinancialleverage gave rise questions. First, since statistics on na- and qualitystandards; (3) a service deliv- to extremely high returns on owned eq- tional ton-kilometers of freight transport ery strategy; (4) afinancial strategy; (5) a uity. Medium-size-firms -both conglom- are much scarcer for developing than for marketing strategy; and (6) support strat- erate and nonconglomerate - have had developed countries, whatis the scope for egies- the highest rates of return to capital, fi- generalizing from data on high-income Mast organizations will find that there nancial leverage, and returns to equity. countries? Second, within what limits is no ideal structure - all require Financial reform bas had a significant mayone apply results obtained from data tradeoffs-and that attention shouldfo- impactonfirmsrealandfinancial choices. on market economies to the prospective cas on eliminating patently dysunictional Shifting from administrative allocations evolution of freight transport demand in aspects of the structure. of credit to market-based allocations has the socialist transitional economies? This paper - a product of the Popula- increasedborrowingcosts,particularlyfor Theyreport the followingfindings, sub- tion Policy and Advisory Service, Popula- smaller firms, but it has also widened ject to caveats related to the simple meth- tion and Human Resources Department access to finance. The net effect appears odology used* -was preparedasbackgroundfor a'best to have been a decrease in the degree of * For the sample of developed coun- practice" paper on effective family plan- market segmentation andarelaxation of tries, and the merged samples of devel- ning programs. Copies of this paper are financial constraints to the benefit of in- oped plus developing countries, total ton- available free from the World Bank, 1818 vestment activity. kilometers offreight transport(excluding H Street NW, Washington, DC 20433. Thispaper-a product ofthe Financial transit) are adequately explained by two Please contact Otilia Nadora, room S11- Policy and Systems Division, Country variables: acountry's area and total GDP. 219, extension 31091(26 pages). Economics Department - was prepared Ton-lcilometers by road are chiefly ex- for the World Bank research project, In- plainedbyGDP;ton-klometersbyral are vestment Decisions, Capital Market Im- explained by country area. 997. How Financial Liberalization perfections, and the Effects of Financial * Road freightin developed and devel- In Indonesia Affected Firms' Liberalizatio.. -ie Ecuadorian and Indo- opingmarketeconomies shows very simiL Capital Structure and Investment nesian Cases (RPO 676-72).Copies ofthis larresponse (in additional ton-kilometers) Decisions paper are available free from the World to variations in GDP. But the elasticity Bank, 18181H StreetNW,Washington,DC of demand for road ton-kilometers with John R. Harris, FabiD Schiantmrelli, 20433. Please contact Wilai Pitaya- regard to GDP should be about or above and Miranda G. Siregar tonakarn, room N9-003, extension 37666 1.25 for developing countries, compared (October 1992) t42 pages). with close to unity for the high-income countries. Financial reform has had a significant * Demand for rail freight transport impactonfirms'reelandfinancialchoices 998. What Determines Demand appears to be determined in closely simi- - helping to reallocate credit toward for Freight Transport? lar waysinbothgroupsofcountries. Elas- smaller firms and relaxing the financial ticity with GDP appears to be close to constraints they face sra Bennathan, Julie Fraser, unity. and Louis S. Thompson * Judging from the narrow basis of How did financial liberalization affect (October 1992) evidence on socialist economies (China Indonesian firms? Harris, Schiantarelli, and the former USSR were excluded for and Siregar analyzed real and financial Long-run demand for freight transport is technical reasons), transport demandwat indicators for the establishments in their determined in closely similar ways in de- determined very differently in their sys --icy Research Working Paper Series 101 -1 than in the market economies. The tries. The recent episodes of hyperinfla- 1000. World Bank Adjustment .sutsare almostentirelyexplainedby tion in these countries were not isolated Lending and Economic differences in the role of, and demand - instead, they were the culmination of Performance In Sub-Sahamn rail transportin the differenteconomic an unstable process, in which inflation Africa In the 1980s: A Comparison - s,. crept up gradually for many yes before with Other Low-Income Countries The road sector offreight transport, on accelerating explosively. These episodes - otherhand, conforms closely to norms were important because they helped to IbrahimA.Elbadawi,DhaneuhwarGhura, and the market economies; the marginal dispel the myth thatitis possible to main- GilbertTwjaren -_.ponse (additional ton-kilometer for tain a stable high rate of inflation on a (October 1992) 'tional GDP) and elasticity with re- long-termbasiswithoutharmfuleffectson -t to GDP, appear - on the available growth. Adjustment programs cannot uceed in 3ence -to be close to what is found for The causes of the new hyperinflations Sub-Saharan African countries unless loped market economies. were not as clear as in the classical epi- governments play a greater, albeit rede- * In short, structural change in the sodes,astheyoriginatedfromacombina- 17ned, role in adjustment: where there is alist economies islikelyto bring about tion of fiscal and nonfiscal factors. The more public investment in infrastructure, greater changes in rail freight activ- chronic fiscal imbalances eventually be- human capital, and agricultural technol- -:han inroad transport. came an insurmountable obstacle, and ogyin ordertogenerate a supplyresponse; This paper-a product oftheTransport inflation moved away from the fragile high policy reform is made credible to the pri- sion, Infrastructure and Urban Devel- inflation equilibrium into hyperinflation. vate sector; program implementation in- ent Department -is part ofa larger The interesting feature of the new epi- proves; and there is better "governance' rt in the department to develop quan- sodes (especially in Argentina and Brazil) and more political stability. ive aids for the evaluation of perfor- is that they were not triggered by a large ice ofinf*astructure-related services, increase in the budget deficit; instead, Elbadawi, Ghura, and Uwqjareninvesti- lesign ofpolicy, and the establishment because the initial equilibrium was so gated the factors thatinfluer: - the par- -iorities. Copies ofthe paperare avail- fragile, inflation was in the end destabi- ticipation of Sub-Saharan Aiiican coun- free from the World Bank, 1818 H lized by financial shocks. tries and all low-income countries in et NW, Washington, DC 20433. One important lesson of the new World Bank adjustment lending. They Lse contact TWUTD, room S10-027, hyperinflations is that the process of re- estimated how the Bank's adjustment _nsion 31005 (29 pages). storingprice stabilityhasbeenlongerand programs affectedeconomicperformance more costlythanin the classicalcases.The in both regions. main reason for this has been thatit was Theyfound that the marginal contribu- - Stopping Three Big Inflations not clearin the minds of the public where tion of Bank-supported adjustment pro- jentina, Brazil, and Peru) inflation wouldsettleoncehyperinflation grams to export performance has been was stopped. In the classichyperinflations positive and significant in Sub-Saharan zel A. Kiguel and Nissan Liviatan ofEurope in the 1920s, expectations were Africa, given the potentially important ,her 1992) thatinflation wouldreturn to the lowlev- linksbetweenexportgrowthandeconomic els that had prevailed before. In the new growth odes of hyperinflation in Argentina, episodes, thereis no compellingreason for But adjustment programshave not sig- efl, and Peru in the 1980s were impor- agents to expect that the economy would nificantly affected economic growth in because theyhelpedto dispelthe myth go back to low inflation. Experience Sub-Saharan Africa and have had a del- cit ispossible to maintaina stable high showed that inflationary expectations eterious effect on investment there. This ofinflationonalong-term basis with- initially settled near the level where in- strengthens the argument of those who karmfid effects on growth. flation was prior to hyperinflation. As a call for more explicit consideration of the result, the disinflation process must con- initial conditions of the Sub-Saharan Af- h existingliteraturefailstarecognize tinue once hyperinflation is stopped. rican economies in the design, emphasis, thigh inflation (annual rates in three This paper - a product of the Transi- and schedule of their adjustment pro- ts) is a distinctly different phenom- tion and Macro-Adjustment Division, grams. i from moderate inflation and hyper- Country Economics Department-is part For one thing, a redefined but more Ltion. The failure to understand the of a larger effort in the department to important role for governments is in or- ific features of the inflation process in examine stabilization policies. The re- der for reforming African economies. Fis- chronic high inflation economies has search wasfundedbythe Banl'sResearch cal and monetary retrenchment are still iy times led to a wrong diagnosis ofthe Support Budget under research project - indispensable, but it is critical that there erlying reasons for changes in infla- 'Stopping High Inflation" (RPO 674-24). be more public investment in infrastruc- in those economies, and the policies Copies ofthe paperare availablefree from ture, human capital, and agricultural led to stabilize prices in those coun- the World Bank, 1818 H Street NW, technology - to generate a supply re- ;. This lack of understanding extends Washington, DC 20433. Please contact sponse. ie interpretations ofthe recent hyper- Raquel Luz, room N11-059, extension Mareover,effirtsnustbemadetmank Ltion in some economies. 39059 (52 pages). policyreformsmore credible tothe private Argentina, Brazil, and Peru in the sector andtoimprove program implemen- )s were certainly high-inflation coun- tation. 102 PolIcy Research Working Paper Serles Also, "goveTnance" and political stabil- ity - politically sensitive issues - criti- cally affect the adoption, implementation, sustainability, and credibility of adjust- ment programs. This paper - a product of the Transi- tion and Macro-Adjustment Division, Country Economics Department, and the Economics and Finance Division, Africa Technical Department-is part ofajoint research effortby CECTMandAFPTEF on "The Effectiveness ofA4justmentLending in Sub-Saharan Africa" Copies of the paper are available free from the World Bank, 1818H StreetNW,Washington,DC 20433. Please contact Anna Maranon, room N11-025, extension 39074 (96 pages). Volume XI Numbers 1001 -1100 Policy Research Working Paper Series 105 1001. World Bank Adjustment in Sub-Saharan Africa.' Copies of the the possible effects of the expected dra- Lending and Economic paper are available free from the World matic growth in the world's population, Performance In Sub-Saharan Bank, 1818HStreetNW, Washington, DC industrial output, use of energy, and de- Africa in the 1980s: A Comparison 20433. Please contact Anna Maranon, mand for food. Copies of this and other of Early Adjusters, Late Adjusters, room N11-025, extension 39074 (60 World Deuelopme-t Report background and Nonadjusters pages). papers are available free from the World Bank, 1818 H StreetNW Washington, DC Ibrahim A. Elbadawi 20433. Please contact the WorldDevelop- (October 1992) 1002. World Fossil Fuel Subsidies mentReportOffice,room77-101, extension and Global Carbon Emissions 31393(31 pages). Structural adjustment programs in Sub- Saharan African have not signifcantly Bjorn Larsen and Anwar Shah improved growth in the second halfofthe (October 1992) 1003. Rent-Sharing in the Multi- 1980s, and they have hurt investment. Fibre Arrangement: Evidence from They have significantly improved export Removing world energ subsidies - esti- U.S.-Hong Kong Trade in Apparel performance but the percei ved increases in mated at US$230 billion - could reduce export cormpetitiveness and intheefficiency global carbon emissions by 9 percent KalaKrishna and Ling Hui Tan ofinvestment (supposed to begenerated by (October 1992) reform programs) have not been sufficient Larsen and Shah present evidence on the tocounterbalancethedeclineininvestment level of fossil fuel subsidies and theirim- Why would importing countries appar- and to restore economic growth. plications for carbon dioxide emissions. ently willingly choose farms ofprotection They conclude that substantial fossil fuel that aregenerally thought to result in large Using a methodology that allows for subsidies prevail in a handful of large, transfers to foreigners? Perhaps because endogenizing decisions to participate in carbon-emittingcountries.Removingsuch their share ofrents -and the consequent World Bank adjustment lending pro- subsidies could substantially reduce na- harm to developing countries from the grans, and for testing the validity of as- tional carbon emissionsin somecountries. MA-may begreater than has been as- sumptions about program participation, Global carbon emissions couldbe reduced sarned. Elbadawi studies the effectiveness of by9 percent, assuming no changein world these programs in Sub-Saharan Africa. fossil fuel prices, and by 5 percent when The Multi-Fibre Arrangement (MPA) re- He shows that atustmentprograms in accountingforestimatedchangesinworld stricts the access of developing country Sub-Saharan Africa had no statistically prices, exporters to developed country markets. significant effect on growth in the second Larsen andShah estimate world energy It is usually assumed that the exporting halfof the 1980s, compared with the first subsidies to be more than US$230 billion. countries receive all ofthe economicrents half but they have had a significant and The welfare costs of these subsidies are that resultfromn these importrestrictions deleterious effect on investment more than US$20 billion, notincluding the - making it unclear whether the devel- Adjustment lending has significantly cost of greenhouse gas and local pollution oping countries gain or lose as a result of improved export performance in Sub-Sa- from fossil fuel consumption. Net fossil the MFA. haran Africa, at least compared with fuel importers in Japan, the United Recent theoretical workon trade policy nonadjusting African countries. States, and Western Europe are estimated under imperfect competition casts doubt The perceived increases in export com- to experience welfare gains of about on whether exporting countriesreceiveall petiti venessandin theefficiency ofinvest- US$14 billion, while welfare effects would of the quota rents arising from "voluntary ment(supposed to be generated by reform be negative in exporting countries in the exportrestraints such as thoseappliedby programs) has not been suff3cientto coun- event ofa dampening effect on world fos- the MFA. Drawing on this theoretical lit- terbalance the ensuing decline in invest- sil fuel prices associatedwith the removal erature, Erzan, Krishna, and Tan (1991) ment and hence to restore economic of subsidies. tested and rejected the hypothesis that growth in Sub-Saharan Africa. Eliminating these subsidies would MFA quota rents on exports from Hong - These findings must be qualified: the translate into an average 21 percent re- Kong to the United States accrued in full methodology for classifying countries as duction in carbon emissions in the subsi- to the Hong Kong exporters. The results adjusting or nonaAjusting does not allow dizing countries, or 20 percent of OECD in thispaperbuildon thathypothesis-test- for differentdegreesofimplementation- emissions. To achieve an equivalent re- inganalysisandessessitsimplicationsfor so, strictly speaking, the findings reflect duction in tons ofemissions in the OECD the returns to Hong Kong producers. an assessment of the effectiveness of a countries would require imposing a car- Their results suggest that rent sharing proxy (a4justmentlending)for the adjust- bon tax of$60-$70 per ton ofcarbon, even is an extremely important feature of the ment programs. when accountingforestimated changes in market for apparel exports from Hong This paper - a product of the Transi- world fossil fuel prices. Kong. U.S. importers were estimated to tion and Macro-Adjustment Division, This paper-a product of the Office of receive rents that were about 62 percent Country Economics Department, and the the Vice President, DevelopmentEconom- of the landed price of the imports. Economics and Finance Division, Africa ics - is one in a series of background Krishna and Tan conclude that the to- Technical Department-is part of ajoint papers prepared for the World Develop- tal potential rents arising from the MFA research effortby CECTM andAFTEF on ment Report 1992. The Report, on devel- were split unevenly between the United ¶TheEffectivenessofAdjustnentLending opment and the environment, discusses States and Hong Kong - with the U.S. 106 Policy Research Working Paper Series share ranging from 47 percent for skirts In Rwanda, rural community develop- in 21recently approved Bankprojects;and to 94 percent for playsuits. ment volunteers addedfamilyplanningto describes a simplified method that was [f the results of this study are corroho- their educational activities, tested in practice and found to improve rated for other developing countries, the In the Sudan, rural catchment areas substantially the quality of economic implications of the MFA for developing and work assignments of rural primary analysis in the sector. countries are considerably worse than has health care personnel were changed to This new method relies on standardized typically been assumed. introduce familyplanningand strengthen and rigorous use of information that is This paper - a product of the Interna- other child survival services. routinelyavailableduringthepreparation tional Trade Division, International Eco- Positive results were evident from of water supply projects. nomics Department - is part of a larger quantitative measures ofservice delivery This paper -a productofthe Infrastruc- effortin the department to analyze the ef- and, in Rwanda and the Sudan, from an tUre, Energy, and Environment Division, fects of the Multi-Fibre Arrangement on increase in contraceptive prevalence in Europe and Central AsiaCountry Depart- developing countries. The study was the project areas. Other criteria for sac- ment III -is part of a larger effort in the funded by the Banks Research Support cess included improved management Bank to improve operational practice and Budget under research project ¶Lcense skills, motivation for replicating success- raise the qualityofprojectsin thewaterand Prices and Rent Sharing in the Multi-Fl- ful programmatic elements, and potential sanitation sector. Copies of the paper are bre Arrangement (RPO 676-69). Copies of for continuity. available free from the World Bank, 1818 thispaperareavailablefreefromtheWorld Questions remain as to why attitudes H Street NW, Washington, DC 20433. Bank, 1818HStreetNW, Washington, DC changed, when contraceptive use for fam- Please contactMariDholmi,room S12-005, 20433. Please contact Maria Teresa ilylimitation willbe practiced widely, and extension 33970 (37 pages). Sanchez, room S7-025, extension 33731(32 how applicable the experiences reported pages). here are to otherlocations- These prqjects donotprovidetheanswers.Theydo,none- 1006. Preparing Multlyear Railway theless,supportanoptimisticviewforthe Investment Plans: A Market- 1004. Family Planning Programs future offamily planning in Sub-Saharan Oriented Approach in Sub-Saharan Africa: Case Africa Studies from Ghana, Rwanda, This paper - a product of the Popula- Jorge M. Rebelo and the Sudan tion Policy andAdvisory Service, Popula- (October 1992) tion and Human Resources Department Regina McNamara, Therese McGinn, Donald - was prepared for a review of effective Practicalguidelinesfordevelopinga mar- Lauro. and John Ross family planning programs. Copies of this ket-orientedmaitiyearrailwayinuestment (October 1992) paper are available free from the World plan. Bank, 1818H StreetNW,Washington,DC Perhaps family planning has a better fu- 20433.Please contact OtiliaNadora, room Withthe emergence ofapowerfultruciing tare in Sub-Saharan Africa than experts S11-219, extension 31091(23 pages). industryandthe deregulation oftransport, have assumed Case studies from three mostoftheance-powerfuldevelopingcoun- countries suggest reason for increased op- try railways are facing a struggle for sur- timism. 1005. An Approach to the vival-.Traditionaltrafficissbhiftingtotruck- Economic Analysis of Water ingandpipelines govemmentsareincreas- In the 1980s, signs that Sub-Saharan Af- Supply Projects ingly reluctant to write blank checks to ricans would welcome family planning in cover deficits, and the falling morale of numbers sufficientto make adifferencein Lasl Love! railroaders is harming productivity and fertility rates were scattered and weak. (October 1992) reliability. Pessimists cited formidable cultural and Railwaymanagementsknowtheymust socioeconomic barriers; optimists pro- A simplified method aimed at improving introduceinstitutional anderganizatial vided resources for pilot projects, coupled the quality ofeconomic analysis on water changes that make railways market-ri- with research to document results and to supply projects. ented- Governments must support legis- guide expansion and replication. lation that creates an enabling environ- Among projects with measurable Development economistsareincreasingly ment that supports the railway's au- achievements in acceptance of family concerned about the correct approach to tonomy and allows it to compete. planning in settings that were less than economic analysis of projects. By looking Young planners and not-so-young rail- promising were the Ghana Registered for a compromise between theory (which roaders strugglin; with multiyear invest- Midwives Project, the Ruhengeri Project identifies ideals)andpractice(which deals ment plans tend to concentrate only on in Rwanda, and the Sudan Community- within the bounds of time and resource investingin infrastructure andacquiring Based Family Health Project. All were constraints), Lovei focuses on potential equipment ("bricks and mortar'). They associated with the Operations Research guidelines for economic appraisals of wa- tend to ignore or underestimate essential Program ofColumbia University's Center ter supply projects. institutional reform, without which the for Population and Family Health. He summarizes theory and the current revival of the railways cannot be sus- In Gh.na, midwivesin private practice World Bank guidelines on the economic tained. were trained and given other support to analysis ofwater supply projects; reviews Rebelo's practical and detailedpaperwill initiate family planning services. the method of economic analysis applied help railway planners prepare profit-orb Policy Research WorkIng Paper Series ented multiyear investment plans. He de- Bulatao and Stephens report estimates was preparedasbackgroundforthe Health scribes the steps ofa plan and, within each and projections of deaths by cause far Sector Priorities Review. Copies of this step, lists basic issues and questions rel- major world regions, based on data from paper are available free from the World evant to that step. He highlights the im- country reports to the World Health Or- Bank, 1818 HStreetNW,Washington,DC portance of marketing and sales in the ganization and regression models. They 20438. Please contactOtiliaNadora, room modem railway, and shows how to screen report mortality rates for seven major S11-219, extension 31091 (83 pages). proposed projects and package them into causes: infectious and parasitic diseases, meaningful corridors, where the level of neoplasms, circulatory system diseases, service can benefit substantially from the complications of pregnancy, certain 1008. Do the Poor Insure? proposed investment. perinatalconditions,irduryandpolioning, A Synthesis of the Literature Long-term objectivesfor modernizinga and othe- causes. Some more specific on Risk and Consumption railway, according to Rebelo, would in- causes are reported on. They give esti- In Developing Countries clude achieving complete autonomy from mates for six age groups by sex for four the government, supporting ongoing eco- years(1970, 1985,2000, and 2015) and six Harold Alderman and Christina H. Paxson pomic rehabilitation programs,maximiz- country groups: industrial market econo- (October 1992) ing profits, signing contract plans for gov- mies, industrial nonmarket economies, ernment-imposed services, and develop- Latin America and the Caribbean, Sub- Formal tests of perfet consumption- ing railway real estate. Saharan Africa, the Middle East and smoothing do not provide anoincing evi- Medium-term objectives would include North Africa, and Asia and the Pacific. dence that such patterns are prevalent in increasing the railway's commercial ori- Among their findings: village economies. Neuertheless, most in- entation, continuing the rehabilitation of * The population over 45 in developing dividualsappearto haveappreciableabil- plant and equipment, searching for and countriesis projected tormore than double ity to mitigate income fluctuations. developing new markets, lobbying for between 1985 and 2015, rising from 17 to approval of an enabling plan, and achiev- 24 percent of the population. Causes of How well do rural households in develop- ing an acceptable tonnagelstaffratio. death, which are closely related to age at ing countries mitigate the income risk of Short-term objectives wouldinclude sup- death, must change accordingly. the rural sector? There are several sen- portingan ongoingeconomicrehabilitation * Infant mortalityin developing coun- siblereasonswhyhouseholdscannotfully program; maximizing profits; removing tries is projected to fall from 78 per thou- insure consumption against income flue- bottlenecks when an investment is not sand in 1985 to 43 per thousand in 2015 tuations. The well-known problems of necessary to do so; starting the rehabilita- and life expectancy atbirthin developing moral hazard, information asymmetries, tion of plant and equipment; preparing a countries is projected torise by fiveyears. and deficient ability to enforce contracts plan for developing an enabling environ- * The leading causes of death for the may result in no or incomplete insurance ment; strengtheningmarketingand sales, world as a whole for both 1970 and 1985 markets-andcertainly thereisadearth accounting, andrailway costing;andstart- were infectious andparasitiediseases and of formal insurance markets in develop- inga manpower development andretrain- circulatory system diseases - with the ing countries. ing program. first more important in developing coun- Yet the literature indicates that these This paper-a productofthe Infrastrue- tries, and the second more important in households do mitigate risk. Alderman ture Division, Latin America and the Car- developed countries. Certain perinatal and Paxson survey the literature on strat- h-bean,CountryDepartmentl-ispartof conditions were also more important for egies for insuring consumption against = a irger effort in theregion to provide prac- developing countries, but accounted for fluctuatingincome and examine evidence i1cal guidelines which promote the corn- only a fourth or a fifth as many deaths in on how effective these strategies are. ..- rcial orientation of government-owned 1985. Neoplasms were more importantin Strategiesfor risk managementinclude ..lway enterprises to make them finan- developed than in developing countries. crop and field diversification; a portfolio llyself-sufficientCopiesofthepaperare * Deaths from infectious diseases are ofoccupations;andthestrategicmigration zilable free from the World Bank, 1818 expected to decline as a percentage of of family members. Strategies for coping 14 Street NW, Washington, DC 20433. deaths; proportionate deaths from dis- with risk include those that smooth con- asecontactAllison Turner,rooml7-151, eases of the circulatory system are ex- sumption over time (through saving be- ension 30933 (74 pages). pected to rise. havior, including borrowing and lending * The greatest number of deaths will in formal and informal markets, accumu- continue to be in Asia, where almost half lating and selling assets, and storing i007. Global Estimates and of all deaths in the world take place. This goods for future consumption) and those Djections of Mortality by Cause, proportion is not projected to change. that smooth consumption across house- i970-2015 * Better data on causes of death are holds (through risk sharing). essential.The WorldHealth Organization Alderman and Paxson focus on, and 1a1o A. Bulatso and Patience W. Stephens is working with countries to strengthen discuss the relative effectiveness, of dif- -Lober 1992) their cause-of-death information systems ferent risk-sharing arrangements. as an essential support for health monitor- Risk sharing arrangements may be -bat estimates and projections ofdeath, ing. through formal institutions (such as in- ause, for 1970, 1985, 2000, and2015- This paper - a product of the Popula- suranceandfuturesmarkets,andforward dts, methods, tables, and expert assess- tion Policy and Advisory Service, Popula- contracts for harvests) and informal -Zs for selected diseases and conditions tion and HumanResources Department- mechanisms (including state-contingent 108 Policy Research Working Paper Series transfers and remittances between various types of labor tasks were used to ian banking. They assess the performance friends and neighbors).Anumberofinsti- proxy differences in energy expenditure. ofHungarian banks and note the tremen- tutions may offer "disguised7 insurance. Parity has alsobeenhypothesized tobe dous progress that has been made in ex- For example, share tenancy, credit con- an important determinant of female nu- panding the number ofcompetingbanks, tracts with state-contingent repayments, tritional health in high fertility countries strengthening the legal and regulatory and long-term labor contracts may each - withrapidreproductive cycling contrib- framework, increasing the banks' mana- contain an insurance component, al- uting to acumulative nutritional decline. gerial autonomy, and promoting develop- though none are explicitly insurance con- But the 'maternal depletion syndrome" meat of the private sector. tracts.AldermanandPaxson examine the remains controversial. Much of the evi- But Vittes and Neal also note that ef- literature on these strategies. dence to date has been impressionistic - fective competition is constrained by the The few pieces of evidence available or the results of studies based on small, continuingsegmentationofthemarket.In suggest that the effect of risk on produc- nonrandom cohorts. addition to the segmentation ofcorporate tion and investment decisions depends on Higgins and Alderman usedc. two-step andhouseholdbankinginheritedfromthe how well households can cope with income instrumental variables technique to get old regime, anew segmentation appears risk. Poorer households, in particular, consistent estimates of the structural tobave emerged, betweenlargeandsmall appear to forgo potential earnings to re- parameters. Energy expenditure, as em- banks, or between old and new banks. duce risk. As such, there is a convergence bodiedin individual time allocations over The entry of new banks - especially of efficiency and equity issues. the previous seven days; was found to be joint- venture banks -has aclearimpact This paper - a product of the Agricul- an important determinant of women's onmarketshares,butcmpetitionappears tural Policies Division, Agriculture and nutritional status. Time devoted to agri- tobemoreeffectiveinincreasingtherange Rural Development Department - was cultural tasks, in particular, had astrong ofservices than in loweringbank spreads. funded by the Bank's Research Support negative effect. The impact of foreign banks would be Budget under research project "Drought The results also appear to confirm the greater if they were allowed to open Insurance" (RPO 677-51). Copies of the existence of a maternal depletion syn- branchesoratleasttoestablishfullyowned paper are available free from the World drome. Perhapsmoreimportant, evidence subsidiaries. Bank, 1818 H StreetNW, Washington, DC was found ofa substantial downward bias During the period under review, there 20433. Please contact Cicely Spooner, room of the calorie-elasticity estimate when the was a collapse of long-term lending, re- N8-039, extension 32116 (44 pages). energyexpenditure proxies were excluded. flecting both conservative lending prac- This paper - a product of the Agricul- tices and a subdued demand for invest- tural Policies Division, Agricultural and ment finance. But the use of short-term 1009. Labor and women's RuralDevelopmentDepartrnent-ispart credits has picked up considerably since Nutrition: A Study of Energy of a larger effort in the department to 1988,inline withtheongoingrestructur- Expenditure, Fertility, and monitortheimpactofagriculturalpolicies ing of the Hungarian economy and the Nutritional Status in Ghana on rural poverty. Copies of the paper ar growth of services. available free from the World Bank, 1818 Reported nominal spreads and profit Paul A. Higgins and Harold Alderman H Street NW, Washington, DC 20433. ratios appear to be high by international (October 1992) Please contact Cicely Spooner, room N8- standards. For small banks, these reflect 039, extension 32116(41 pages). thehighlevelofinflationandthelowlevel Women's nutritional status is reduced of leverage. But for the large banks, the greatly by certain kinds ofenergy-expend- high nominal spreads maybe more appar- ing work (especially agriculturl tasks) 1010. Competition and Efficiency et than real because of the existence of and by "maternaldepletionsyndrome in in Hungarian Banking nonperformingloans. women with high fertility. Thereis considerable uncertaintyabout Dimitui Vittas and Craig Neal the size of nonperformingloans, following Economic approaches tohealth and nutri- (October 1992) the collapse of CMEA trade and its ad- tion have focused largely on measures of verse impact on corporate profitability. child nutrition and related variables (such Considerable pOgress has been made in Tackling the problem of nonperforming asbirthweight)asindicatorsofhousehold reformingtheHungarian banking system loans isimportantbothforenhancingthe production of nutritional outcomes. But andstrengthening its lgal andrgulatory efficiencyofbanks and forloweringnami- when dealing with adultnutrition, econo- framework. But Hungarian banking suf- nal spreads, the high level of which ap- mists have to address an issue that has fer from market segmentation and high pearstohinderthefinancingofnewfirms. generated tremendous controversy in the nominal spreads, caused by highinflation, This paper -aproductofthe Financial clinical nutrition literature. low leverage, and nonperformning loans. Policy and Systems Division, Country That issue is heterogeneity in an Economics Department - is part of a individual's energy expenditures. Pre- Banking reform started much earlier in larger effort in the department to study schoolerse energy expenditure also differs, Hungary than in othersocialist countries financial policy issues in transitional so- but the differences are small enough tobe and Hungary now has by far the most cialisteconomies. Copies of the paper are ignored. Not so for adults, whose waking advanced system among transitional so- available free from the World Bank, 1818 hours are devntedmostly tolaboractivities cialist economies. H Street NW, Washington, DC 20433. the energy costs ofwhich varyenormously. Vittas and Neal discuss recent trends Please contact Wilai Pitaystonakarn, Variables measuring time allocation to in competition and efficiency in Hungar- room N9-003, extension 37664 (29 pages). Policy Research Working Paper Series 109 1011. How Tax Incentives Affect * Theeffectson firms'organization(do They show that stock prices for differ- Decisions to invest In Developing the incentives encourage mergers, take- ent groups of banks reacted quite differ- Countries overs, or bankruptcy?). ently to focal events. Among all banks, This paper - a product of the Public U.S. multinationals showed the strongest Robin Baadway and Anwar Shah Economics Division, Country Economics positive reaction to the Brady announce- (November 1992) Department-is partofalarger effortin ment and the Mexican agreement. U.S. the department to evaluate public policies non-multinationals do not appear to have The design of investment incentives in for private sector development in develop- been significantly affected by these inter- developing economies should reflect con- ing countries. The study was fundedby the national-debt-related events. sideration oftheir effects on the marginal Bank's Research Support Budget under The reaction experienced by all Japa- effective tar rate, on firms likely to suffer research project "An Evaluation of Tax nese banks was much weaker than that Josses, on cash flows, on foreign-owned Incentives for Industrial and Technologi- of U.S. multinationals and was negative Arms, and on the way capital is allocated cal Development" (RPO 675-10). Copies of for the Brady announcement and the ini- among asset& the paper are available free from the World tial Mexicoannouncement These authors Bank,1818HStreetNW,Washington,DC contend that the lack of a strong reaction Boadway and Shah contendthatin evala- 20433. Please contact CarlinaJones, room was because ofthe Japanese banks' rela- atinganddesigninginvestmentincentives N10-063, extension 37754 (117 pages). tivelylowexposure to developing country in developing economies, analysts should risk. They see the negative market reac- consider their effect on: tion as areflectionofthe expectation that Themarginaleffectiuetaxrate (METR). 1012. The Brady Plan, the 1989 a U.S.-initiated debt reduction strategy Evensimple taxincentivescan perversely Mexican Debt Reduction would not be favorable for Japanese affect the METR. Many schemes have Agreement, and Bank Stock banks. Indeed, after the menu choices relatively generous write-offs to begin Returns In the United States and were announced, the market recognized with,sogenerousthatanegativemarginal Japan that the Japanese banks were treated effective tax rate is not uncommon. In fairly and corrected itself these circumstances, tax rate reductions Halak Unal, Asl Demdrga-Kunt, They do not find that banks that made (including tax holidays) can discourage and Kwok-Wai Leung different choices were treated differently investment. Investment tax credits are (November 1992) by the market, so banks were able to ne- more likely to be effective. gotiate menu choices in their best inter- Loss firma. Incentives that do not have The menu approach to debt restructuring est and to make portfolio choices consis- -nerous loss-offsetting or refundability maybenefitboththecreditarbanksandthe tent with their business objectives. mrovisions will be of limited use to firms debtor countries. The results here confirm that the menu 'iIelytosufferlossesinicludingsmallgrow- approach to debt restructuring may ben- ;nrgfisandfirmsinriskyenvironentts). Unal, Demirgit-Kunt, :.nd Leung inves- efitboth the creditor banks and the debtor Cash flows. Incentives that improve tigate the impact of the 'menu approach countries. Enms' cash flows may be more effective to debt rescheduling on the marketvalue This paper-aproductofthe Debt and ilat those that do not. Refundability may oftwo major creditors: US.andJapanese International Finance Division, Interna- h-importanthere. Simply adopting cash- banks. They try tounderstandhowmajor tional Economics Department - is part ! wcosting principles with refundability creditor banks are affected by debt of a larger effort in the department to .. ty be more effective than reducing tax reschedulings and the menu choices they understand commercial bank lending be- meLes. make, so that debt deals can be structured havior. Copies of the paper are available Foreign-owned firms. If the value of a in awaythatappeals to bothcreditorsand free from the World Bank, 1818 H Street incentive is fully offset by reduced debtor countries. NW, Washington, DC 20433. Please con- :dits for foreign taxes, the incentive ef- They measure the stock market's reac- tact Widhanaya Patrawimolpon, room .--t will probably be minimal. tion to the announcement of the Brady N9-043, extension 37664 (26 pages). Capital allocation among assets. Some Plan and the Mexican aebt reduction asures favor short- overlong-lived capi- agreemenL The Brady Plan was imple- ,machinery over inventory, some in- mented through the menu approach, 1013. The Impact of Mexico's stries over others. Incentives that en- which acknowledges creditorheterogene- Retraining Program on tirageinvestmentselectivelymaycause ity and provides financing packages that Employment and Wages tortions in the way capital is allocated. meet the country's financing require- Other factors tobe considered in design- ments while still allowing the banks to Ana Revenga, Michelle RibOnd, tax incentives: reduce their exposure. and Hong Tan * Inflation, which is typically high in The Mexican agreement provides an (November 1992) reloping economies. Incentives should opportunity to test the impact of the Brady 'set the effects of inflation. Plan's implementation. By examiningin- Compared with the controls (without * Tax evasion, a common problem in dividual bank's menu choices, exposure training), trainees (especially men) find reloping countries. levels, and the market's reaction, they jobs more quicily if they have work expe- * Technology transfer. explore whether banks were able to make rience. 'h=ining increases men's monthly * The fulfillmentofsocial, environmen- optimal portfolio choices when confronted earnings to a greater extent the higher , and regional non-economic objectives. with the obligation to participate. their level of schooUng attainment. 110 PolIcy Research WorkIng Paper Series Revenga, Riboud, and Tan evaluated how ibbean Country Department II. Copies of 1015. Benefit Incidence Analysis Mexico's Labor Retraining Program the paper are available free from the In Developing Countries (PROBECAT) affected unemployed and World Bank, 1818 H StreetNW, Washing- displaced workers. As part of the World ton, DC 20433. Please contact Debbie Thomas M Selden and Michael J.Wasylenko Bank-supported Manpower Training Young, room R2-050, extension 30932(40 (November 1992) Project (loan 2876-ME, 1987). PROBE- pages). CAT has provided short-term vocational Benefit incidence analysis offers an impor- training to more than 250,000 unem- tang perspective on budgets and can illu- ployed people. Their evaluation was based 1014. Ethnicity, Education, and minate the distributional impacts ofpro- on new longitudinal data on PROBECAT Earnings in Bolivia and Guatemala posed reallocations of government re- trainees developed for this purpose, and sources among projects. includes data on a control group of unem- George Placharopoulos ployed people who did not join (November 1992) As interesting and difficult as itis to allo- PROBECAT. Theirmainfindings were as cate tax burdens to individuals, the pro- follows: Indigenous people will earn more if they fession knows even less about allocating - * On average, the trainees found jobs get more schooling. benefits. Selden and Wasylenko survey more quickly than the control group. But the literature on benefit incidence since training does not shorten the term of un- Indigenous groups are often associated DeWulf's (1975) review, focusing an the employmentfor those without work expe- with poverty and so are low levels ofedu- methodology and results of benefit inci- rience. cation.Guatemalaand Boliviaare the two dence analysis in developing countries. * Male trainees are more likely to be Latin American countries in which the Research in this area faces all the gen- employed three and six months after ethnicpartofthepopulatianispropartion- eral-equilibrium difficulties faced by tax training than are the controls. Female ately greatest. And Bolivia is more incidence analysis as well as the difficult trainees with work experience are more "schooledr than Guatemala. So task of measuring benefits from publicly likely to be employed three, six, and twelve PsachaTopoulos tried to determine how provided goods and services. Despite the months after training than are the con- levels ofethnicityandeducation affectthe inherent pitfalls of this methodology, trols. level of worker earnings. Selden and Wasylenko believe that ben- * Male trainees are more likely to find His investigation was based on data efit incidence analysis can provide an employzment in large firms than are com- from household surveys in the two coun- important perspective on the budget by parable controls. tries. He found that other things being combining data on household use with * Trainingincreasesthemonthlyearn- equal, indigenous people who acquire data on project costs. In particular, ben- ings of male trainees, but this effect var- more human capital enjoy greater eco- efitincidenceanalysescanhelpilluminate ies systematically depending on the nomic rewards than those who acquire the distributional impacts of proposed person's level of schooling attainment. less. Just giving ethnic groups basic edu- reallocations of government resources * The monetary benefits of training cation is bound to improve their position. among projects. The value of such re- outweigh the costs ofthe PROBECAT pro- This finding was supported by both search is especially high considering the gram for certain groups of trainees. For within-country and cross-country evi- scarcity of recent research in this area. male trainees over 25 with prior work ex- dence: Indigenous people fare better in Selden and Wasylenkoreviewthe exist- perience, the benefits outweigh the costs Bolivia (where there is more education) ing methodology, survey the available of training within three months of start- than in Guatemala (where there is less). results, and point out areas in which fur- ingwork. For all othermalesexcept those One possible (although controversial) ther research might have large payoffs. with no prior work experience, thebenefits intervention is to provide schooling in the They also make specific methodological outweigh the costs within one year. child's first language. Such an interven- suggestions that might help ensure that. Men with no prior work experience tionhasbeensuccessfullyimplementedon future research is as useful for spend the longest time job hunting after a small scale inGuatemala. Bilingual pro- policymakers as possible. For example: training (8 months, compared with the grams also exist, on a small scale, in Bo- * Aggregate results based on the zero- trainee mean of 4A months) and benefit livia. government counterfactual relyonstrong less from training in terms of monthly This paper - a product of the Latin assumptions about fixed relative prices earnings (128 thousand pesos compared America and the Caribbean Technical and incomes, government efficiency, and with the average benefit of 152 thousand Department-is part ofa larger effort to the relationship between marginal and pesos). For this group, the costs of train- documentpovertyconditionsin theregion. total benefits. And those studies are of- ing are offset only after 17 months of Copiesofthe paperare availablefree from ten not designed to identify which types higher earnings. the World Bank, 1818 H Street NW, of public services benefit the poor. Re- This paper-ajointproductoftheLatin Washington, DC 20433. Please contact searchers should focus more on providing America and the Caribbean Country De- Maria Malca, room S13-139, extension benefit incidence studies on specific gov- partment II and the Industry Develop- 37720 (23 pages). ernment functions or programs that can ment Division, Industry and Energy De- help policymakers reach conclusions partment - is part of a broader study of about proposedreallocationsofresources Mexicds labor market being carried out among government programs. by the Human Resources Operations Di- * Benefit incidence shouldbe assigned vision of the Latin America and the Car- to households based on household survey Policy Research Working Paper Series ill information on usage rather than on ad Europe and Central Asia region and ton, DC 20433. Please contact Otilia hoc assumptions that assign benefits MiddleEastandNorthAfricaregioncom- Nadora, room S11-219, extension 3109L based on income or the number of mem- bined. bers in the household. This year's projections contain two * Improved annual cost measures for major changes from the previous edition. 1017. Rural Poverty, Migration, services need to be developed, particularly First, projected mortality from AIDS has and the Environment In Developing for capital inputs. been incorporated into the tables for Sub- Countries: Three Case Studies * Researchers should group house- Saharan African countries. Second, demo- holds by deciles and whenever possible graphic estimatesandprojections arepro- RichardE. Bilsborrow should considerothergroupings basedon vided separately for each of the fifteen (November 1992) household income adjusted for household countries that constituted the former So- composition, age, location, and other rel- viet Union. Case studies-ofthe links between high- evant socioeconomic variables. Among trends observed: lands and lowlands in Lain America; of * Careful attention to life-cycle ben- * The total fertility rate for the world transmigration in Indonesia; and of mi- efits, benefit shifting, rent-seeking, out-of- is an estimated 3.2 children perwomanin gration and desertification in the Sudan pocket costs, displacement of private see- 1992. The highest total fertility rates are -illustratethe relationship betweenpov- tor efforts, average versus marginal ind- found in East and West Africa, where the erty, itaernal migration, andenvironmen- dence, and several otherissues can signifi- rateisabove 6.MostcountriesintheAsian tal change in rural areas of developing cantly increase the value of benefit inci- and Latin American regions have moder- countrie& dence analysis to policymakers. ate fertility of three to five children per This paper - a product of the Public woman, although both continentscontain Bilsborrow presents three case studies (of Economics Division, Country Economics countries withveryhighandverylowlev- thelinksbetweenhighlandsandlowlands Department - is part of a larger effort in els. More developed countries have the in Latin America transmigrationinIndo- the department to study theimpact ofpub- lowestfertility, with rates generally rang- nesia; and migration and desertification lic expenditure on household welfare, es- ing between 2.5 and L5, but one of the in the Sudan) toillustrate therelationship pecially of the poor. Copies ofthe paper are former Soviet republics, Tajikistan, has a between poverty, internal migration, and available free from the World Bank, 1818 total fertility rate of 5. environmental change in rural areas of F Street NW, Washington, DC 20433. * Europe (including the former Soviet developingcountries. Policies to deal with Please contact Carlina Jones, room N10- republics) is the only continent %here the problems of environmental degrada- 063, extension 37754 (55 pages). aggregate fertility is currently below re- tion in areas that are destinations for placement- thatis, where women are not migrants would usually include: having enough children to replace them- * Preparation of a detailed national 1016. Europe and Central Asia selves. Recenttrendsinsome countries of inventoryoflandandwaterresources,and Region, Middle East and North Europe show small increases in fertility, a land-use plan to protect biologically Africa Region Population and the projections assume that the total important orfragile areas and directnew rojections, 1992-93 Edition fertility rate will recover to replacement agricultural settlements elsewhere. level by 2030. Europe is also the continent * Coordination of this plan with the T. Vu, Eduard Boas, and Ann Levin with themosthomogeneousfertilitylevels: construction of roads. 1iqvember 1992) with the exception of four of the former * Better coordination across govern- Soviet republics that have total fertility ment agencies in the development and rrently, Asia has 59 percent of all ratesabove3,fertilityintheother41coun- implementation ofpolidesrelatedtoland )ple; Europe, 15 percent; America, 14 tries varies in anarrowrange between L5 use. cent; Africa, 12 percent; and Oceania, and 2.8. * Reduction of population growth, a percent. Over time, Asia's share is pro- * The Northern American region has driving force behind decisions tomigrate. ted to remain fairlystable, butEurope's the highest aggregate life expectancy, * Improving land use in traditional xre will almost be halved and Africa's 76.7. TheEuropean region has the second areas of settlement, to reduce both over- ire more than doubled. highest aggregate life expectancy, 74.4. use and underuse of land. Every country in this region is above the * Developmentofasystemoflandten- pulation projections for all countries are world's average of 66. Moving from west ure that provides land users with incen- pared annually by the Bank's Popula- to east through this region, life expectan- tives to maintain productivity. n and Human Resources Department. cies tend to decline, from a high of 78 in * Environmental education programs ey are published firstin summaryform Iceland to a low of 66 in Turkmenistan. (in schools and for farmers) to create a the Bank's World Development Report This paper - a product of the Popula- national environmental consciousness d later in greater detail as technical tion, Health, and Nutrition Division and and more appreciation for the country's tes or working papers and, in alternate the Population Policy Advisory Service of natural assets and beauty. irs, as a book. the Population and Human Resources * New, appropriate systems of data Separate papers cover the six Bank re- Department-is part of a larger effortin collection and analysis, to help clarify ins: (1) Africa (Sub-Saharan), (2) Latin the department to update demographic underlying processes and develop more .1erica and the Caribbean (and North indicators on an annual basis. Copies of refined, appropriate policies. ierica), (3) East Asiaand Pacificregion the paper are available free from the * Broad-basedmacroeconomicpolicies cI South Asia region combined, and (4) World Bank, 1818 H Street NW, Washing- aimed at improving incomes in rural ar- 112 Policy Research Working Paper Sedes eas, relative to urban areas - aimed at "typical' Bank recommendations. partlybecauseofthemotivesbehindthose reducing poverty, environmental degrada- Rajarain finds that the quality of analy- policies. Few empirical studies even test cion, and rural outmigration. sis underlying Bank recommendations in whether the policies effectively increase This paper - a product of the Office of this regard is highly uneven. The follow- credit to the target group. Schwarz out- LheVice President, DevelopmentEconom- ing broad conclusions are indicated lines amethodfor testingthe effectiveness ics - is one in a series of background * Revenue concerns are often not ad- of credit policy, then examines existing papers prepared for the World Develop- equately addressed in the design oftariff empirical work to see how it fits that ment Report 1992 The Report, on devel- proposals. In afew casesthis neglectmay methodology. opment and the environment, discusses have contributed to policy reversal. The first common empirical technique the possible effects of the expected dra- * The protective effect of domestic in- examinescreditallocationintheeconomy. matic growth in the world's population, direct taxes is often not recognized and Schwarz finds that for the largest pro- industrial output, use of energy, and de- thus not incorporated into the reform of gram, housing credit, the effect of credit. mand for foodt Copies of this and other the structure of protection. program oncreditallocationisvery small World Development Report background * Although there is little consensus on and maybe negative when cross-program papers are available free from the World a desirable tariff structure, in afew cases effects are considered. Bank,1818HStreetNW,Washington,DC the Bank has recommended a uniform The second common empirical tech- 20433. Please contact the WorldDevelop- nominal tariff. This could be seen as the nique examines individual sectors. Re- mentReportoffice,roomT7-101, extension logical culmination ofattemptsto narrow sultshere are mixed. Inagriculture,much 31393 (75 pages). the range of tariffs. of the crmlitraises the demand for land, This paper - a product of the Public providing a gain for landowners rather Economics Division, Country Economics than increasing production. Ineducation, 1018. Tariff and Tax Reform: Department-is part ofalargereffortin less than a third of the students who got Do World Bank Recommendations the department to improve the design of governmentcreditwouldnothave gone to Integrate Revenue and Protection policiesto achievereform objectives. Cop- college without it. So in both cases, the Objectives? ies ofthe paperare available free from the credit had a positive impact but at a siz- World Bank, 1818 HStreetNW,Washing- able cosL Anand Rajaram ton, DC 20433. Please contactPeggy.Jean Schwarzconcludesthatdespiteitshuge (November 1992) Pender, room N10-067, extension 37851 volume, directed credit in the United (28 pages). States has a limited impact on growth. A selective review ofthe World Bank's rec- The credit programs have generally sue- ormendations on tariff reform suggests ceededin increasing credittothe targeted that there is scope to improve the design of 1019. How Effective Are Directed group, but not necessarily in increasing these recommendations to reflect concerns Credit Policies In the United investment by that group. regarding revenue as well as protection. States? A Literature Survey This paper-aproduct ofthe Financial Policy and SystemsDivision, Country Eco- Tariffreform aimed atreducing domestic Anita M. Schwarz nomics Department - is part of a larger protection and the bias against exports (November 1392) effortin the department to studytheeffec- holds the threat of widening the fiscal tiveness of directed credit policies. Copies deficit by causingtariffrevenue to decline. U.S. polic-yondirectedcredit has alimited of the paper are available free from the Because the success ofan adjustment pro- impact on growth - partly because it is World Bank, 1818 H Street NW, Washing- gram depends critically on the correction oriented more toward equity thangrour:h. ton, DC 20433. Please contact Maria of fiscal imbalances to achieve stabiliza- US. credit programs have generally sauc- Raggambi, room N9-033, extension 37664 tion, tariff reforms must be coordinated ceeded in increasing credit to, but not nec- (30 pages). with tax policy recommendations to de- essarily in increasing investment by. the velop alternative revenue sources. Con- targeted group. versely, the tariffreforms must eliminate 1020. Another Look at Population the protective elements of domestic tax Schwarz surveys U.S. experience with and Global Warming structuresiftheyaretotrulyachieve their directed credit asbackgroundforalarger protection objectives. study ofthe Asian experience. Almosthalf Nancy Birdsall Rajaram reviews the extent to which of net credit lent in the United States (November 1992) the Bank's analysis and tariffrecommen- annually is directly affected by govern- dations in twelve countries (Bangladesh, ment policies - half of net credit cover- There is little basis for the view that the Ghana, Indonesia, Jamaica, Malawi, Mo- ingbudget deficits, and halffalling under South could contribute to majorreductions rocco,Pakistan,thePhilippines,Thailand, various federal credit programs. in global warming by taking new and Turkey, Zaire, and Zambia) reflected such But the main difference between U.S. strongersteps to reduce itspapuation. But anintegratedframework.Hefocuseson(1) and Asian credit policyis that U.S. credit cost analysis suggests that it makes sense the revenue impactoftariffreform, (2) the policyisoriented more toward equity than for developed countries in theirowninter- effect of domestic indirect taxes on protec- toward growth. Different sectors are af- eststospend money toreducertes popu- tion, and (3) the structureofprotection.The fected differently by U.S. credit policies. lation growth in developing countries as review is admittedly selective and the at- Few empirical studies test how U.S. part ofanyoptimalcarbon reductionstrat- tempt is to capture the reasoning behind credit policies affect growth - perhaps egy. Policy Research Working Paper Serles 113 Birdsall addresses two questions: First, for the United Nations' Expert Group Colemanand Jones focus onacompari- how much could feasible reductions in Meeting on Population and Environment, son of the welfare effects of price stabili- projected rates ofpopulation growth in the New York, January 1992. Copies of the zation under a variable tariff scheme and developing countries help reduce green- paper are available free from the World storage, but suggestabetter option: to use house gas emissions? Second, how much Bank, 1818 HS.reetNW,Washington, DC financial instruments forhedgingagainst would it cost to ensure such reductions in 20433. Please contactPRDDR,room N11- commodity price risks. This requires that population growth, compared with other 051, extension 37460 (45 pages). there be no capital controls - one of the options for reducing emissions? main reasons private insurance is seldom The answer to the first question is that undertaken in developing countries. reductions in population growth would 1021. Measuring Welfare Changes This paper -a product of the Interna- matter, but not much. Based on current from Commodity Price tional Trade Division, International Eco- .econometricestimateslinking population Stabilization In Small Open nomics Department -is part of alarger growth to deforestation, feasible reduc- Economies effort in the department to research com- tions in population growth could reduce modity price risk management by devel- emissions from deforestation (relative to Jonathan R. Coleman and Chris Jones oping countries. Copies of the paper are what they otherwise would be) by 8 per- (November 1992) available free from the World Bank, 1818 cent over the next 35 years. Feasible re- H Street NW, Washington, DC 20433. ductionsin population growthrates could New formulas for calculating the welfare Please contactDawn Gustafson, room 67- reduce fossil fuel emissions by about 10 changes from commoditypricestabilidon 044, extension 33714 (26 pages). percent. The percentage reductions, are derived within a general equilibrium though substantial, are small relative to framework. A better option than storage or projections of a tripling or more in emis- varying import levies may be to use finan- 1022. A New Approach sions under any baseline scenario in the cial instruments for hedging against risk to Evaluating Trade Policy next 50 years. Thus thereislittle basisfor the view that Coleman and Jones extend the widely James E. Anderson and J.PeterNeary the South could contribute tomajor-reduc- used Newbery and Stiglitz (1981) ap- (November 1992) tionsin global warmningbytalingnewand proach tomeasuringwelfare changesfrom stronger steps to reduce its population. commodity price stabilization to a general Introducing something new: The 1rade The answer to the second question is equilibrium setting. They derive the wel- Restrictiuenesslndermeasurestherestric- that reducing population growth is cost- farechangesin terms ofnetconsumer and tiveness of a system of trade protection. effective compared with other options to producer surplus, rather than in terms of This measure is both simple and consis- reduce emissions. Birdsall estimates the producer income as in the Newbery and tent with economic theory. costs of reducing carbon emissions by re- Stiglitz approach. ducing births throughincreased spending Coleman and Jones present formulas Anderson and Neary introduce a new on family planning at between $6 and $12 for measuring the welfare changes for measure, the Trade Restrictiveness Index, per ton; and by educating girls at between domestic price stabilization achieved to measure the restrictiveness ofa system $4 and $8 per ton. These compare to a through profitable storage(as assumedby oftrade protection. Theyproposeanalter- marginal cost of $20 per ton to reduce cur- NewberyandStiglitz)andforstablization native to the commonly used ad hoc in- rent emissions by 10 percent, using a car- through a variable tariff scheme. These dexes oftrade restrictiveness, such as the bon tax. Discounting reduces the cast ad- formulas differ significantly, soit is inap- trade-weighted average tarifE That mea- vantage of the population reduction strat- propriate to use the Newbery and Stiglitz sure has no welfare-theoretic basis and egies over the tax, but does not eliminate formula tojustifythe use ofdomestic price canbehighlymisleading, in practice. For them as acritical partof an overall global controls such as a variable levy. example, the complete exclusion of trade strategy to reduce emissions. In recent years, governments in many in a commodity would usually lower the The implication of the cost analysis is developing countries have liberalized index, because its trade weight would fall simple: The global negative externality their trade policies in the pursuit of im- to zero. representedbyrapidpopulationgrowthin provedeconomicperformance.Butthishas Anderson and Neary show that their developing countries provides a strong, exposed their economies to variations in proposed index is soundly based in stan- new rationale for developed countries, in international prices and raised questions dard welfare economics. When trade isre- their own interests, to finance programs aboutthe desirabilityofdomesticprice sta- strictedby tariffs only, the Trade Restric- that would reduce population growth in blizationprograms.Apopularmechanism tiveness Index equals the uniform tariff, developing countries. This is true even for this purpose is a variable import levy which would be equivalent to the existing though feasible reductions in population scheme. system oftariffsinthe senseofyieldingthe growth would represent only a modest Coleman and Jones' analysis confirms same level of aggregate welfare contribution to reducing greenhouse gas that domestic welfare is lower under trade But tariffs have declined in importance emissions. Spending to reduce rates of policies that stabilize domestic prices, as in recent years as a means of restricting population growth in developing countries such policies serve only to shift the price trade, so the measure must also be able to makes sense as part of any optimal car- uncertainty from producers and consum- takeaccountafquantitativerestrictionson bon reduction strategy. ers to the government budget - while trade. Where quotas are the only form of This paper - a product of the Country incurring the social costs of the restriction, this is easy. the Index equals Economics Department - was prepared distortionary tariffs and subsidies. the equiproportionatereductioninpermit- 114 Policy Reseawh Working Paper SerIes ted import volumes that is welfare-equiva- nomics Department - is part of a larger cue the commonsense idea that lower lent to the initial structure of quotas. project to study the cost ofprotection. The mean and lower variance of tariffs are When both quotas and tariffs are study was funded by the Bank's Research both efficient. Second, a special case is present, the Index can be defined as the Support Budget under research project offered in which the proper weights in the uniform tariff factor (one plus the uniform "The Cost of Protection Indee (RPO 676- mean and variance of tariffs are the ob- tariff) and uniform importreduction factor 49). Copies ofthe paper are available free sarved trade weights. which would yield the same level of welfare from the World Bank, 1818 H Street NW, Thus, the Trade Restrictiveness Index as the initial system of trade restrictions. Washington, DC 20433. Please contact is superior to traditional summary mea- The authors show how this can be for- Maria Teresa Sanchez, room 87-025, ex- sures such as the average tariff rate and mulated, noting that if a single good is tension 33731(30 pages). the coefficient variation for the tariff subject to both a binding quota and a tar- schedule. It requires only limited addi- iff, it should be viewed as quota-con- tional information on the structure ofthe - strained - the tariff serves merely to 1023. Tariff Index Theory economy to yield a measure that is pref- ensure that some ofthe rents accrue to the erable on both theoretical and practical importing country. James E. Anderson grounds. These theoretical derivations permit a (November 1992) This paper - a product of the Interna- major synthesis ofthe theory ofprotection tional Trade Division, International Eco- and suggesthow the results ofcomputable The Trade Restrictiveness Index is shown nomics Department - is part of a larger general equilibrium models mightbe pre- to prouide a summary measure of the wel- effort in the department to analyze the sented to make them internationally and fare costs ofprotection that is related, but effects of trade distortions on developing intertemporally comparable. But in most preferable, to traditionalmeasures such as countries. The study was funded by the cases such a model is not available and, the average tariff and the coefficient of Bankes Research Support Budget under evenifit were, it would notbe sufficiently variation. research project"CostofProtection Index" disaggregated to deal with a complicated (RPO 676-49). Copies of the paper are system of trade protection. For a single tariff, the 'height" of the tar- available free from the World Bank, 1818 So the authors present some empirical iff is an unambiguous measure of the H Street NW, Washington, DC 20433. shortcuts that can beadoptedforestimat- policy's restrictiveness With more than Please contact Maria Teresa Sanchez, ing changes in the Index. Chief among one tariff, theory has not provided an ex- room 87-025, extension 33731(32 pages). these is the assumption that the goods tension that captures the idea of the under consideration are separss,1e from tariffs height, so analysts have used in- others in an appropriate general-equilib- dex numbers such as the mean and the 1024. An Exact Approach rium sense. This can provide a rigorous coefficientofvariation (standard deviation for Evaluating the Benefits foundation for a form of partial-equilib- divided by the mean) of tariffs. from Technological Change rium analysis (the consideration ofa sub- By contrast, the theoretical literature set ofmarkets in an economy). They also on the "piecemeal reform" oftariffs shows Will Martin and Julian 3A. Alston showhow the TradeRestrictivenessIndex that efficiency gains from tariff reform (November 1992) canbeadapted to allowfordifferentforms depend on complex conditions that have of rent sharing and for a country's ability little relation to the mean or variance of Howamodifiedtradeexpenditurefunction to influence its terms of trade. tariffs. But in the absence of a connection can beused to measurthe elfar cost and Applying these empirical methods to between theory and empirical measures, benefits from technological change-in a exports of textiles and apparel from Hong it is difficult to know whether to discard model that allows formultiple market dis- Kong to the United States, the authors the measures. Moreover, the piecemeal tortions andgeneral equilibrin mfeedback. find that the protective system becomes reform questionofmeasuring the welfare morerestrictivefor both countries over the gain from a tariff reform is not directly It is commonly believed that taxing agri- seven years considered (1982-88). In- related to the problem of evaluating the cultural commoditiesin developing coun- creased trade restrictiveness does not height of restrictiveness. tries, and subsidizing agricultural com- necessarily mean that quotas have been The problem offinding a single number modities in industrial countries, reduces tightened. When there is economic analogous to the 'height" of tariffs is the incentives in the developing countries for growth, constant or even rising import tariff index number problem. Anderson both current production and longer-term quotas might still amount to a tightening and Neary have developed a solution: the investments in capital, knowledge, tech- of protection. Trade Restrictiveness Index, which they nology, and infrastructure. it is argued Results based on the trade-weighted define as the uniform tariff factor that is that distortions in agricultural markets average of "tariff equivalents" (the gaps equivalent in trade restrictiveness have kept investments in research and between Hong Kong and U.S. prices) di- (equivalent in the balance of trade) to the development, and productivity rates, low verge significantly from those ofthe Trade actual differentiated tariff structure. in agriculture in developing countries. Restrictiveness Index. The two measures Here, Anderson develops the Trade Martin and Alston lay the theoretical have opposite implications for the change Restrictiveness Index in terms of mean foundation for empirical studies of how intraderestrictivenessfortwo-thirdsofthe and variance-covariance indexes of the such distortions affect returns to agricul- observations. tariff schedule. There are two payoffs. tural research and development in devel- This paper- a product of the Interna- First, the Trade Restrictiveness Index can oping countries. Earlier studies ofthe ben- tional Trade Division, International Eco- be decomposed intn expressions that res- efits from technological change have typi- Policy Research Working Paper Series 115 cally usedpartial equilibrium models with In a cross-country study for 1967-87, national levels. McNelis and Schmidt- Marshallian welfare measures. Suchmod- Matin tests whether the finding that in- Hebbel develop and estimate a two-sector els have not allowed for a general set of creased openness improves performance dynamic model using both current and market distortions and market interne- holds true for Sub-Saharan Africa as a time-varying parameters. They find the tions. subgroup among developing countries. domestic interest rate to be more respon- Techniquesrecentlydevelopedforevalu- Econometric analysis - based on the sive to shocks under imperfect capital atingwelfarein the contextofgeneral equi- augmented production function that in- mobility, the real exchange rate more re- libriumn models better measure the impli- cludes labor, capital stock, andameasure sponsive under perfect capital mobility. cations oftrade-distortingpolicies. Martin ofopenness -shows thatopennessexerts In short, liberalization of the capital and Alston describe how to harness these a significant positive impact on economic account does not eliminate volatility but approaches to evaluate the benefits and performance ofcountriesinSub-Saharan rather shifts it fromthe domestic interest costs of technological changes. Africa. The relationship is especially rate to the real exchange rate. * They show that amodified tadeexpen- stronginfixed-effect"estimatesthatuse This paper - a product of the Transi- diture fimction can be used to measure annual panel datawith country dummies tion and Macro-Adjustment Division, welfare changes exactly, with a model to capture unobserved country-specific Country Economics Department - re- .consistentwiththeoptimizingbehaviorof differences. ceivedfinancialsupportfromtheInstitato both producers and consumers. They do Matin finds the evidence of a positive Interamericano de Mercados de Capital. so in a general setting that allows for link between openness and performance An earlier version of the paper was pre- multiple market distortions andmultiple surprisingly robust to different measures sented at the Seventh Latin American paths of general equilibrium feedback. ofopenness,to differentperiods, andtothe Regional Meeting of the Econometric So- They illustrate this approach using a inclusion ofotherpolicy variables.All four ciety,CostaRica,August1988.Thepaper quadratic form for a profit function that is measures of openness, for example, are willbepublishedintheAugustl993Jour- acomponentofthetrade expenditurefunc- significant for 1967-87. For the shorter na ofInternational Money and Finance. tion- They spell out, in principle, how to period, 1980-87, three are significant CopiesofthispaperareavalIablefreefrom apply this approach with minimal require- Also, the size and significance ofthe open- the Warld Bank, 1818 H Street NW, mentsforadditional information, usingthe ness coefficients do not change when one Washington, DC 20433. Please contact resultsfromacomputable general equilib- controls for macroeconomic policy. AnnaMaranon,ToomN11-042, extension rium model. They provide a diagram to il- This paper - a product of the Trade 31450 (52 pages). lustrate the application of the technique. Policy Division, Country Economics Do- This paper- a product ofthe Interna- partment-is partofalarger effortinthe tional Trade Division, International Eco- department to assess the experience of 1027. Lessons from Bank nomics Department - is part ofa larger Sub-SaharanAfricawith trade liberaliza- Privatizatlon In Mexico departmental study ofhow distortions in tion. Copies ofthepaperare availablefree commodity markets affect the benefits from the WorldBank, 1818 H Street NW, Guillerma Barnes from, and incentives for undertaking, ag- Washington, DC 20433. Please contact (November 1992) ricultural research and development Dawn Ballantyne, room N10-019, exten- projects in developing countries. The sion 38004(38 pages). Bank privatizationinMexico -arguably study was fundedby the BankVs Research oneofthe mastauccessflfinancial opera- Support Budget under research project tionsinrecentyeara-haseenfciltaed 'Agricultural Policy Reform for Develop- 1026. Financial Liberalization by a strong macroeconomic stabilization ing Countries" (RPO 676-11). Copies of and.Adjustment In Chile program, Lggal andfinancial rebrm, and this paper are available free from the and New Zealand the adoption of clear objectives, precise World Bank, 1818 K StreetNW, Washing- rules, and ansparent procedures. ton, DC 20433. Please contact Dawn Paul D. MeNelis and Klaus Schmidt-Hebbel Gustafson, room S7-044, extension 33714 (November 1992) The recently completed privatization of (31 pages). Mexican commercial banks maybe one of Liberalization ofthe capital account does the most successful financial operations not eliminate volatility. Rather, it shifts it in recent years. In 13 months, the Mexi- 1025. Openness and Economic f-om the domestic interest rate to the real can authorities were able to sell 18 banks Performance In Sub-Saharan exchange rate. to private groups afMexicaninvestArs for Africa: Evidence from Time-Series more than US$13 billion totel - more Cross-Country Analysis McNelis and Schmidt-Hebbel analyze than three times book value, and with a macrodynamic adjustment during finan- pricelearnings ratio of 14.5. Kazi 3L fatin cial liberalization in Chile and New Guillermo Barnes, Director General of (November 3992) Zealand the Development Planning Unit of the During the adjustment to more open Ministry ofFnance and amember ofthe Openness exerts a significant positive im- capital accounts in the late 1970s or mid- Privatization Committee that supervised pact on performance in countries in Sub- 1980s, both countries experienced appre- the program, sets out the preconditions, Saharma Africa - the more open the ciation of the real exchange rate and a objectives, and main achievements of the economy, the better the economic perfor- collapse of net exports, while domestic privatization program. He summarizes mance. interest rates slowly converged to inter- the Mexican experience in nine lessons 116 Policy Research Working Paper Series that may be relevant for developing coun- 1028. Socioeconomic and Ethnic After discussing ownership issuesrelated tries considering similar exercises: Determinants of Grade Repetition to tropical forests, Deacon develops a * The conditions suitable forprivatiza- In Bolivia and Guatemala simple general equilibrium model to rep- tion and the strength of the financial sys- resent - at least in a stylized way - the tem are directly related to the economy's Harry Anthony Patrinas salient aspects of the deforestation pro- general performance. Macroeconomicsta- and George Psacharopoulos cess. He uses the model to generate first- bilityis essential for bank privatization to (November 1992) and second-best policy options for control- succeed. ling deforestation and,later, to assess the * Bank privatization must be comple- Children from less wealthy households environmental consequences of govern- mented by the structural transformation and children of indigenous origins are ment policies often cited in the literature of the economy, to improve efficiency and more likely to repeat a grade, so targeted on deforestation. productivity. interuentions could bedirected at thepoor Property rights, though important for. * Financial reform must aim to and could have an indigenous component, understanding the process of tropical de- strengthen competitive economic condi- such as bilingual education. forestation, do not necessarily point to a tions and to enhance the efficiency of the simple or straightforward fix for environ- financial sector. After reviewing the literature on repeti- mental problems, particularly in develop- * Bank privatization requires a new tion (students repeating grades in school) ingcountries- legal framework, especially designed for in developing countries, Patrinos and The sheer size, communal nature of private institutions. Psacharopoulos examine factors related to service flows, and pervasiveness of mdi- * Legal reform should lead to struc- repetition inBolivia andGuatemala-They vidual access to tropical forests make tures that encourage solid, efficient finan- develop a model to estimate the incidence monitoring and enforcement costly in cial intermediation. and determinants ofrepetition. They use some situations and unimaginablein oth- * To encourage ample participation multivariate logistic regression analysis ers. Redefining nominal rights in ways and to ensure fairness, the privatization to estimate the determinants ofrepetition, that appear to correct inefficiencies may process mustbe trustworthy- with clear using the results in simulations to deter- yield gains in some cases,butan approach objectives, precise rules, and transparent mine probabilities of who is more likely to to environmental protection that leans procedures. repeat. heavily on this prescription seems aimed * The mechanics of privatization Their empirical analysis shows that more at symptoms than at causes, says shouldbe consistent with the legal frame- certain populations are more likely to re- Deacon. work and should be based on adequate, peat a grade: children from less wealthy Moreover, policy approaches based on detailed preparation- households and children of indigenous the use of Pigouvian taxes or marketable * The proceeds of privatization should origins. This suggests that any targeting permitschemes mayyieldelficiency gains be in cash, which should be used to per- activities couldbe directed to the poorand in some cases, but such approaches gen- manently reduce government outlays. couldhaveanindigenouscomponent, such erally involve the same monitoring and * Common sense rules should be fol- as bilingual education. enforcement problems that prevent the lowed, such as selling the small banks This paper - a product of the Latin marketfrom colvingallocation problems. first, ensuring economic certainty and America and the Caribbean Technical Simple, direct solutions to deforestation confidence, centralizing management of Department-is part ofa larger effort to and other environmental problems are the privatization program, and ensuring document poverty conditionsin the region. unavailable, but an ability to understand honesty and transparency in the process. Copies ofthe paper are available free from the environmental and welfare cose- The overall lesson of the Mexican expe- the World Bank, 1818 H Street NW, quences of policies adopted for other ea- rience :is that bank privatization should Washington, DC 20433. Please contact sonsisuseful-ifonlytobelppolicymakers not be -rushed. Mexico waited until 1990, Maria Malca, room S1.I-139, extension avoid mistakes that would otherwise go when inflation was less than 20 percent a 37720 (26 pages). unrecognized. year and the banks were strong (their The model Deacon develops for this numbers hadbeen reducedand riskyven- purpose is highly stylized and intended tures restricted), while meticulous prepa- 1029. Controlling Tropical primarily to provide a systematic way of ration set the ground rules for transpar- Deforestation: An Analysis thinking about the environmental and ent and effective procedures. of Afternative Policies welfare effectsofgovernmentpolicy-for This paper-a product ofthe Financial exmnple, by considering patterns of sub- Policy and Systems Division, Country Robert T. Deacon stitution among inputs and outputs, in Economics Department - is part of a (November 1992) cases where an environmental resource to larger effort in the department to study whichpeoplehavefreeaccessis exploited. issuesin bank privatization. Copies ofthe Asimplegeneralequilibrium model-rep. If the use offirst-best policies is infea- paper are available free from the World resentingsalientaspectsofthedeforestaton sible - whether because of monitoring Bank, 1818 H StreetNW, Washington, DC process -generates first- and second-best costs, transboundary effects, or other rea- 20433. Please contact Wilai Pitayato- policy options for controlling deforestation sons -thenitbecomesimportanttobave nakarn, room N9-003,extension 37664 (22 and helps to assess the environmental con- detailed knowledge of patterns of substi- pages)- sequencesofgovernment policies often cited tution and complementiarity among ordi- in the literature on deforestation. naryinputsand environmental resources, Policy Research Working Paper Serles 117 and information on the use of various different policies-throughother channels on how flexible activities am with regard environmental resources in the produc- than the effect on air pollution. to the fuel used. The author reviews em- tion of specific goods and services. Knowl- Krupnick reviews existing models of pirical methods and findings. edge of such factors can permit urban transport and evaluates their abil- policymakers to pursue policy goals in ity to simulate the effects of different poli- What are the costs ofmakingconsumption situations where first-best instruments cies on emissions and on other variables or production activities use less-polluting are unavailable. relevant to welfare. He finds that: fuels? Bacon reviews how the fuel mix This paper - a product of the Public * Little modeling work is done on de- used by different industries has changed Economics Division, Country Economics veloping countries, but some stylizedfacts over timeand examines two techniquesfor Department-is part of a larger effort in (the greater importance of nonmotorized estimating the resp-nsiveness of fuel de- the department to study environmental modes, of mopeds, of old vehicles, and of mand to fuel prices: econometric models policiesin developing countries.An earlier work-related trips, greater growth in ur- and the engineering approach. version of this paper was circulated as banization, and greater growth in the With econometricmodels, the elasticity "Government Policy and Environmental urban vehicle stock) allow us toassesshow of substitution between energy and other Quality in Developing Countries: Comple- well models from developed countries inputs determines the costs of making ments or Substitutes" The research was apply in industrial countries. activities less energy-intensive, while the funded by the Bank's Research Support * Models vary greatly in complexity. elasticityofaubstitutionbetween sources Budget under research project "Pollution The central question for users is whether ofenergy (interfuel substitutability)deter- and the Choice of Policy Instruments in they want detailed coverage ofthe spatial mines the marginal coats ofreplacing one DevelopingCountries"(RPO 676-48). Cop- nature of pollution and congestion. The energy source with another. ies of this paper are available free from the most comprehensive and detailedmodels The engineering approach uses more World Bank, 1818 1 Street NW, Washing- also require the most data. detailed technical information and can ton, DC 20433. Please contact Peggy Krupnick proposes eclectic use of sev- drawamorecompletepicture,butwithless Pender,room N10-067, extension 37851(38 eral models, since a model incorporating abilitytoinformaboutactivitieswithavast pages). long-term responses, shorter-term re- number of different economic agents. sponses, and emission consequences is not Among Bacon's main conclusions: easily tractable. * There are surprisingly large varia- 1030. Measuring the Effects Krupnick acknowledges the many com- tionsinenergyandfuel use overtime and of Urban Transportation Policies plex links between policies (on the one between countries. Industrial output in- on the Environment: A Survey hand)andwelfareandairpollution(onthe creased 62 percent in OECD countries of Models other),butsays thatresearch can often be between 1971 and 1988, for example, narrowed according to available policy while energy use stayedunchanged! Also, Alan J. Krupnick instruments, data availability, and the shares ofenergy sourcesforindustryand (November 1992) implications considered relevant Often, electricity vary greatly wit local avail- simple models can improve the basis for ability,indicatingthatthesesectorshave Air pollution from urban travel is influ- policy evaluation, particularly when there some flexibilityin choice ofenergy source. enced by travel demand - by its distribu- are limited data and resources for re- A judgment on whether this variability tion among modes, by congestion levels, search. indicates that an economy responds and by the characteristics of vehicles and This paper - a product of the Public cheaply if energy prices are changed se- fiels. How well do existing models evalu- Economics Division, Country Economics lectively depends on how one reads the atetheeffeerofdifferentpolicies. especially Department-is partofalargerresearch more detailed studies in the econometric on welfare and on air pollution? project funded by the Bank's Research and engineering literature. Support Budget on "Pollution and the * Lack of data is the biggest problem -Mandatingemission control devices in new Choice of Policy Instruments in Develop- in estimating fuel and energy substitut- cars is only one of the most obvious steps ing Countries" (RPO 676-48). Copies of ability in non-OECD countries. to address the problem of vehicle emissions. this paper are available free frm the * Engineering studies offuel switching .Others range from taxes on gasoline and World Bank, 1818 r StreetNW,Washing- in industry are rarely available. They ex- parking to incentives to scrap old cars or ton, DC 20433. Paase contact Peggy ist, however, for the power ii:LIstry and move businesses out of the cities. Pender, room N10-067, extension 37851 couldbeused to estimate the costsoftiter- There are models to simulate the"engi- (77 pages). native fuel-mixes for particular greenfield neering" implications when changes ar sites. The technique could not be used for made to the vehicle fleet(such as the U.S. assessment of economywide policies. Environmental ProtectionAgencys"MO- 1031. Measuring the Possibilities * Econometric studies are useful inas- BILE 4"), but other models are needed to of Interfuel Substitution much as they take a sector- or capture individual behavior, for two rea- economywide perspective. Econometric sons. Flrst, behavior -for example, using Robert Bacon techniques are challenging, but often rep- certain vehicles - affects emissions, and (November 1992) resent the state of the art in providing thereby the effect of policies on pollution. reliable estimates for elasticities of sub- Second, behavioral relations determine Whethrfiteltaxescanreduceairpollution stitution - particularly when data are how much consumer welfare is affected by cheaply throughfuel substitution depends scarce and the level ofaggregationis high. 118 Poacy Research Working Paper Series * The issue of whether econometrically ther to go. But each subregion ofthe Asian average, which is 66. The total fertility rate estimated structural parameters can be continent includes countries at different for Latin America is intermediate at 3.1, transferred across borders has not been stages ofthe fertility transition: each sub- and replacementfertility is prjected to be thoroughly investigated. region has at least one country with a to- reached in every country no later than This paper - a project of the Public tal fertility rate of 6 or greater and one 2035. International net migration has a Economics Division, Country Economies country with replacement-level fertility. trivial effect on population growth at the Department-is part of a larger effortin The prqjections of when replacement fer- regional level; projections of future net the department tostudy pollution control tility will be reached in the region as a migrationassumeagradualdeclinetozero policy in developing countries. The study whole are determined by the trends in from current levels. was funded by the Bank's Research Sup- individual countries with the slowest de- port Budget under research project "Pol- cline; the Asian subregion aggregates will Population projections forall countries are lution and the Choice of Policy Instru- therefore be late in achieving this. prepared annually by the World Bank's ments in Developing Countries (RPO * South Asia has the worst mortality Population andHumanResources Depart- 676-48). Copies of this paper are available conditions of the Asian subregions, ba; ment. They are published firstin summary free from the World Bank, 1818 H Street improvement has been quite rapid since form in the Bank's World Development NW, Washington, DC 20433. Please con- the mid-1970s, with life expectancy in- Report and later in greater detail as tech-- tact Peggy Pender, room N10-067, exten- creasing from 49 to 59 years currently. nical notes or working papers and, in al- sion 37851 (76 pages). Life expectancyin SouthwestAsiaisnear ternate years, as a book. the world's average, while it is well above Separate papers cover the six Bank re- that in East and Southeast Asia at 70 gions: (1) Africa (Sub-Saharan), (2) Latin 1032. East Asia and Pacific Region, years. East and Southeast Asia contains AmericaandtheCaribbean(andNorthern South Asia Region Population some of the countries (Japan and Hong America), (3) East Asia and Pacific region Projections, 1992-93 Edition Kong) with the highest measured life ex- and South Asia region combined, and (4) pectancies in the world. Europe and.Central AsiaregianandMiddle Eduard Boa, My T. Vu, and Ann Levin * The most populous country in the East and North Africa region combined. (November 1992) world is China, with a population of 1.2 Among trends observedL billion. Its population growth rate, 1.5 * AlloftheBank'sregionshavepositive TheBank's largest region iastAsia and percent in the early 1990s, is low for a population growth rates, but a few coun- Pacific, which currently has 30 percent of low-income country and is due to the low triesare losingpeople. These countries are the world's population. It is followed by level of fertility achieved in the last two inoneoftworegions:inLatinAmericaand SouthAsia with2lpermentAfrica with 10 decades. the Caribbean, where several small island percent, Europe and Central Asia with9 * India, the second most populous countries (Dominica, Grenada, and St. percent, LatinAmerica and the Caribbean country, has an estimated population of Kitts and Nevis) have recently had nega- with 8percent, andMiddle East andNorth 883 million in 1992. Because ofits higher tivegrowthrates,andinEurope(Bulgaria, Africa with 5 percent. total fertility rate,itis growingfaster than Hungary, and Ireland). In the case of the China - 2-0 percent a year - despite Caribbean islands, the cause ofpopulation Population projectionsfor all countries are higher mortality. The population oflndia decline is outmigration, whereas in East- prepared annually by the Banks Popula- is projected to surpass the 1 billon mark prn Europe it results from a combination tion and Human Resources Department. in the year 2000 and to surpass China in of below-replacement fertility and out- They are published firstin summary form total population by 212t. migration. in the Banks World Development Report This paper is a product of the Popula- * OntheAmericancontinentfertilityin and later in greater detail as technical tion, Health, and Natrition 1-fision and all countries has dropped to below 6 chil- notes or working papers and, in alternate the Population Policy and Advisory Ser- dren per woman, but some countries have years, as a book. vice of the PopuAation and Human Re- gone much further than others. The total' Separate papern cover the six Bank re- sources Department. Copies of the paper fertilityrate forLatin America isinterme- gions: (1) Africa (Sub-Saharan), (2) Latin are available free from the World Bank, diate at 3.1, and replacement fertility is America and the Cnibbean(andNorthern 1818 H Street NW, Washfn)ton, DC projected tobereachedineverycountryno . America), (3) East Asia and Pacific region 20433. Please contactOtilia Nadora, room later than 2035. In Northern America, fer- and South Asia region combined, and (4) S11-219, extension 31091. tilityis at 2 children per woman -that is, EuropeandCentralAsiaregionandMiddle just below replacement level. East and North Africa region combined. * At theregionallevel,international net Among trends observed; 1033. Latin America and the migrationhasatrivialeffectonpopulation * In Asia, most countries have begun Caribbean Region (and Northern growth. The most significant flow in the the transition from high to low fertility, America) Population Projections, world occurs between Latin America and with declines in many countries starting 1992-93 Edition the Caribbean aad Nortbern America, before and during the 1970s. In East and which amounts to just over one-half mil- Southeast Asia, fertility has already My T. Vu, Eduard Bos, and Ann Levin lion persons per year. Migration often oc- reached a low level of 2.5 children per (November 1992) curs for unpredictable reasons, and is of- woman. South Asia, at 4.1 children per ten reversed in a short time. The projec- woman, has progressed less far in this In Latin America and the Caribbean, life tions of future net migration assume a process, and Southwest Asiahas still fur- expectancy is slightly above the world's gradual declinetoserofrom currentlevels. Pollcy Research Working Paper Serles 119 This paper isa product ofthe Population, gence of financial conglomerates, or uni- Takacs develops a model to illustrate Health, and Nutrition Division and the versal-type banks, andquestions whether the economic impact and welfare cost of Population Policy and Advisory Service of - in the face of limited managerial and importprohibitions,localcontentrequire- the Population and Human Resources institutional capability, limited capability ments, and export requirements. She ap- Department. Copiesofthe paperareavail- for supervising financial markets, and plies that model to Philippine data. able free from the World Bank, 1818 H extraordinary financial market risks - Herresultsindicatethattheprotective StreetNW, Washington, DC20433.Please financial conglomerates simultaneously regime in the Philippines imposes sub- contact Otilia Nadora, room S11-219, ex- pursuing conflicting fundamental and stantial costs on consumers and encour- tension 31091. transitional objectives will prove viable. ages the allocation of resources to rela- Scott advocates delaying the emergence tivelyhigh-cost activities. Eliminating all of financial conglomerates until skills are of the restrictions overnight may lead to 1034. Revising Financial Sector developed andmarketturmoil subsides. In adjustment problems, but gradual liber- Policy In Transitional Socialist the transitional period, regulatory policy alization could limit these problems. Economies: Will Universal Banks would assign to banks primary responsi- The proportion of domestic conten re- Prove Viable? biltyforachievingfundamentalobjectives, quired, the percentage of compensatory and would encourage nonbank financial exports required for kits, and the tariff David H. Scott institutions to pursue transitional objec- rates on kits could be lowered in stages, (November 1992) tives. Policy should promote financial according to a preannounced schedule, to soundness in the banking system, to con- allowgradualadjustment. The prohibition In the transitional period, regulatory pokey trol the potential costs to government of on imports of assembled vehicles could be should assign to banks primary responsi- achieving its fundamental objectives. replaced bya tariffand phased out gradu- bilityforachievingfundamentalobjectiues: This paper-a product ofthe Financial ally. To avoid proportionatelymore protec- establishing and maintaining the integrity Policy and Systems Division, Country tion of the assembly industry, the tariff on of the payments system and the safety of Economics Department - is part of a finished autos could be phased out more depositors' savings, and ensuring that larger effort in the department to study quicidy than theothertariffs, toavoidsend- money markets function. It should encour- financial reform in transitional socialist ing false signals to the domestic industry age nonbank financial institutions to pur- economies. Copies of the paper are avail- about the direction of adjustment sue other objectives such as the privatiza- able free from the World Bank, 1818 H To avoid increasing the effective rate of tion and restructuring ofenterprises. Street NW, Washington, DC 20433. protection on as..embly operations during Please contact Karin Waelti, room N9- liberalization, elimination ofthe domestic Focusingoneffortsunder wayinmost tran- 043, extension 37664 (24 pages). content and compensatory exportrequire- sitional socialisteconomies, Scottquestons mentsishouldbeaccompaniedbydecreases whether the banks emerging in the new in the tariffrates an assembled vehicles. policy framework will prove viable or be 1035. How Import Protection This paper - a product of the Trade supervisable.Heoffersamodeloffinancial Affects the Philippines' Motor Policy Division, Country Economics De- sector structure designed to foster the de- Vehicle Industry partment-ispartofalargereffortinthe velopment of a sound banking system. department to evaluate trade policy mea- In describing the environmentin which Wendy E. Takacs sures and recommend methods of trade financial policy is being revised, Scott (November 1992) policy reform. Copies of the paper are notes that the extraordinary challenges available free from the World Bank, 1818 policymakers face might influence the Heavy protection ofmotor vehicle imports H Street NW, Washington, DC 20433. shape ofpolicy. He is concerned that poli- in the Philippines imposes substantial Please contact Dawn Ballantyne, room cies to promote a sound banking system costs on consumers and encourages the N10-023, extension 37947 (31 pages). *might be overlooked or sacrificed, misallocation of resources to relatively Fundamental policy objectives, says high-cost activities. Scott, are those important to long-term 1036. Output Decline In Hungary *economic well-being. Theseincludeestab- The motor vehicle industry in the Philip- and Poland in 1990-91: Structural lishing and maintaining the integrity of pines is regulated and protected by the Change and Aggregate Shocks the payments system and the safety of provisions of development programs for depositors' savings, and ensuring that cars, commercial vehicles, and motor- Simon Commander and Fabrizio Coiifi money markets function. Transitional cycles. Each program virtually prohibits (November 1992) objectives, on the other hand, relate pri- theimportofcompletelybuilt-up vehicles, marily to the immediate task of privatiz- specifies minimum local content require- Two different paths to refbm appears to ing and restructuring enterprises. ments for vehicles assembled in the coun- have led to two different outcomes in eco- Policymakers mustbalance inherent con- try frm imported completely knocked- nomieperformance Whatare the lessons? flicts between the two kinds ofobjectives down kits, and requires thatfirms assem- while promoting the achievement ofboth. bling kits export to earn foreign exchange Commander and Coricelli trytodistinguish Many transitional socialist economies, to cover the cost of the kits. between general and national features in he observes, adoptapolicyframework that Similarprotectiveregimes have existed explainingtheimpulse,tnsamonchan- envisions universal banking. He assesses in a number of countries, especially in nels,andpathofoutputdclineinHungary the consequences of the immediate emer- Latin America. and Poland. 120 Policy Research Working Paper Serles It is clear that output losses are mas- 1037. Vocational Secondary 1038. Determinants of Expatriate sively concentrated in the socialized in- Schooling, Occupational Choice, Workers' Remittances in North dustrial sectors, but they identify signifi- and Earnings in Brazil Africa and Europe cant differences in the distribution of those losses and their associated employ- Ana-Maria Arriagada and Adrian Ziderman Ibrahim A. Elbadawi and Robert de Rezende ment outcomes; in the timing and degree (November 1992) Rocha of synchronization of those losses; and in (November 1992) the two countries' different policy re- As part ofa "new waue'ofstudies on the sponses to these powerful recessionary efficacy of uncational school, this one re- The level of remittances from expatriate pressures. ports the finding that students who com- workers is significantly affected by eco- In particular, they try to separate plete vocational school and work in a re- nomic poicies in the home (labor-export- shocks particular to a sudden (Polish) big lated field earn more than vocational stu- ing) country. Special incentive schemes bang and those attributable to a more dents who work in unrelated fields and cannot substitute for a stable, credible gradual path of reform (Hungary). more than academic graduates. macroeconomic policy. The contrast between Hungary and Poland is less robust than initial impres- Empirical studies on the efficacy of voca- Elbadawi and Rocha review the theoreti- sions led one to expectL By 1991, both tional education, mainly in developing cal literature on the determinants of in- economies have open trade regimes, and countries - a literature now comprising ternationalworkers'remittancesandthen a practically fullyliberalized price system. dozensofevaluation studies -have been positan empiricalmodel thataccountsfor The magnitude of shocks to both econo- fairly unanimous in recording a negative demographic, portfolio, and macroeco- mies and the accompanying macroeco- verdict on the costs and benefits of voca- nomic factors that - together with spe- nomic policies clearly diverged. The role tional secondary education, particularly cialincentivepolicies-determine official of macroeconomic policies was easier to compared with traditional academic remittances. isolate in 1990, before the full effects of the school. They estimated the model using data CMEA shock could be felt. Interestingly, Arriagada and Ziderman, in this study fromfivemajorlabor-exportingcountries in 1990, the decline in output was far setin Brazil, reach a different conclusion. of Narth Africa and Europe: Morocco, Por- smaller in Hungary than in Poland, and Like a number of recent evaluation tugal, Tunisia, Turkey, and the former was of rather a different nature. In 1990, studies (for Hong Kong, Israel, and the Yugoslavia. The econometric results employment declined more rapidly than United States), this one challenges the es- strongly corroborate the modePs predic- output in Hungary, but lagged sharply tablishedorthodoxybyreportingfindings tions and reveal interesting policy impli- behind output in Poland. So productivity far more supportive of vocational school- cations. increased, albeit marginally, in Hungary, ing- Unlike traditional approaches, it fo- In planning for the future growth of while declining sharply in Poland. Con- cuses on the relationship between field of remittances, labor-exparting countries trary to expectations, the Polish big bang vocational study and subsequent occupa- should explicitly take into consideration approach has produced less adjustment tion. the history of migration, since an aging than the more gradual approach followed Arriagada and Ziderman report that labor force abroad will be less inclined to by Hungary. students who complete vocational school remit- Labor-exporting countries should One reason for this could be the lack of and workin related fields have significant also accountfor the economic prospects of progress on microeconomic reforms that earningsadvantagesoverstudentswhodo the major labor-receiving countries and have accompanied the drasticshiftinmac- not work in fields related to what they for the geographical distribution of their roeconomic policies. But Commander and studied and over students who complete migrant labor. Coricelli suggest that this result could also academic school. Elbadawi andRocha'sresults showthat be associated with the two different paths This paper - a product of the Educa- remittances are significantly affected by to reform, the big bang and gradualism. tion and Employment Division, Popula- economic policies in the home (labor-ex- This paper - a joint product of the tion and Human Resources Department porting) countries. Special incentive National Economic Management Divi- -is part of alarger effort in the depart- schemes cannot substitute for a stable, sion, Economic Development Institute, ment to provide policy guidance for voca- credible macroeconomic policy. and the Transition and Macro-Adjustment tional and technical education and train- Thispaper-aproductoftheTransition Division, Country Economics Department ing Copies ofthe paper are available free and Macro-A4justment Division, Country - was presented at the conference on the from the World Bank, 1818 H Street NW, EconomicsDepartment, andthe Trade and "Macroeconomic Situation in Eastern Eu- Washington, DC 20433. Please contact Finance Division, Technical Department, rope," organized by the IMF and the World Cynthia Cristobal,room S6-214, extension Europe and Central Asia and Middle East Bank, andheldin Washington,DCinJune 33640 (16 pages). and North Africa regions - is part of a 1992. Copies of this paper are available larger project funded by the two depart- free from the World Bank, 1818 H Street ments, "2he Determinants of Expatriate NW, Washington, DC 20433. Please con- Workers' Remittances. Copies of this pa- tact Olga del Cid, room M3-047, extension perare available free from theWorldBank, 35195 (44 pages). 1818HStreetNWWashington,DC20433. Please contact Lanha Ly, room H9-07, extension 37352 or Anna Maranon, room N11-025, extension 31450 (56 pages). - icy Research Working Paper Series 121 39. Education, Externalities, Weale developsasimulation model from * under severe macroeconomic imbal- - tility, and Economic Growth workbyBarroandBecker.Themodel links ances. fertility decisions with consumption/saving DeMelo andDbarstudythereform pack- xtin Weale decisions. In this model, parents derive age of trade liberalization, stabilization, tember 1992) utility from their children's welfare; as a and supporting policies in Argentina, Bo- consequence, children areaform ofsaving. livia, Chile, Meidco, and Uruguay. They reationyields externalities that appear The model is extended toreflecteducation conclude that for the economies in transi- nger in macroeconomic data than in asan endogenous decision and then further tion: sehold-Ievelstudies. Simulations show to look at the effects of an external effect of * Rationalizing the foreign trade re- - there isa small growth externality as education on economic growth. Simulations gime is crucial for the success of stabili- 6 as a fertility externality which is in- demonstrate that the rate of return on zation measures. nced by the rate of return to education education relative to that on physical capi- * Rapid,far-reachingreformis possible Live to that on physical capital. talisamajorinfluenceanfertility,suggest- in sectors that were subject to prolonged ing that the model sheds some light on periods ofheavy protection. benefits of education are usually as- education's external effect on fertility. * Sustainedgrowthrequiresacompre- edbyanalyzingratesofreturn. Social This paper - a product of the Educa- hensive reform package, with supporting s ofretur reflect the fact that educa- tion and Employment Division, Popula- policies for labor, capital, and domestic .--- may be provided free or at a subsi- tion and Human Resources Department product markets. !d price and that a part of any - is part of a larger effort in the depart- * Liberalization ofthe financial sector vidual's income accrues to the state ment to establish the linkages between requires investigating the links between --)ugh taxation. But they typically do not human capital investments and economic commercial banks and private sector hude private benefits that are not di- development. Copies of the paper are firms. tly connected with the individuars available free from the WorldBank, 1818 * Iftradeliberalizationistosucceedin ;s earnings; nor do they include the H Street NW, Washington, DC 20433. the long run, itis important to study the rnal effects of education on economic Please contact Cynthia Cristobal, room evolution of the real exchange rate and wth. S6-035, extension 33640 (51 pages). measures to stabilize it. Some benefits are generally omitted In the final section of the paper, de Melo o calculations of social returns to edu- andDharstudytherecentimpetustoward -on, but the estimates produced - 1040. Lessons of Trade trade liberalization through regional ar- ging from 13 percent to 26 percent - Liberalization in Latin America rangements in Latin America. The issue implausibly high. There are several for Economies In Transition isrelevanttocountriesinEasternEurope ;ons for this. Studies may not reflect and theformerSovietUnionbecause they factthatfamily backgroundinfluences Jaime de Melo and Sumana Dhar belongedto the CMEA, aregional trading -.1 the likelihood ofparticipatingin edu- (November 1992) arrangement, and because such arrange- -on an da person's future earning power ments are evolvinganewamongcountries a without education. Failure to take The reform packages of trade liberaliza- in the former Soviet Union. munt of the effects of quality of educa- don, stabilization, andsupportingpolicies This paper - a product of the Trade L may also lead to upward bias. in Argentina, Boliuia, Chile, Mexico, and Policy Division, Country Economics De- An alternative approach is to make Uruguay offer lessons for the economies in partment-was preparedforthe UNDP/ Us-country comparisons using macro- transition in Eastern Europe and the TEP Conference on 'World Experience of iomic data. A number of such studies former Soviet Union. Trade Liberalization" held in Kiev, June discussed. In assessing whether edu- 9-11, 1992. Copies ofthis paper are avail- on has any external effect on economic After four decades as prime examples of able free from the World Bank, 1818 H -rth, assumptions must be made about inward-looldng trade policies and import- Street NW, Washington, DC 20433. cation's direct effect on earning power. substituting industrialization, several Please contact Dawn Ballantyne, room ed on a conservative figure ofa 5 to 8 Latin American countriesundertookcom- N10-023, extension 37947 (40 pages). :entincreaseinearningsforeveryyear prehensive trade liberalization and mac- ducation, there is some evidence to roeconomic adjustment in the 1980s. De port the presence of a small external- Melo and Dhar contend that the experi- 1041. Family Planning Success but the evidence cannot be said to be ences in those countries are relevant for Stories In Bangladesh and India rwhelming. - the economies in Eastern Europe and the There is, however, much clearer evi- former Soviet Union in transition from Moni Nag ce of a link between education and socialism to market economies. (November 1992) ility rates. The effect is observed in In all ofthese LatinAmericancountries, h macroeconomic data and household the move toward an outward orientation Wizen resources are limited, a progmram lies, but is strongerin macroeconomic occurred that encourages people to take advantage tGr reasons that are not clear. This * when the economy was facingalarge ofexisting services may be more proatical et constitutes an externality that-at negative external shockbecauseaffalling than one that provides new services mne of widespread (but not universal) terms of trade and rising debt payments; ern about population growth - is of * after several decades of protection- TheM atlabPrcjectinBangladeshandthe it importance. ism; and Kundam Project in India have demon- 122 Policy Research WorkIng Paper Series strated that a significant rise in contra- 1042. Family Planning Success Adequatefunding.Bothprojectshad ceptive prevalence can occur in socioeco- In Two Cities In Zaire special funding that allowed them to ex- nomic environments that are generally periment with approaches for increasing conducive to high fertility and mortality. Jane T. Bertrand and Judith E. Brown contraceptive prevalence. That funding Nag describes the inputs and outputs of (November 1992) may partly explain their organizational thesetwo projects and tries toidentify the autonomy and may have contributed to factors underlying their success. Factors that contribute to the success of the sense of purpose and esprit de corps Both projects are experimental in the f1mily planning programs include deuet- that developed among project staff. sense that in each an intervention area is aping astrong senseofmission among staff Larger-scale programs in Zaire have op- provided with special inputs thatare not members, ensuring an uninterruptedsup- erated with significant financial con- provided to a contiguous control area. The ply of contraceptives through outlets in straints, so it would be unfair to compare special inputs were different for the two many locations, andestablishing a system them with these more successful projects. projects. of regular, supportive supervision. Also Special funding does notguaranteeproject In the intervention area in Matlab, the important: enough organizctional au- success but may make it far more likely, project took responsibility for providing tonomy (perhaps through decentraliza- conclude Bertrand and Brown. family planning and some rudimentary tion) to make staff members feel respon- This paper - a product of the Popula- maternal and child health services that sible for achieving project objectives. tion Policy and Advisory Service, Popula- were considerably different from those tion and Human Resources Department provided in the national program. In Both projects described here, Matadi and - was prepared for a review of effective Kundam, the project did not take respon- Kananga, helped health providers in those family planning programs. Copies ofthis sibilityfor providing services in the inter- two cities offer clinical family planning paper are available free from the World vention area, but rather tried to mobilize services. But their approaches differed Bank,1818HStreetNW,Washington,DC the community through various clubs and markedly.PRODEF/Matadi concentrated 20433. Please contact Otilia Nadora,room committees to take the most advantage of on pioneeringcommunity-baseddistribu- S11-219, extesion 31091 (36 pages). the government's family planning and tion of contraceptives, with carefully su- - other development programs. pervised distributors. The Kananga The success of the Matlab Project can Project emphasized clinical supervision 1043. DerivIng Developing Country be attributed to various aspects of the and pleasingthe lients*intducedsocial Repayment Capacity from the organizational system developedfordeliv- marketing withloose supervision ofretail- Market Prices of Sovereign Debt ering consumer-friendly services. The ers; and provided an information team success of the Kundam Project can be at- skilledin face-to-bce group meetings, plus Stijn Claessens and George Pennacchi tributed to various aspects of the system a weekly radio program. (November 1992) developedforcommunitymembers'active Four factors common to both projects participation in the program. seemed to contribute to their success: The market prices of developing countries' The projects are notfully replicable be- * The single-minded dedication ofstaff debts are imperfect indicators ofthe coun- cause ofinadequate human andfinancial memberstomakingfamilyplanningwork. tries'payment capacity, for three reasons: resources, but the lessons learned from * An uninterrupted supply of afford- the concave shape ofthedebt'spayoffatruc- them should be useful in improving na- able contraceptive methods available tre, the presence ofthird-party guaran- tional programs. The Kundan Project is through outlets at many locations. tees, and the differences in the terms of more realistic in the sense that it focuses * Enough organizational autonomy to various debt claims. This new model takes on activities that supplement local activi- be able to respond to problems as they those factors into accoun ties of the national program rather than arose. Such autonomy made project per- substitute for them (as in the Matlab sonnel identify more with project goals The marketprices ofdevelopingcountries Project). Thus the Kundam Projectis more and feel responsible for achieving project debts are imperfectindicators ofthecoun- likely to be replicable than the Matlab objectives. tries'paymentcapacity,forthreereasons: ProjecL * Regular and supportive supervision the concave shape of the debts payoff This paper - a product of the Popula- of those responsible for service delivery. structure, the presence of third-pary tion and Human Resources Department Both projects emphasizedregular contact guarantees, and the differences in the - was prepared as a background paper with clinic personnel - Matadi also in- terms of various debt claims. for the best practices paper on effective cluded distributors. These contacts bol- Claessens and Pennacchi derive an family planning programs. Copies ofthis steredmorale by showing that the project improvedindicatorofpaymentcapacityby paper are available free from the World administration was closely following ser- developingapricingmodel-usingoptin Bank, 1818 H StreetNW, Washington,DC vice providers'activities and bytransmit- valuation techniques - that takes these 20433. Please contact Otilia Nadora, room tingto providersthe staffs enthusiasm for three factors into account. S11-219, extension 31091 (37 pages). project activities. Supervisory visits in- Applying the model to bonds issued re- cluded administrative functions such as cently by Mexico and Venezuela, they find collecting service statisticsand cantrolling that the estimated indicator of payment inventory, but these activities were capacityoftenbehavesdifferentlyfromthe handled in a friendly, nonthreatening rawbondpricesthemselves,confirmingthe manner that encouraged service provid- importance of cleaning the raw prices for ers to perform their tasks well. these threefactorsIn orderofimportance, Policy Research Working Paper SerIes 123 the benefits of cleaning raw prices come Although theirpaperisintendedprima- * Doubling female secondary school first from correcting for the effects of dif- rily for those workingin developingcoun- enrollmentin 1975 from 19 to 38 percent ferent terms (such as fixed versus floating tries, the discussion ofcost function meth- would have reduced the infant mortality interest rates), followed by the value of odology has broad implications for inter- rate from 81 to 38. Halving the ratio of third-partyenhancements and thenby the pretingeconometriecost functions and for population per physician would have re- concavity of the payoff structure. examining economies of scale and scopein duced the infant mortality rate only from They find some evidence that the new both developing and industrial countries. 85 to 81. Doubling per capita GDP from indicator ofrepayment capacityconforms Their survey ofeconometric techniques $650 to $1,300 would have reduced the better than the raw prices themselves to is not uncritical. They question, for ex- infant mortality rate only from 98 to 92. generally held beliefs about which vari- ample, the validity ofrecenttests ofover- * Doubling female secondary school tbles drive a country's repayment capac- capitalization undertaken on American enrollment (from 19 toS8 percent) in 1975 ity. In particular, they find that variables hospitals. They also make general obser- would have lowered the number of births that are often assumed to be related to vations about the methods used to inves- by 29 percent of the 1985 number. Dou- payment capacity-such asoilpricesand tigate economies of scope and economies bling family planning services wouldhave the countries' stock market prices - are of scale. reduced it by 3.5 percent. more closely (and with the right sign) as- Thispaper-aproductoftheHealthand * Doubling female secondary school sociated with the new estimated measure NutritionDivision,PopulationandHuman enrollment would have reduced infant ofpayment capacity than are the second- ResourcesDepartment-ispartafalarger deaths by 64 percent. Halvingthe ratio of ary market prices of the bonds. effort in the department to examine the population per physician would have re- This paper-a product ofthe Debt and efficiencyofresource allocationforhuman duceditonlyby2.5 percent. Doublingper International Finance Division, Interna- services. Copies of thepaper are available capita GDP has no effect on reducing in- tional Economics Department-is partof free from the World Bank, 1818 H Street fant deaths, all other factors being con- a larger effort in the department to study NW, Washington, DC 20433. Please con- stant. the determinants of secondary market tact Otilia Nadora, room S11-219, exten- Female education affects desired fam- prices of developing countries' debt Cop- sion 31091 (32 pages). ily size by raising the opportunity cost of ies of the paper are available free from the a woman's time in economic activities, World Bank, 1818 H Street NW, Washing- increasing demand for family planning, ton, DC 20433. Please contact Rose Vo, 1045. Social Gains from Female and promoting more effective contracep- room S8-42, extension 33722 (37 pages). Education: A Cross-National Study tive use. This paper is a product of the Women Kalanidhi Subbarno and Laura, aney in DevelopmentDivision,Population and 1044. Hospital Cost Functions (November 1992) Human Resources Department Copies of for Developing Countries the paper are available free from the Female secondary education, family plan_ WorldBank,1818 H StreetNWWashing- Adam Wagstaffand Howard Barm. a ning and health programs all reducefer- ton, DC 20433. Please contact taria (November 1992) tility and infant mortality-but the effect Abundo, room S2-270, extension 36820 (50 of female secondary education appears to pages). A critical surveyofthetechniques available be particularly strong. for analyzing hospital costs and a review of the few hospital cost-flmction studies SubbaraoandfRaneyexplorethe strength --1046. World Bank Project-FInanced undertaken for developing countries. offemale secondary educationrelative to, Research on Population, Health, andin combination with, familyplanning arid Nutrition There is an extensive literature on hospi- and health programs in reducing fertility Cal cost functionsforindustrial countries, andinfantmortality. Theyfind thatfam- J.Price Gittinger and Carol Bradford anda small literature for developingeoun- ily planning and health programs do in- (November 1992) tries. Yet the. issues facing policymakers fluencefertilityandmortality,butthatthe in all countries are much the same: Are impact of expanding female secondary Most population, health, and nutrition hospitals overcapitalized, as is often enrollments appears to be much greater, projectsprouidefinanceforresearc. Per- claimed of U.S. hospitals? Are hospitals especially in countries with low female sonalities-afboth borrowers and Bank inefficientin otherrespects? Dohospitals secondary enrollment. Fertilityandinfant staff-makea diffencein the quality of vary in efficiency? Are private hospitals mortality are more elastic with respectto research. Supervision and peergroup re- more efficient than their public counter- female secondary education than to fam- view also makea diffrence, and more best- parts? Should hospitals specialize or pro- ily planning and health programs. Their practices wo4shops are in order. vide a broad range of services? Should simulations suggest: costs bereducedby concentrating casesin * Doubling female secondary school This report on World Bank project-fi- fewer hospitals? enrollnient(from 19 to 38 percent)in 1975 nanced research on population, health, . Wagstaffand Barnum critically survey wouldhave reduced the total fertility rate and nutrition (PIIN) is based on a review the techniques available for analyzing in 1985from 5.3 to3.9. Doublingtheafam- of 109 staff appraisal reports for projects hospital costs and review the few hospi- fly planning service score" (from 25 to 50 financedinfiscal 1980-91 and on selected tal cost-function studies undertaken for percent) in 1982 would have reduced the interviews with task managers. The re- developing countries, total fertilit rate only from 5.51Z 5.0. portlooksatanly thesimplestdimensions 124 Policy Research Working Paper Series ofproject-financedresearchandexamines H Street NW, Washington, DC 20433. ability to reward merit. research outcomes of only afew projects. Please contact Otilia Nadora, room S11- In the 1980s, public spending increas- Among conclusions tentatively reached* 219, extension 31091 (16 pages). ingly channeled limited financial re- * Morethan 90percentofPHNprojects sources and human capital toward from fiscal 1980-91 financed research. nondeve- lopment purposes, including * Bank experience with project-5- 1047. COte d'lvolre: Private Sector poorly performing enterprises and elite- nanced research in the PHN sector has Dynamics and Constraints oriented services, precluding their use in been extremely variable: quite successful the private sector. The methods offinanc- in some countries and almost a total fail- Enrique Rueda-SabaLer and Andrew Stone ing public spending (such as withholding ure in others. Even so, some striking suc- (November 1992) taxes and accumulating arrears) have cessesjustify continued efforts toincorpo- sharply curtailed the capital available to rate research into projects and to encour- Taxes weigh heavily on private firms, private enterprises. The public sector's age use of that research to improve both while the burden of labor regulations is dramatic accumulation of arrears and national PHN policy and follow-on Bank- reduced by informal responses. But the growingreputation as abadcustomerare financed projects. essential precondition for a substantial undermining the competitive private sup- * Personalities makeadifference,both supply response is continued macroeco- plyofgoodsandservicestothegovernent among borrowers and within the Bank. nomic policy reform. Government -employment policies at- Often successes are associated with a tractmanyofthemostqualified potential particular person within the government Private sector assessments provide infor- entrepreneursandbusinessprofessionals or the Bank who has taken a continuing mation and analysis essential to formu- to government employment. personalinterestinencouragingresearch. lating strategies for alleviating con- Rather than a sharp divide, there is a * Supervisioniscrucialtogoodresults. straints on private sector development. continuum between small informal and Supervision must be frequent enough to They are meant to contribute both to the largeformal firms. Somemedium-size and keep theresearchcomponenton time and Banks policy dialogue with borrowing large formal firms engage in informal ofgood quality. For quality research to be governments and to the formulation of behavior,andlargefirms sometimeslower completed, it is important that those re- country assistance strategies. their costs through links with informal sponsible for supervision attach a high Rueda-Sabater and Stone examine the firms - including purchases of inputs priority toresearch even ifitis not alarge constraints on growth faced by private that have escaped regulation andi taxes. part of the project in terms of budgeL enterprises and how these relate to the This paper - a product of the Public * Research that lends to a project out- policy and institutional enviromnent in Sector Management and Private Sector come - such as research needed to jus- Cte dvoire- They employ new data Development Division, CountryEconom- tify release of funds or for a follow-on sources as well as surveys of andin-depth ics Department-reflects an early appli- project-is more likely tobe undertaken interviews with, private entrepreneurs. cationof a methodology far private sector and completed than is research with a They focus on: assessment developed by the Division to more general objective. * The effects oftaxes andlaborregula- identifyconstraints on,andprioritiesfor, * In countries where the institutional tion on private firms. the development of a country's private capability exists, usinganational institu- * The impact of public spending on sector. Copies of the paper are available tion to review research proposals and to private sector development. free from the World Bank, 1818 H Street administer research grants can be quite * The role of informalityin enterprise NW, Washington, DC 20433. Please con- effective. Experience indicates that some activity. tactPriscillalnfante,roomN9-059,exten- sortofpeer-group review produces better Among their findings: sion 37642(48 pages). research. Tax policy and enforcement impose a * Thereisprobablyroomformorebest- heavy financial burden on a shrinking practices workshops wherePHN staffcan base offormal enterprises, whose regula- 1048. Targets and Indicators exchange experiences about successful tory burden has also grown. Taxes are In World Bank Population Projects design and supervision ofproject-financed increasingly independent ofa firm's prof- research components. But usually it will its. This substantial fixed cost may lead George Baldwin be necessary to retain experienced con- some businesses to eit prematurely and (November 1992) sultants to help design substantial re- may discourage others from formal entry. search components. The overall tax burden on small and me- The Bank should strengthen its use ofin- * More systematic collection and dis- dium-sizeenterpriseshasrisendispropor- ternationalcomparisons and trndanaly- seminationofproject-financedresearchis tionately, to levels that discourage formal sis rather than increasing its use offtrget justified, given the considerableamounts participation in the economy. Informal setting;theuseofdenographicandhealth of money and effort devoted to it. firms pay some taxes, but there is consid- surveys should be the rule, not the excp- 'This paper-a productofthe Healthand erable leakage in collection. ion, in Bank population and health Nutrition Division, Population andHuman Unnecessamyrigiditiesinlaborpolicies projects: and more atention should be Resources Department-ispartofalarger weigh lessheavily than expected on firms, giuentoprogram-levelthamtoproject-evel effort in the department to disseminate becausetheyavoidtheirfullcoststhrough performance. Bank-fimded population, health, and nu- such means as subcontracting and ap- trition research. Copies of the paper are prenticeships. The restrictions nonethe- In reviewing World Bank evaluations of available free from the World Bank, 1818 lesslimitfirms'flexibility ofoperation and theimpactofpopulationprojects, Baldwin Policy Research Working Paper Series 125 explains the nature and uses of four famni- * That operational staff show more data from 11 high-inflation countries pro- lies of performance indicators. Two mea- concern far a programs contraceptive mix. vide empirical support for their model. sure inputs: * That more attention be paid to a Relaxing the hypothesis of a constant Project implementationindicators, which program's service quality. semi-elasticityleadsto estimates showing are project-specific, are the principal mea- * That the use of demographic and that, on average, the semi-elasticity of sures used in Bank supervision. They mea- health surveys be the rule, not the excep- money demand with inflation increases sure success in creating sources capable of tion, in Bank population and health with inflation. conducting certain desired activities. projects. The results imply well-behaved Laffer Process (or actiuity) indicators measure This paper - a product of the Popula- curves that peak at plausible inflation performance ofa project?s intended activi- tion Policy and Advisory Service, Popula- rates; under the Cagan form, there is no ties but tell nothing about the "yield" or tion and Human Resources Department seignorage Laffer curve. output of those activities. - is part of a larger effort in the depart- In addition, the estimates based on the And two measur- output. ment to assess the performance of family correct measure of the opportunity costof Performance (or intermediate-output) planning programs in developing coun- holding money contrast starkly with im- indicators measure the yield or output- tries.Copiesofthepaperareaviulablefrhe plausibly high LafTer-curve maxima ob- performance of a project or program. For from the World Bank, 1818 H StreetNW, tained when usingconventional but wrong family planning, the principal indicatorin Washington, DC 20433. Please contact measures of inflation this categoryis acceptorfigures, normally Otilia Nadora, room S11-219, extension This paper-aproductofthe Transition with details about methods used plus the 31091 (57 pages). and Macro-Adjustment Division, Country age, parity, and geographical distribution Economics Department - is part of a of acceptors. Quality may or may not be largereffortin the departmentto assess the good and coverage may or may notbe com- 1049. Money Demand and relationship between fiscal deficits money prehensive. These indicators do not di- Seignorage-Maximizing Inflation creation, and inflation. The study was rectly measure ultimate demographic funded by the Bank's Research Support impacts-lowerfertilityandslowerpopu- William Easterly, Paolo Mauro, Budget under research project '"he lation growth. and Klaus Schmidt-Hebbel Macroeconomics ofPublic Sector Deficits" Demographicoutcome (or impact) indi- (November 1992) (RPO 675-31). Copies of this paper are cators do measure demographic impacts, available free from the World Bank, 1818 usually thecontraceptiveprevalencerate The elasticity of substitution in transac- H Street NW, Washington, DC 20433. and age-specific and total fertility rates. tions between money and bonds is a cru- Please contactRebeccaMartin,roomN1l- One can use a desired value ofany com- cia determinant of the seignorage-maxi- 021, extension 31448 (32 pages). paratorasatarget,butatargetisonlyone mizing inflation rate and of whether the possible comparator. Two more widely semi-elasticity of money demand with in- usedcomparatorsforfamilyplanningae flation increases with inflation. 1050. Marginal Incomr. Tax trends (comparing current with past per- Rates and Economic Growth formance) and international perfarmance There is widespread consensus among ln Developing Countries (an external comparison). Baldwin recom- economists that high inflation is often mends strengthening the Bank's use of caused by the governments need to raise Wilham Easterly and Sergio Rebelo world ("successful developing country") seignoragetofinancehigh budget deficits. (November 1992) standards and of trend analysis rather Depending on the shape ofthe money de- than increasing its use oftarget setting. mand function, steady-state seignorage One step closer to being able to do the The Banks primaryinterestis normally may follow a Laffer curve, where seigno- empirical work needed on the common the performanceofthe borrowers national rage first rises and then falls with higher hypothesis ofgrowth theory- that income program, so more attention shouldbe given inflation. If so, a rate of inflation exists taxes have a negative effect on the pace of to program-level than to project-level per- that maximizes steady-state inflation economic expansion. formance - except for pilot projects. Conventional estimates of the - Baldwin recommends: seignorage-maximizing rate of inflation One of the central predictions of growth * That the Bank standardize its terni- often make use of the Cagan form, which theory, old and new, is that income taxes nology about these four families of indi- implies a constant semi-elasticity of have a negative effect on the pace of eco- cators. money demand with inflation. Easterly, nomic expansion. Little empirical work * That the Population and Human Mauro, and Schmidt-Hebbel develop a has been done on the topic because of the Resources Department periodically pre- model that implies a variable semi-elas- difficulty ofmeasuring the relevant mar- parecomparatortablesandgraphsforuse ticity. They show that the elasticity of ginal tax rates. in Bank project and sector reports. substitution in transactions between Easterly and Rebelo experiment with a * That the Bank discontinue Project money and bondsis a crucial determinant method for computing average marginal Performance AuditReports on population of the seignorage-maximizing inflation income tax rates that combines informa projects, as they seldom add much to in- rate and of whether the semi-elasticity of tion on statutory rates with the amount formation and judgments contained in money demand with inflation increases of tax revenue collected and with data on Project Completion Reports. The money with inflation. income distribution saved could be applied to more effective Individual country estimates and cross- Their method relies heavily on the as- evaluation research. countrypanelregressionsbasedon annual sumption that the marginal tax schedule 126 PolCy Research Working Paper Series has a logistic form. Their method stands property, contracts, companylaw, foreign 1052. A Reappraisal of How abetterchance ofmeasuring the relevant investment, bankruptcy, and antimono- Oral Rehydration Therapy average marginal tax rate than the widely poly law. Essentially the same legal Affected Mortality In Egypt used alternative of assuming (implicitly framework exists in the Czech and Slovak or explicitly) that the income tax is pro- republics, although the legal frameworks Hda Rahad portional. of the two could diverge considerably in (November 1992) The possibility of estimating marginal the coming months and years if the coun- income tax rates suggests two lines ofre- try separates, as is expected. Do not expect too much from oral search: a study of the properties of mod- The CSFR differs somewhat from its rehydrmtiow therapy. An upper celing for els with nonlinear income taxes and a Central andEasternEuropean neighbors, the potential impact of oml rehydraion search for adequate empirical strategies especially Poland and Hungary,in that its therapy in Egypt is a 25percent reduction for testing those models with cross-coun- pre-warlegal system was more thoroughly in the infant mortality rate. try data. abrogated during the socialist period. So, This paper a product of the Transition fewer people are familiar with market- Oral rehydration therapy is the key low- and Macro-Adjustment Division, Country orientedlegal principles and practices. On cost child survival intervention used to EconomicsDepartment .spartofalarger the other hand, in 1989 the CSFR had the deal with diarrheal illness in developing effort in the department to assess the ef- advantage of starting with a relatively countries. The existence of a low-cost, fects of economic policies on long-run "clean slate' on which to craft modern highly efficacious technological fix (oral growth. The study was funded by the laws. In some areas oflaw-suchas com- rehydration salts) forthe life-threatening Bank's Research Support Budget under pany, contract, and antimonopoly law - dehydration that accompanies diarrhea research project "How Do National Poli- legalreformintheCSFRisrelativelywell- provided a strong rationale for making cies Affect Long-Run Growth?"(RPO 676- advanced and could to some degree serve oralrehydration therapy acornerstone of 66). Copies of the paper are available free as a model fqr other reforming socialist diarrheal disease control programs. The from the World Bank, 1818 H StreetNW, economies. In others - including consti- Egyptian oral rehydration therapy pro- Washington, DC 20433. Please contact tutional and real property law - legal gramhas been quotedas havingthemost Rebecca Martin,roomN11-021,extension reform is embroiled in political contro- spectacularsuccessinreducinginfantand 31448 (18 pages). versy and is lagging behind developments child mortality. But there is a need to dif- in some neighboring countries. The inter- ferentiate between the efficacy of oral ests of former property owners are clash- rehydration therapy in clinical settings 1051. The Legal Framework for ing with those of current tenants, creat- and in community use. Private Sector Activity In the Czech ing a surge of new disputes entering the The National Control offDiarrheal Dis- and Slovak Federal Republic courts. The surge in cases is likely to be eases Project (NCDDP) was launched in exacerbated as the currentmoratoriumon Egypt in 1983. A pilot program was fol- Cheryl W. Gray bankruptcy claims against state enter- lowed by national promotion starting in (November 1992) prises expires in 1993, and as cases un- Februaryl984.Asearlyas 1985, opinions derthenewintellectualpropertylawsand were being expressed aboutthe favorable In the reform of company, contract, and commercial code come onstream. The impactofNCDDPactivitiesonchildmor- antimonopoty law, the Czech and Slovak CSFR's judicial system, suffering from tality. Federal Republic could to some extent be recent purges ofjudges compromised by There is no doubt that the NCDDP amodelforotherreforming soialistacono- the formerregime as well asgenerallylow greatly increased both awareness of the mies. In constitutional and real property pay and prestige, appears tobe relatively dangers of dehydration consequent upon law, it lags behindsomeneighboringeoun- ill-preparedtocope with the skyrocketing diarrheainchildrenandknowledgeoforal tries. And the courts are relatively ill-pre- demands expected in the newly reformed rehydration therapy. But survey data on pared to handle theskyrocketing demands system. the use of oral rehydration therapy dur- expected in the newly reformed systmn. All in all, it is a time of great progress, ing diarrheal episodes show such use to great confusion, and great challenge. be far from universal (with use in fewer Since its 'velvet revolution in late 1989, This paper - a product of the Transi- than 50 percentofepisodes). urther, eth- the Czech and Slovak Federal Republic tion and Macro-Adjustment Division, nographic studies show appropriate usp, (CSFR) has moved steadily to create the CountryEconomics Department-is part in terms of timing and quantity, tobe the conditions for developing a private mar- ofalargerresearch effort on the economic exception rather than the rule. ket economy.Not onlybas the CSFR freed implications oflegal reform in Central and The maximum theoretical effect of the up the conditions forentry ofnew private Eastern Europe. Copies of the paper are NCDDP on child mortality would be to firms, but it has also taken far-reaching available free from the World Bank, 1818 eliminate all deaths from diarrhea, are- steps to return property to former owners H Street NW, Washington, DC 20433. duction of about 50 percent The mai- and to privatize large parts of its state- Please contact Maxine Berg, room N11- mum effect that could reaisticaUy be ex- ownedindustry.For this emergingprivate 021, extension 36969 (25 pages). pected is a reduction of less than 20 per- sector to thrive, there must be a clear le- cent. Analysis of a time series of infant gal framework to provide decentralized mortality from vital registration data in- 'rules of the game.? dicatesan abrupt, statistically-sgnificant Gray describes the evolvinglegal frame- change in level in 1985 amounting to a work in the CSFR in several key areas: once-offdclineofabout 15 percent Inthe Policy Research Woing Paper Series 127 absence of other changes taking place at outlook completely.Throughgovernment 1054. Distributional impact of Cash about the right time that might explain andinternational donor support, thefam- and In-Kind Social Transfers In this drop, itisconcludedthat theNCDDP fly planning program was restructured Eastern Europe and Russia probably was responsible. Thus, although andexpanded. The numberaffamily plan- many ofthe claims made for the impact of ning p.- sonnel more than doubledin some Branko Milanovic the NCDDP an child mortality in Egypt units. More service delivery points were (December 1992) appear to have been greatly exaggerated, set up - particularly in rural areas. And it does seem likely, in the absence of al- the information, education, and commu- Duringthefransitiontoa marketeconomy, ternative explanations, that the program nication and evaluation and research cash social benefits in theformerly social- significantly reduced infant mortality in units were established. Through a World ist countries must become more targetedas the mid-1980s. Bank-assistedproject(withgrantfunding well as smaller in absolute amounts. The . This paper - a product of the Popula- from Norway and Denmark), the Minis- reforming socialist economies arlikely to tion, Health, and Nutrition Division, try ofHealth began strengtheningitsfam- follow the corporatist earnings-linked Population and Human Resources De- fly planning capabilities. model of continental Europe. partment- was prepared for an interna- These efforts helped increase the con- fional workshop on 'Child Health Priori- traceptive prevalence rate from about 14 Milanovic empirically explores the distri- ties for the 1990s," 'ild in June 1991 in percentin1982 to43percentin1988.But butionalimpactofsocialtransfersincash Baltimore, Maryland, sponsoredby Johns the program's growthisbeginning to stall. andinkindinRussiaandEastern Europe. Hopkins University and the World Bank. More effortandresourcesare neededif the He shows that cash transfers, on the Copies ofthis paper are available free from program is to grow or even maintain its whole, are distributed almost uniformly the World Bank, 1818 H Street NW, presentstatus.Particularlyimportantare (equally per capita) regardless of one!a Washington, DC 20433. Please contact the following. position in income distribution. By con- Otilia Nadora, room S11-219, extension * Designing innovative strategies to trast, in market economies, absolute 31091 (26 pages). reach hard-to-reach populations. amounts of cash transfers decline as one * Giving more emphasis to informa- moves up the income ladder. tion, education, and communication, espe- The family allowance is the only type of 1053. Development ciallyformen andyouths, usingmultime- cash transferthatis somewhatfocusedon : the Zimbabwe Family dia. the poor in the socialist economies. Fam- Planning Program * Involving other sectors in the deliv- ily allowances are paid for children, and ery of family planning services. since larger households are typically Al F. Zinanga * Broadening the mix of contraceptive poorer, some redistribution is achieved. -eber 1992) methods (especially promoting long-term Education benefits are also slanted and permanent methods)- slightly toward the poor, primarily A e-vious national family planning effort * Making use of,.alternative family through the high share ofpublicapending 2a after independence in 1980. As a planning delivery systems, such as the use on primary education. As the level of -dit, the contraceptive preualnce rate of depot holders, volunteers, and govern- schooling rises, the distribution ofeduca- --- -eased from about 14 percent in 1982 ment extension workers. tion benefits resembles more closely the 3 percent in 1988. But program efforts * Establishing a national population distribution of income. now stalling. policy. Health care benefits are distributed * Considering cost recovery and other uniformly, per capita. In market econo- ily planning was introduced in Zim- measures for self-sustainment and pro- mies, on the other hand, public health we as a voluntary movement in the gram growth. benefits are targeted more to the poor- -Os. Volunteers formed aPamily Plan- This paper - a product of the Popula- primarily because the rich often opt out g Association in the mid-1960s. The tion Policy and Advisory Service, Popula- of publicly-run programs. ernment became interested in family tion and Human Resources Department During the transition, cash benefits in ining in the late 1960s after analysis - is part of a larger effort in the depart- the formerly socialist countries must be- .le 1961 population census. It gave the ment to understand the impediments to come more targeted as well as smallerin mily Planning Association an annual contraceptive use in different environ- absolute amounts. The reforming social- at, allowed contraceptives to be avail- ments. The study was funded by the ist economies are likely to follow the cor- throughMinistryofHealthfacilities, Bankes Research Support Budget under poratist earnings-linked model of conti- allowed nonmedical personnel to ini- research project "Impediments to Contra- nental Europe. e and resupplyfamily planning clients ceptive Use in Different Environments" This paper - a product of the Transi- -S condoms and pills. But before Zim- (RPO 675-72). Copies of the paper are tion and Macro-A4justment Division, we achieved independence in 1980, available free from the World Bank, 1818 Country Economics Department-ispart ily planning was viewed with great H Street NW, Washington, DC 20433. of a larger effort in the department to ?icion by the black majority, so the Please contact Otilia Nadora, room 511- study income distribution in formerly so- ram's effectiveness was limited to the 219, extension 31091(13 pages). cialist countries. Copies of the paper are aLn few available free from the World Bank, 1818 A new era began after independence. H Street NW, Washington, DC 20433. new government took over the Fam- Please contact Sabah Moussa, room N11- 71hnning Association and changed its 017, extension 39019 (39 pages). 128 Policy Research Working Paper Series 1055. Wealth, Weather Risk, and profit per unit ofagricultural assets were Please contact Maria Malca, room S13- the Composition and Profitability similar across classes of wealth. But over 139, extension 37720 (93 pages). of Agricultural Investments the sample range of rainfall variability, these rates of profit were always higher MarkR. RosenzweigandfHansP.Binswanger for the poorer farmers than for the 1057. Measuring the Incomes (December 1992) wealthier ones, suggestingthatthe disad- of Economies of the Former vantages ofsmall farmers in risk diffusion Soviet Union Inestment portfoalis ofsmallfarmers re- are more than offset by their labor cost flect their difficulties in smoothing con- advantage. Socio-Economic Data Division, sumption in the face ofhigh risks Improu- This paper is a product of the Latin International Economics Department ingfarmers'ability tosmooth consumption America and the Caribbean Technical (December1992) - pe-haps through public employment Department. Copies ofthe paperare avail- schemes or increased consumption credit able free from the World Bank 1818 H Thestudy'sestimatesofincomepercapita - would increase the overall profitability Street NW, Washington, DC 20433. for the states of the firmer Soviet Union, of their investments and would decrease Please contact Caroline Banton, room 14- while subject to considerable uncertainty, - inequality ofearnings in high-risk areas. 049, extension 34783 (42 pages). c- considered reliable enough for their primary purpose: to assign the new states Despite the growing evidence that farm- oftheSovietUnion to incomecafgoriesfor ers in low-income environments are risk- 1056. Earnings and Education Bank analytic=landoperationalpurposes. averse, there has been little empirical In Latin America: Assessing evidence ontheimportanceofriskin shap- Priorities for Schooling There is as yet no fully satisfactory way ing the actual allocation of production Investments to compare income percapitaoftheformer resources among farmers differentiated SovietUnion with that ofother economies. by wealth. George Psacharopoulos and Yimg Chu Ng Even more problematic is compiling esti- Rosenzweig and Binswanger use panel (December 1992) mates for the separate economies that data on investments in rural India to ex- have emerged with the breakup of the amine how the composition of productive In most Latin American countries, the Soviet Union. The main problem is the and nonproductive asset holdings varies earnings premium received by graduates isolatednon-marketeconomyofthecoun- across farmers with different levels of to- ofligher education decreased in the 1980s. try, compounded by the chaotic state of tal wealth and across farmers facing dif- Investment in primary education shows information services. ferent degrees of weather risk- the highest rate ofreturn among all levels The results presented here, while sub- Income variability is a prominent fea- considered. ject to considerable uncertainty, are con- ture of the experience of rural agents in sidered reliable enough for their primary low-income countries. Rosenzweig and Psacharopoulos and Ng use household purpose: to assign the new states of the Binswanger report evidence, based on survey data for 18 Latin American coun- Soviet Union to income categories for measures of rainfall variability, that the tries to assess earnings differentials by Bankanalyticalandoperationalpurposes. agricultural investment portfolio behav- level ofeducation, and toassess howthese The main difficulty was choosing a ior offarmers in such settings reflectsrisk differentials changed in the 1980s. ruble-dollarconversionfactorthataccords aversion, due evidently to limitations on Introducingthe cost ofeducation allows reasonably well with the Bankes Atlas consumption-smoothing mechanisms them to estimate private and social rates method. Official rates cannot be used be- such as crop insurance or credit markets. of return on investments on education cause they are as artificial and mislead- The authore' results suggest that across several dimensions: by gender, by ing as any other planned price, meaning uninsured weather risk is a significant level of education, by sector of employ- that they diverge by a large margin from, cause of lower efficiency and lower aver- ment, by nature of the secondary school the rate effectively applied to interna- age incomes: A one-standard-deviation curriculum, and over ti tional transactions. This study investi- decrease in weatherrisk(measuredby the The results show that, in most coun- gated three alternative conversion meth- standard deviation of the timing of the tries, the earnings premium received by ods,yieldingGNPpercapitaestimatesfor rainy season) would raise average profits graduates of higher education decreased the former Soviet Union for 1990 rang- by up to 35 percent among farmers in the in the 1980s. Investment in primaryedu- ing from $2,440 to $3,720. lowest wealth quartile. cation shows the highest rate of return The method judged most reliable (re- Moreover, rainfall variabilityinduces a among all levels considered- and is still ferred to as the synthetic Atlas-type con- more unequal distribution of average in- the number one investment priority in version factor) gave an estimate of $2,870. comes for a given distribution of wealth. most countries. That figure is somewhat at odds withAt- Wealthier farmers are willing to absorb This paper - a product of the Techni- las estimates for the former Soviet Union significant risk without giving up profits cal Department, Latin America and the and other members of the Council for to reduce production risk. Smaller farm- Caribbean Region - is part of a larger Mutual Economic Assistance (CMEA), ers have to invest their limited wealth in effort in the department to document the which may reflect the limited applicabil- ways thatreduce their exposure to risk at role of education in the region's develop- ity of the Atlas methods for historically the cost of lower profit rates. mentefforts. Copies ofthe paper are avail- planned economies. Income per capita is Theauthorsfoundthatathighlevelsof able free from the World Bank, 1818 H calculated for each of the states of the rainfall variability, differences in rates of Street NW, Washington, DC 20433. former Soviet Union and for the other Policy Research Working Paper Serles 129 European members of CMEA. These efficiency gains vary depending on building and institutionaliing coalitions The method developed here relies on a the degree of the international investor's of beneficiaries frot reform. purchasing power parity bridge from access to the emerging market securities planned to market economies. Unlike con- (access effect), on the degree to which the Turkey's adjustment experience was a ventional use of this measure, the study industrialized countries' securities mar- tremendous success in terms of structur- uses the relationship between purchasing ket span the securities offered in the ally reorienting the economy. The share power parity and exchange rates for com- emerging markets (substitution effect), ofoutput for export rose from 5 percentin parator market economies to suggest an and on the existing cross-borderarbitrage 1979 to 23 percent in 1989, and real out- Atlas-type conversion factor. The estima- restrictions put roughly doubled. The financial mar- tions for the states of the former Soviet As a byproduct of their analysis, they kets opened andhave developed depth and Union have a suggested margin of error study the reasons why country funds sell sophistication. The program failed to re- of plus or minus 10 percent at apremium ordiscountrelative to their duce fiscal deficits, inflation, income in- Incomplete reports for 1991-92 show net underlying asset value. They also equality, and the size of the ineffcient large declinesin real GDPin all countries show that the efficiency gains that arise public enterprise sector, but the transfor- = fthe former Soviet Union - as much as with the development of new funds can be mation of trade and finance fumdamen- 95 percent in some cases. It is unlikely posidve even when these funds start trad- tally altered the context of the problems, that mechanically extending results to ing at a discount. changing their effects on the private sec- 1992 will yieldmeaningfulresults, so this They conclude with a catalog of policy tor and changing the governments options study is just a beginning implications, including strategies foreffi- for dealing with them. This paper - a product of the Socio- ciently promoting country funds. For ex- The firstphase ofeconomic adjustment wronomic Data Division. International ample: was sustained, although not initiated, in wmnomics Department - is part of a * In general, introducing the country an authoritarian context, but the Turks r er effort in the department to facili- fund in the advanced or developed mar- restored democracy when the agenda for !integrationofthe historically planned ketincreases the prices of the underlying reform was incomplete. The Motherland nomries, including the former Soviet component assets traded in the originat- Party (ANAP) won office on the platform ublics, into the global economy. Cop- ing emerging markets. of economic success and eventually lost ofthe paper are available free from the * Asapolicymatter,countryfundsthat partly because of the failure of economic worldBank, 1818HStreetNW,Washing- should be encouraged by emerging coun- policy. ANAPs electoral defeatin 1991 did , DC 20433. Please contact Estela tries for introduction by fund promoters notmean, however, the demise of the pro- --nora, room S7-136, extension 33706 (70 should be targeted to those local assets structural adjustment or the pro-liberal- 'es). with imperfect or no substitutes in the ization coalitions. The long period of advanced core markets. ANAP rule helped consolidate reforms to In some circumstances, it may be such a degree that all of the principal ii58. The Pricing of Country sociallyoptimal to subsidize the introduc- parties agreed on a broadly similar eco- - ids and Their Role in Capital tion ofnewfunds that are expected to sell nomic program. The ideological differ- bllization for Emerging at a discount. ences between the left and the right-a -nomles This paper-aproduct ofthe Debtand state-directed versus a market-oriented International Pinance Division, Interna- economy - substantially diminished cDiwan,VihangErnunza, and LemmaW. tional Economics Department - is part The reforms of the early 1980s greatly her. . of a larger effort in the department to reduced the importance of rent-seeking, --ember 1992) study portfolioinvestments in developing particularly through foreign trade, but countries. The study was funded by the patronage politics become widespread ary ,itnds traded in the developed Bank's Research Support Budget under againin the secondhalfofthe decade. The ital markets can help promote the effl- research project "Closed-End Country initial strength ANAP derivedfrom privi- cy of pricing in the emerging capital Funds: Theoretical and Empirical Inves- leged access to state resources progres- -kets and can enhance capital mobi- tigation" (RPO 676-07). Copies of this sively became a disadvantage, creating -on by local firms paper are available free from the World resentmentandreactionamongthepopu- Bank, 1818 H StreetNW, Washington, DC lace. One source of discontent was the an, Errunza, and Senbet theoretically 20433. Please contact Rose Vo, room S8- over-invoicing of exports (that is, 'flcti- lyze countryfunds,focusingonemerg- 042, extension 31047 (54 pages). tious exports-, designed to take advan- economies in which capital markets tage offavorable export subsidies, and the riotreadily accessible to outside inves- government's failure to discipline or pe. - They study country-fund pricing and 1059. Political Economy of Policy nalize the companies involved. Thisjeop- associated policy implications under Reform In Turkey In the 1980s ardized attempts to build a pro-export rnative variations on segmentation of coalition, and some keyfeaturesofimport rnational markets. Ziya Onis and Steven B. Webb substitution continued. They show that country funds tradedin (December 1992) Onis and Webb attribute the failure of developed capital markets can help Turkey's macroeconomic policies in the note the efficiency of pricirg in the Among the lessons from Turkeys experi- late 1980s to the government's failure to rging capital markets and can en- ence with economic policy reform- The cultivate popular support for macroeco- e capital mobilization by local firms. political management of reform requires nomic stability; to the top bureancratd 130 Policy Research Working Paper Series lack of autonomy to counteract political Steinberg resolves inconsistencies be- output - although they may haue oppo- pressures to expand the fiscal deficit; and tween Goskomstat l-0 tables for the over- site effects on the current account. Liquid- to the continuation of top-down individu- all FSU accounts and those for the 15 in- ity constraints and wage rigidities tend to alisticlinkagesbetweenpolicymakers and dividual FSU economies by drawing on amplify the cyclical adjustment to external key economic interests. datafromotherfinancial tables. The main shocks. This paper - a product of the Transi- agustments are in inter-republic trade, tion and Macro-Adjustment Division, whichisincludedinindividualFSUecono- The transmission of shocks and policy Country Economics Department-is part mies' I-Os, but not in the overall 1-0 for changes depends crucially on the struc- of a larger effort in the department to the FSU, and for "unplanned" sectors ture ofthe economy. Schmidt-Hebbel and understand whatis necessary for sustain- (military, police, and so on). Additional Serven analyze the impact of two classes ing structural adjustment. Earlier drafts adjustments necessary to estimate GNP of external shocks in open economies, us- of this paper were read by participants in from net material product - such as in- ing a rational-expectations framework. the May 1992 conference on Voting for clusion of nonimaterial services-are ex- that nests three prototype economies: Reform: The Political Economy of Struc- plicitly shown in the appropriate I-0 sec- * A neoclassical, full-employment tural Adjustment in New Democracies. tors. Appendices report details on these benchmark economy, with intertem- Copies ofthis paperare availablefreefrom and other adjustments, notably the appor- parally optimizing consumers and firms the World Bank, 1818 H Street NW, tionment and revaluation ofinter-repub- and instantaneous clearing of asset, Washington, DC 20433. Please contact lic trade from internal to foreign trade goods, and factor markets. Barbara Protas, room I- 47, extension prices. * A full-employment economy, with 37859 (60 pages). Theendproductis onein whichincome, partly liquidity-constrained consumers output, and expenditures areestimatedin and investors. a consistent SNA-type framework for the * AKeynesianeconomyexhibitingboth 1060. Economies of the Former overall FSJandfor the l5individual FSU liquidity constraints and wage rigidity, Soviet Union: An Input-Output economies. These -0 tables provide the wbichresultsintransitoryunemployment. Approach to the 1987 National information needed for macroeconomic Their model is forward-looking in that Accounts and sectoral analysis, and form the basis the short-run equilibrium of the economy for estimating per capita GNP for these depends on current and expected future Dmitri Steinberg economies values ofall exogenousvariables, and dis- (December 1992) Steinberg presents the three-tier 1-0 playshysteresis(thatis,italong-rnmequi- tables forthe PSUregion asawholeinthis librium is path-dependent). An input-output approach is used to derive paper, but presents only the SNA tier for Using parameters for a representative internationally comparable estimates of individual economies. All tables for each open economy, they simulate and compare GNP for the 15 economies of the former FSU economy, with supportingtables, are the dynamiceffects offoreign transfers and Soviet Union. available on diskettes from the contact of a terms-of-trade windfall in the form of person indicated above. a lower price for an imported production Steinberg uses an input-output (-0) ap- This paper - a product of the Socio- input.They contrast the role of Keynesian proach to derive internationally compa- Economic Data Division, International elements with the neoclassical factors in rable estimates of GNP for the 15 econo- Economics Department - is part of a determining the dynamic adjustment to mies of the former Soviet Union (FSU). larger effort in the Bank to provide an shocks, by analyzing the effects ofperma- The commonly accepted measure of eco- objective framework for determining nent/transitory and anticipatedfunantici- nomic output of GDP or GNP based on the whether, and where, special problems of pated disturbances in the three prototype System of National Accounts (SNA) can- international comparability arise in re- economies. The results illustrate three not be readily estimated for these econo- ports about national accounts of econo- main points- mies because relevant statistical report- mies emerging from the former Soviet * Both permanent and transitory dis- ingsystemshave yet tobe setup toreplace Union. Copies of the paper are available turbances cause changes in long-run ca- the system used historically - the Mate- free from the World Bank, 1818 H Street pacity and output. rial Product System (MPS). NW, Washington, DC 20433. Please con- * Transitory and permanent shocks Steinberg's "three-tier" approach im- tact Estela Zamora, room S7-136, exten- may have opposite effects on the current proves on the short-cut method of "bridge sion 33706 (113 pages). account;in particular,apermanentfavor- tables (from MPSto SNA)*byintegrating able foreign shock produces a current ac- additional financial data and using the countdeficit, while a transitoryfavorable inherent cross-checks of 1-0 tables. The 1061. Dynamic Response to shock induces a current account surplus. three steps in the process are to: Foreign Transfers and Terms-of- * Liquidity constraints and wage ri- * Analyze the official 20-sector MPS- Trade Shocks In Open Economies giditiestendtoamplifythecyclical adjust- type 1-0 tables. ment to external shocks. * Integrate financial data on services, Klaus Schmidt-Hebbel and .uLa Serven Thispaper-aproductofthe Transition etc, from National Economic Balance (December 1992) and Macro-A4justment Division, Country (NEB) tables. Economics Department - is part of a * Convert the 1-0 table derived from Both permanent and transitory distur- larger effort in the department to under- the integrated NEB tables to SNA forms. bances can change long-run capacity and standmacroecnomiea4ustmentin devel- cy Research Working Paper Series 131 , countries. Copies of the paper e * The more rapidly growing high-in- focus on Mongolia's innovative voucher .able free from the World Bank, 1818 come countries have actually enjoyed privatization scheme, and the interplay treat NW, Washington, DC 20433. negative growth in toxic intensity oftheir between the speed of contraction in re- se contact Anna Maranon, room N11- manufacturing rix. source availability and that of the move- extension 31450 (46 pages). * Stricterregulationofpollution-inten- ment to a market economy. They show sive production in the OECD countries that the reform process was not smooth: appears to have led to significant that after the rapid formulation and Z. Economic Development, locational displacement, withconsequent implementation of major reforms, there Ironmental Regulation, acceleration ofindustrial pollution inten- was a marked slowdown, when reform the International Migration of sityin developing countries. The poorest timetableswererevisedandamoregradu- -1c Industrial Pollution, 1960-88 economies seem to have the highest alist approach adopted. Later, reforms growth in toxic intensity. One cannot, of driven by the privatization program rt E. B. Lucas, David Wheeler, course,be certain ofthe causal connection. picked up momentum again. But one im- "lemaxnala Hettige * Pollution intensity has grown most portantlessonlearnedinMongoliais that -nber 1992) rapidly in developing economies that are voters are likely to shy away from radical relatively closed to world market forces. reformerswhenfacedwithgrowingshort- Iisplacementoftoxicintensitytoward Relatively closed, fast-growing economies ages and a collapsing economy. In June loping countries may not have been experienced rapid structural transitions 1922, the Mongolian People's Revolution- table in the last two decades. And toward greater toxic intensity. The oppo- ay Party (the former communist party) industrial migration seems to have site seems to have been truefor more open was returned to power in general elec- the result ofrestrictive trade polices economies. tions, capturing 72 of 76 parliamentary ie developing countries themselves This paper - a product of the Office of seats. ! than of regulatory cost differences the Vice President, DevelopmentEconom- Denizer and Gelb identify factors re- een the North and the South. ics - is one in a series of background lated to speed versus caution: organiza- papers prepared for the World Develop- tional andinstitutional limitations; politi- ral previous studies have asked ment Report 1992. The Report, on devel- cal considerations; whether a "model* of her environmental controls imposed opment and the environment, discusses transformation exists; and a contracting e industrial economies are diverting the possible effects of the expected dra- resource envelope. stmentsinpollution-intensiveactivi- matic growth in the world's population, Using a simple computable general ff-shore. Broadly, these studies can- industrial output, use of energy, and de- equilibrium model, they analyze the im- a that direct investment does not ap- mand for food. Copies of this and other pact of the cutoff of Soviet aid, which tobestimulatedbysuchregulations, World Development Report background amounted to 30 percentofGDP, andofthe Ty because the cost of emission con- papers are available free from the World disruption of trade. They conclude that is generally a tinyfraction ofoperat- Bank,1818HStreetNW,Washington,DC preventing a decline in welfare of more osts. 20433. Please contact the WorldDevelop- than 20 percent - which is close to the Yet directinvestmentreflects only part mentReport office, room T7-101,extension declinein 1991-wouldrequire aidflows lat may be happening to world pro- 31393 (20 pages). of about 15 percent of GDP. ton patterns. Technology transfers Their model suggests that the rural occur with no simultaneous direct sector is reasonably well insulated from ament, and production may readily 1063. Mongolia: Privatization external shocks, in sharp contrast with the towardadifferentglobal distribution and System Transformation urban sector. out either direct investment or tech- In An Isolated Economy One response scenario explored by the y transfer. model is thatofmassivereverse migration Lxcas, Wheeler, and Hettige attempt a Cevdet Denizer and Alan Gelb to rural areas. They point out that the ral test of the displacement hypoth- (December 1992) more the resource envelope tightens and developing time series estimates of squeezes away the margin above subsis- ufacturing pollution intensity for a Mongolia initiated an innovative reform tence, the harder it will be to sustain an -sample of developed and developing program in the face of severely growing orderly pattern ofreform. In the extreme, triesbetween 1960and1988. Among shortages and a collapsing economy. The thispatternmayforce the countrytoadopt - conclusions: latter may hasten reform. But collapse can a rationed "wartime" economy, despite As aresult ofshiftsin industrial corn- also create serious difficuties, including intentions to shift to a market system. ion, total manufacturing emissions rejection of radical reforms by the elector- This paper - a product of the Transi- ive to GDP grow faster than GDP at are. tion and Macro-Ajustment Division, levels ofpercapitaincome and slower Country EconomicsDepartment-is part GDP at higher levels of income. Denizer and Gelb examine the process of ofalargereffortinthedepartmenttocom- * Thishappensbecausemanufacturing economic transformation in Mongolia, a pare and evaluate country experiences x declining share of GDP at higher huge, isolated, sparsely populated coun- with systemic transformation toward pri- ne levels, not because of any shift try. After identifying factors that led to vate market economies. Copies of the pa- rd a cleaner mix of manufacturing formulation of a radical adjustment pro- per are available free from the World ities. gram in such an isolated country, they Bank, 1818HStreetNWWashington,DC 132 Policy Research Working Paper Seres 20433. Please contact Raquel Luz, room First, theoretical work on inequality and education, which gets a high priority in N11-035, extension 39075 (44 pages). growth stresses that this negative correla- government educational spending. tion is caused by high levels of inequality A second public university and new provoking high levels of government eco- private universitieshavebeen es'uolished 1064. More Evidence on Income nomic intervention. Soak-the-rich policies since 1986, but Makerere accounts for Distribution and Growth may be less necessary where there is less most university enrollment and govern- inequality. ment spending on higher education and George R. G. Clarke Second, although the partial correlation it trains most of the countrys high-level (December 1992) is robust., the direction ofeausality has not professional and technical manpower. Its been determined and the effects of specific revitalization after manyyears of neglect Inequality is nota necessary condition far income distribution policieshave notbeen is central to government and donor plans growth. Indeed, inequality is associated tested. for investment in human resource devel-* with slower growth - perhaps because Finally, if policies designed to decrease opment increased inequality causes more conflict inequality result in greater government The authors emphasizebowcontinuing ouer distributional issues, encouraging consumption and the cost of increased austerity affects staffretention and staff. greater economic intervention and higher government consumptions outweighs the engagementin academic work, as well as taxes. benefits of greater equality, long-term the quality of programs Makerere offers. growth maybe harmed. They present a strategy for university Inequality is often regardedasa necessary Butforcertain: inequity isnota prereq- development that involves establishing evil that has to be tolerated to allow uisite for growth. policy structures to- growth, says Clarke. The view that in- This paper - a product of the Transi- * Guideandcoordinateinvestmentsin equalityisnecessaryfor the accumulation tion and Macro-Adjustment Division, higher education as a whole. ofwealth, and contains the seeds ofeven- Country EconomicsDepartment-is part * Facilitate the expansion of higher tual increases in everyone's income, is of a larger effort in the department to education and the development of di- evident in "trickle down" economic theo- understand the determinants ofeconomic ploma-granting institutions to accommo- ries, where societal acceptance ofinequal- growth. The study was funded by the date increasing social demand. ity allows the rich to earn a greater rate Bank's Research Support Budget under * Promote cost-saving and revenue- ofreturn on their assets. research project "How Do National Poli- generating activities in the public univer- Others argue that inequality slows cies Affect Long-Run Growth?"(RPO 676- sities- which would require givingthem growth - because increased inequality 66). Copies of the paper are available free more autonomy in matters affecting their causes more conflict over distributional from the World Bank, 1818 H Street NW, cost structure and budgeting. issues, thereby encouraging greater eco- Washington, DC 20433. Please contact Among specific actions they recom- nomic intervention and higher taxes. Rebecca Martin, room N11-054, extension mend- According to Clarke, the empirical evi- 39065 (28 pages). * Malng better use of public univer- dence shows that: sity assets by developing night courses, * Inequality is negatively, and ro- part-time degree and non-degree pro- bustly, correlated with growth. This result 1065. Strengthening Uganda's grams, and contract training and other is robust to many different assumptions Policy Environment for Investing income-generating activities. about the exact form of the cross-country in University Development * Investigating possibilities for better growth regression. use of university farms and other proper- * Although statistically significant, the ThornasOwenEisemon,JohnSheehan,George ties. magnitude of the relationship between Eyoku, Franklin Van Buer, Delane Welech, * Makingmoreusingofexistingcapac- inequality and growth is relatively small. Louise Masutti, Nat Colletta, and LeeRoberts ity in public institutions and increasing. Decreasing inequality from one standard (January 1993) the capacity of the newly established pri- deviation rbove to one standard deviation vate universities. below the mean increases the long-term In recent years, Makerere University hs * Strengthening secondary education growth rate byabout l.3 percentage points experienced increasing student and staff in science subjects andencouragingmore' a year. unrest. Theacademiccommunityisdemor- women to study science and technology. * Inequality has a similar effect in de- alized by tight government controls on * Coordinating future donor invest- mocracies and non-democracies.When an spenZ ng -especially by inaction on staff ments so they address the broad needs of interaction term between the type of re- salary demands. Donorsupport will not be Makerere and other universities. gime and inequalityisincludedinthebase forthcomigrwithoutbroadpolicyreforrmin * Raising incomes of academic and regression, it is insignificant at conven- higher education, rather than piecemeal nonacademic university staff members. tional significance levels. reform. This paper - a product of the Educa- * The cross-country data on inequality tion and Employment Division, Popula- follows Kuznets'inverted-U shape. Eisemon, Sheehan, and colleagues exam- tion and Human Resources Department Care should be taken in interpreting ine the policyenvironmentforinvestment -is part of the background preparation these results. Althoughinequalityis nega- in university development in Uganda, for the Bank's Higher Education Policy tively correlated with growth, this does with special attention to the needs .of Paper. Copies of this paper are available not necessarily imply that'soak-the-rich" Makerere University. They present data free from the World Bank, 1818 H Street policies will improve long-term growth. on the structure and financing of higher NW, Washington, DC 20433. Please con- cy Research Working Paper SerIes 133 Cynthia Cristobal, room 86-214, ex- Caribbean, Country Department I - is ingacanbe interpretedinmany ways. The Ion 33640 (70 pages). part ofa larger effort in the region to de- causation issue on whether education re- sign specific reforms that can assist decen- ally affects earnings can be answered only tralized economies such as Brazil and with experimental data generated byran- 3. Pollution Control Venezuela in dealing with unusual domlyexposingdifferentpeopletovarious Decertralized Economy: sources of policy failures in the area of amounts ofeducation. Given the fact that ch Level of Government pollution control. Copies of the paper are moral and pragmatic considerations pre- uld Subsidize What In Brazil available free from the World Bank, 1818 vent the generation of such pure data, H Street NW, Washington, DC 20433. researchers have tomake do with indirect io Estache and Kangbin Zheng Please contact Antonio Estache, room inferences or natural experiments. Some nary 1993) E10-081, extension 81442 (35 pages). have been attempted. Psacharopoulos looks at the research on .weral, the most effective approach is overeducation or surplus schooling te abatement subsidy - kept low - 1067. Returns to Investment The conclusions reinforce earlier pat- Sined with a pollution tar. But when In Education: A Global Update terns. They confirm that primary educa- u )arstate inspection capabilities ar tion continues to be the number one in- 'ed. federal manitring subsi dies may George Psachampoulos vestment priorityin developing countries. L effective substitute. (January 1993) They also show that educating females is marginally more profitable than educat- idies in Brazil essentially serve three Primary education continues to yield high ing males, that the academic secondary oses: returns in developing countries, and the school curriculum is a better investment * Assigned to the right level of govern- returns decline by the level of schooling than the technicalfvocational tract, and they couldreinforce the effectiveness and a country's per capita income. that the returns to education obey the 11ution taxes in reducing pollution. same rulesasinvestmentin conventional * They offer an opportunity for addi- Psacharopoulos updates compilations of capital - that is, they decline as invest- d combinations of instruments and rate ofreturn estimates to investment in ment is expanded. e more flexibility in dealing'with the education published since 1985 - and This paper is a product of the Office of Ific institutional characteristics of discussesmethodologicalissuessurround- the Director, Latin America and the Car- y state. ing those estimates. ibbean Region. Copies of the paper are * They can serve a purely 'public rela- Some key world patterns available free from the World Bank, 1818 ?* effect by showing that the federal * Among the three main levels of edu- H Street NW, Washington, DC 20433. rnment does not always rely on cation, primary education continues to Please contact George Psacharopoulos, its" but can also provide "carrots." exhibit the highest social profitability in room 14-187, extension 39243 (60 pages). Estache and Zbeng have four main all world regions. ;ages of relevance to the Brazilian * Private returns are considerably My. higher than social returns because ofthe 1068. Enterprise Reform rst, carrots will not work without a public subsidization of education. The In Eastern Europe Subsidies ofany type will not work degree ofpublic subsidyincreases with the out a coexisting pollution tax. level of education, which is regressive. Sweder van Wijnbergen -cond, some carrots are better than * Social and private returns at all lev- (January 1993) rs at achieving the government's ob- els generally decline by the level of a es. In general, a state abatement country's per capita income. Applying Westerntextbooksolutionsto the idy is the more effective instrument * Overall, the returns tofemaleeduca- problems of enterprise reform in Eastern abine with a pollution tax. But when tion are higher than those to male educa- Europe is ikely to be counterproductime al or state inspection capabilities are tion, but at individual levels ofeducation Policy design must be imaginative and ed, monitoring subsidies may be an the pattern is more mixed. explicitly incorporate the political con- tive substitute. * The returns to the academic second- stmints andincentieproblemsspecifteto drd, increasing abatement subsidy ary school track are higher than the voca- the region, leading to ne approaches to ; can be counterproductive -tending tional track -since unit costof vocational enterprise and banking reform. crease firm investment more than education is much higher. ssary and hence reduce the pollution *. The returns for those who work in the Enterprise refarmis emerging as the core ase, while increasing subsidy costs. private (competitive) sector of the economic problem in Eastern Europe. As can worsen the monitoring and in- economy are higher than in the public privatization has been delayed, a new 'San efforts and fiscal revenue. (noncompetitive) sector. And the returns problem has emerged, largely unantici- rially, itis more effective to keep sub- in the self-employment (unregulated) see- pated by outside advisers: It is probably ateslow ifthey are to be effective and tor of the economy are higher than in the possible torun aclear-cutstate enterprise Linable and at the same time get the dependent employment sector. efficiently, and it is certainly possible to rsement needed from state and fed- Controversies in the literature are dis- get efficient performance from a private 'fiscal administrations. cussed in the light of the new evidence. enterprise. But it is utterly impossible to is paper - a product of the Infra- The undisputable and universal positive getanythinglike efficiencyfroman enter- ture Division, Latin Americandthe correlation between education and earn- prise for which the current and future 134 Polfty Research Working Paper Series ownership status are in limbo. What has available free from the World Bank, 1818 fortin the department to understand pub- happened in Poland, where reform started H Street NW, Washington, DC 20433. lie-private relationship in the provision of earlier than elsewhere, is probably a har- PleasecontactBonnie Pacheco, room N11- social services. Copies of the paper are binger of things to come. 071, extension 37033 (36 pages). available free from the World Bank, 1818 Two years after the crumbling of cen- H Street NW, Washington, DC 20433. tral authority that used to exercise both Please contact Daniele Evans, room N9- ownershipandcontrol,ownershipofstate- 1069. Why Is There Proportionately 061, extension 37496 (34 pages). ownedenterprisesremainsineffectiveand More Enrollment In Private control diffuse. Lacking sharply defined Schools In Some Countries? control rights, various groups (workers, 1070. Economic Fundamentals incumbent managers, and local authori- Estelle James of Road Pricing: A Diagrammatic ties) oftenlhadno other way ofdemonstrat- (Janua7 1993) Analysis ing their clout than by disrupting the en- terprise. And with changes in ownership Heavy enrollment in private secondary Timothy D. Has announcedbutnotimplemented,manag- schools stems from limited public spend- (December 1992) ers and workers councils alikehave every ing, which creates an excess demand from incentive to decapitalize the enterprise people who would prefer to use the public Most economists agree that road pricing and increase its debts. schools butare involuntarilyecluded and benefits society by curtailing congestion. Eastern Europe is not well served with pushed into the private sector. Efficiency analysis demonstrates why the straight textbook advice. The common public rejects congestion pricing. A dedi- wisdom on privatization fails to address The proportion of students enrolled in eatedroadortramnsportfund is more viable the problemscreatedby diffuse ownership private rather than public schools varies when the road users are charged not only andconflicts overcontrol thatexistbefore greatly among countries. James tries to for the damage caused by heavy vehicles privatization. Regular cash auctions may explain (1) the systematicallybigher pro- but also for congestion. fil to match managers and capital stock portion ofenrollmentin private schoolsin efficientlybecause ofpervasive wealth con- developingthaninindustrial countries, at Han presents aconceptualframeworkfor straints. Standard advice on enterprise the secondary level, and (2) the seemingly road pricingbasedon arigorons diagram- restructuring does not allow for the sheer random variation across countries within matic - but nonmathematical -frame- scale of the problem or the special reasons a given level of education and stage of work derived from first (economic) prin- why,inEasternEurope,currentprofitsare development. ciples. His analysis of traditional argu- apoorguide topotentialprofitability.Sim- She argues that differentiated demand ments sbout road pricing shows why ply applying Western bankruptcy proce- and nonprofit supply - both of which implementing congestion pricing asprac- dures based on current data about enter- stem from cultural heterogeneity, espe- ticed in the past has encountered ob- prise profitabilityintroduces adestructive cialy religious heterogeneity - are the stacles.Partly, it is because both types of bias toward liquidation and delay. major explanations for variations in the road users - the tolled and the tolled off And, argues van Wijnbergen,introduc- proportion of private education within a (those who avoid the road to shun a toll) ing Western style unemployment insur- given stage of development and educa- -are shown to be worse off under a con- ance, although it would lower the social tional level. stant value oftime, exceptfor the govern- costsofunemployment,couldalsocontrib- By contrast, she hypothesizes that the ment. And when differences in time valn- ute to its indefinite extension. proportionately heavy enrollment in pri- ation are taken into account primarily Van Wijnbergen sketches how these vate secondary schoolsin developingeoun- those with very high time values are bet- problems can be addressed byincorporat- tries stems from limited public spending, ter of f.Unless congestion toll revenues are ing all the incentive problems specific to which creates an excess demand from earmarked and travelers perceive that the Eastern Europe into the design of the people who would pefer to use the public moneyischanneledbackinreducedtaxes, policiestobeimplemented. Sometimesthe schoolsbut are involuntarilyexcludedand loweruser charges, orimproved transport advice that results is novel and as yet pushed into the private sector. services, neither the tolled nor the tolled untried; sometimes examples exist of its Limited public spending on secondary off will support road pricing. Only where successful implementation. But the alter- education, in turn, is modeled as a collec- there is travel hypercongestion is every- native isalongperiodofdediningincomes tive decision which is strongly influenced one better off with congestion pricing. and, presumably, increasing social unrest by the numerous families that opt for In the absence of scale economies or as the consensus underlying the reform many children, and that consequently can diseconomies, the level of economic prof- programs begins to erode. only afford toinvest small amounts in each its-toll revenue collections less a road's This paper - a product of the Europe child, in developing countries. fixed and non-use-related costs - serves and Central Asia Department - is part The resultsofregressionsthatdetermine as a surrogate market mechanism indicat- of a larger effort in the department to private-sector size recursively and simul- ing that a road should be expanded or assist the process of enterprise reform in taneously with public educational spend- downsized. The decision to let roads dete- Eastern Europe. Parts of this paper draw ing are consistent with these hypotheses. riorate over time is itself an act of on van Wijnbergen (1992), which ap- This paper - a product of the Public disinvestment. pearedin the 1992 Majolin essay compe- Sector Management and Private Sector Han shows that if a road authority lev- tition volume sponsored by American Development Division, CountryEconom- ies economically efeicient charges for con- Express Bank. Copies of this paper are ics Department - is part of a larger ef- gestion, itis possible tomake money on a _y Research Working Paper SerIes 135 Roads can be profitable in urban tives for reducing road congestion are (1) weigh costs (as in the Dutch proposal). in the long run because land rents cordon pricing using manual follbooth, Together, thebenefit-costratioandthecost -igh; congestion tolls reflect the asso- (2) supplementary vehicle licensing, (3) per transaction are acceptable but this a high opportunity costs. automatic vehicle identification, and (4) technologyisstillnotwidelyusedcommer- On urban roads withindivisibilities and smart card technology. cially. Dnomiesofscale, efficient pricing may Han argues that electronic approaches il the extent of profitable undertak- Hau explores 20 criteria for a "good" road to direct road use charging are superior On rural roads with indivisibilities pricing system and presents case studies tomanual approachesforroadusers, road conomies ofscale,marginal cost pric- illustrating the costs, revenues, and ben- authorities, and society as a whole. And an produce short-run profits. Eco- efits of alternative congestion charging rapid progress in microelectronics, c efEciency is enhanced by pursuing mechanisms. cryptology, and microwave technologies ial pricing in the short run and opti- Han finds that manual tollbooths are will continue to yield large-scale econo- -avestmentincapacityinthelongrun. not suitable for congestion charging be- mies in the manufacturing of automatic -ule is to implement short-run mar- cause they are land-, labor-, and time-in- vehicle identification equipment, read- 'costpricingwhilevaryingroadcapac- tensive. Cordon pricing (as in the Bergen write transponders, smart cards, and the er the longran. toUring) canbe aneffectiveinstrumentfor hardwareandsoftwarethatgowiththem. Insights by Newbery, Small, and Win- chargingfor congestionifhalfthe tollianes Hau ranks electronic road pricing with - about the economic implications arereserved for seasonal pass holders tray- automatic vehicle identification alone a extensive damage that heavy ve- eling through the pricing points at regular higher than electronic road pricing with 3 cause to roads - enrich the basic highway speed. Enforcement ofthose driv- smart card-type AVI based on an -ing model- Charging for both the ingin reserved lanes can be carried outby unweightedindexefall criteria.Andgen- nal and variable costofroad damage, periodic videographs of vehicle license erally, the area licensing scheme is supe- signing afee based on vehicle weight plates. rior to cordon pricing. If budgets allow, xle, can help cover deficits arising Area licensing schemes require that authorities should investigate the feasi- road congestion. vehicles enteringthe central business dis- bility of electronic road pricing. If the Even ifa road network is broadly char- trict during peak hours prominently dis- budget is tight, they should look into the ized by increasing returns to scale in play a monthly or daily license. Enforce- arealicensing scheme withitslow cost and "ing and strengthening roads, the ment is undertaken at gantry points by highbenefit-coastratio(thelatterbeingthe t could be closed by diseconomies of traffic wardens who performnvisual checks most important of the 20 criteria Han !.Aroad network thataccommodates on the nonstop traffic. The enforcement uses). cars and trucks costs more than the costs of area licensing schemes are pro- Both conceptually and practically, Hau of an autos-only and a (smaller) hibitiveatmotorway speeds butrelatively finds that it is important to earmark the s-only road system. So the surplus low-cost in a standard congested urban proceeds of road pricing to implement _inted with diseconomies ofscope off- setting with limited gateways. Area li- marginal cost pricingin the road sector. the potential loss associated with censing schemes, also known as supple- Thispaper-aproductof the Transport -specificeconomies.Adedicatedroad mentary licensing, carry the lowest cost Division,nfrastructureandUrbanDevel- nsport fund is all the more viable per transaction. opmentDepartment-is part ofa larger ise road users are charged not only Electronic road pricing with automatic effort in the department to evaluate op- the damage caused by trucks and vehicle identification (an off-vehicle re- tions to charge for the use ofroads. Cop- y vehicles but also for congestion. cordingsystem) is electronic toll collection ies of the paper are available free from the -ispaper-aproductoftheTransport by time of day writ large and made obliga- World Bank, 1818 H StreetNW, Washing- ion, Infrastructure and UrbanDevel- tory on vehicle ownerz in a jurisdiction. ton, DC 20433. Please contact Jennifer nt Department -is part ofa larger The cost ofthe electronic equipmentis not Francis, room 810-063, extension 31005 t in the department to evaluate op- trivial, but is outweighed by the benefits. or 35205 (99 pages). for charging for road use. Copies of Sensitivity analysis performed on the )aper are available free from the HongKong electronicroadpricingacheme IBank,1818 HStreetNW, Washing- in 1983-85 shows that even after exclud- 1072. Costs of Alternative DC 20433. Please contact Jennifer ingtime savings, thesavingsin operating Treatments for Incomplete is, room S10-063, extension 31005 costs produce benefit figures that are Abortion -205 (96 pages). greater than system costs. The invasion- of-privacy issue that led to the political Brooke P. Johnson, Janie Benson, Janet failure of the Hong Kong electronic road Bradley, Aurora RAbago Ordodez, Catia . Congestion Charging pricing scheme can now be overcome by Zambrano, Leonard Okolko, Leticia Vzquez ianisms for Roads: An giving road users access to confidential Chavez, Paulina Qui, andKhama oPW uation of Current Practice "numbered account arrangements" with a (January 1993) prepaid cash deposit. hy D. Han The capital cost of electronic road pric- Unsafely performed abortion is one of the nber 1992) ing with smart card technology (an on-ve- five leading causer of maternal deaths hicle charging system) is higher than the worldwide. Many women who have under- e many direct and indirect methods cost for automatic vehicle identification gone unsafe abortions enterthe healthcare trging for road use, the key alterna- technology alone, but benefits still out- system to seek help for the resulting com- 136 Policy Research WorkIng Paper Seriel plications, includingincompleteabortion. 1073. Fiscal Aspects provided by the international financial The human and financial cost of this of Developing Country Debt institutions - of the secondary burden health problem is tremendous, especially Problems and Debt and Debt- associated with the internal transfer ot in the developing world Service Reduction Operations: resources to the public sector. A Conceptual Framework This paper- a product of the Debt and This study examined the potential for re- International Finance Division, Interna- ducing costs to healthcare systems by Peter J. Montiel tional Economics Department - is part changing the standard method of treat- (January 1993) of a larger effort in the department to ment for incomplete abortion. Vacuum understand the costsandbenefits tocou= aspiration(VA) hasbeen shown tobe safer The quality offiscal adjustment programs tries of debt relief arrangements. Copies than dilation and curettage (D&C) for must improve ifBradyPlan programs are of the paper are available free from the uterine evacuation, the World Health to improve fiscal solvency. World Bank,1818 IIStreetNW,Washing Organization includes VA as an essential ton, DC 20433. Please contact Rose Yo, service at the first referral level. The causes and implications of the devel- room S8-042, extension 31047 (29 pages). The technique most commonly used for oping country debt crisis - as well as its treating first-trimester incomplete abor- solution - all have an important fiscal tion in developing countries, however, is dimension. 1074. How Moving to World Prices D&C.This study examined thebypothesis The crisis was triggered by the wide- Affects the Terms of Trade that use of manual vacuum aspiration spread perception that the public sectors In 15 Countries of the Former (MVA)-avariationofVA-wouldbe less in many heavily indebted countries were Soviet Union costly than D&C and thus advantageous effectively insolvent in the international to healthcare systems with limited re- environment of the early 1980s. The ac- David G. Tarr sources. tual fiscal response to the resulting liquid- (Januarj 1993) The purpose of the study was to iden- ity crisis involved increased reliance on tify and, where possible, to explain the domestic financing, the inflation tax, and As 15countries oftheformer Soviet Unk factors that contributed to cost differences the curtailment ofpublicinvestment. This move to international trade prices, -'- between MVA and D&C for treatment of createdadverse a4justmentincentivesfbr termsoftrade improveforexporters oft - first-trimester inw*mplete abortion. To policymakers and resulted in credit ra- material and energy (including Kazah achieve this objective, researchers ob- tioning, capital flight, assumption ofpri- stan, Russia, and Turkmenistan), a---- served patient management and docu- vate external claims by the public sector, decline for countries that concentrate mented resource use at hospital sites in and poor domestic investment perfor- food and machinery exports (suck Ecuador, Kenya, and Mexico. mance. Relarus, Estonia, Latia, Lithuania, a--- In most cases, treatment with MVA Solutionsinvolverestoringfiscal health especially Moldova). required a shorter patient stay and fewer through a combination of debt relief and hospital resources than D&C, as the two effidentfiscal agustment, aimed atmiti- Tarr presents the first documented ect! techniques were practiced at the various gating the burden associated with public mates of how moving to internatio study sites. The policy decision to adopt sector debt service and minimizing the trade prices affects the terms of trade MVA,supportedbyprocurementofinstru- liquidity problems facing the indebted 15 countries of the former Soviet Unirm ments and incorporation oftrainingin its public sector. First,he decomposes the totalimpac use,isthe chiefprerequisitefor achieving The debt and debt-service reduction achangein the terms oftradeintoachm these improvements. (DDSR) programs implemented so far in the inter-republic and extra-repu- But the full advantages of MVA are re- under the Brady plan have provided only terms of trade. The broad pattern, he ecti alizedonlyifitisintroducedinconjunction partial solutions, closing without elimi- mates,isthatexportersafrawmaterial- with certain changes in patient-manage- nating the gap between the face value of enery (notably Kazkbstan, Russia, E ment practices, such asofferingoutpatient the external debt and the present value Turkmenistan) gain, whereas counte treatment ofincomplete abortion. of prospective public sector debt service. that concentrate an food and macbin Further, decentralizing MVA services Theyhave done so partly byreducingthe exports (notably the Belarus, Esto'A can maximize the benefits of the tech- former and partly by increasing the lat- Latvia,Lithuania,andespeciallyMoldo nique, facilitating (hospitals' and) ter. are the biggest losers. healthcare systems efforts to decrease the Their contribution toward easing the The results support the customs und cost of delivery service and improve the immediate liquidity problems ofthe debt- theory ofpricing within the CMEA. quality of care. orshasnotbeen encouraging. The amount He also estimates the initial impact -- This paper - a product of the Popula- of debtreliefembodiedin BradyPlan pro- the terms of trade on the GDP for all tion and Human Resources Department grams enacted so far has not in itselfbeen countries. This, as well as the commo&:' - is part of a larger effort in the depart- sufficient to restore fiscal solvency. Bet- composition of trade and estima' ment to improve the status of women's ter-qualityfiscaladjustmentcouldgreatly changes in relative prices by commodZ., health. Copies of the paper are available help improve the situation. at the 105-sector and 15-sector levels Lr free from the World Bank, 1818 H Street The mostimportant potential contribu- eachofthe 15independentstates,is avil NW, Washington, DC 20433-Please con- tion of such programs, then, may have able in the appendix. tact Otilia Nadora, room S11-219, exten- been the reduction - through the policy This paper - a product of the Tr-- sion 31091 (31 pages). conditionality associated with resources Policy Division, Country Economics D- Policy Research Working Paper Series 137 partment-is part ofalargereffortin the 20433. Please contact Cynthia Cristobal, included in an otherwise well-composed department to examine the role of trade room S6-035, extension 33640 ( 35 pages). program, appropriately accountingfor the liberalization in the transition from a so- welfare costs of demandconsumption. He cialist to a market economy. Copies of the shows that the targeted emission reduc- paper are available free from the World 1076. A Presumptive Plgouvian tions can be obtainedat 11 percent lower Bank, 1818 H Street NW, Washington, DC Tax on Gasoline: Analysis costs, saving $64 million annually, when 20433. Please contact Nellie Artis, room of an Air Pollution Control the demand conservation induced by the NI0-013, extension 38010 (119 pages). Program for Mexico City gasoline tax allows some other, more ex- pensive abatement options to remain un- Gunnar S. Eskeland used. 1075 Many Paths to Skilled (January 1993) He proposes an advaloremgasolinetax 'Employment: A Reverse Tracer of about 25 percent, when no separate Study of Eight Occupations Taxinga variableinputinpollutingactivi- value is associated with the collection of in Colombia ties makes sense when abatement is in- revenue or with avoidance of noise, con- duced indirectly, rather than by a pollu- gestion, accidents, and road damage. In Adrian Ziderman and Robin Horn tion ta By including agasoline taxin an Mexico City alone, the tax would collect (January 1993) otherwise well-composedcontolprogram $350 million a year. After recent price forMe:ico City, one saves 11 percent ofthe increases, implicittaxratesin Mexico City The manpower requirements forecasting welfare costs of the program, because - are higher than suggested by Eskeland's approach to national planning for voca- keeping emissions constant-costly tech- analysis. Higherrates may or may notbe tional education and training reduces nicalabatement measures are replaced by justified due to the benefits of demand choices available to individuals and cre- cheaper demand conservation. conservation not accounted for in the ates a less diverse and efficient training analysis. system. Without continuous monitoring of emis- This paper - a product of the Public sions, a pollution control agency needs to Economics Division, Country Economics Ziderman and Horn use the reverse tracer evaluate abatement options itself Apart Department-is partofa larger effort in study technique to identify alternative from making activities cleaner, it should the department to examine alternative training paths for selected skilled and also stimulate reductions in the level of instruments to pollution control in devel- semi-skilled occupations in Colombia. activity in polluting sectors. opingcountries.The study wasfundedby The study, confirming earlier research Eskeland develops an analytic frame- the Bank's Research Committee under for the United States, shows that work- work to show that a tax on a variable in- research project"Polutionandthe Choice ers pursue many different training paths put, such as gasoline, is useful for this ofEconomic Policy Instrumentsin Devel- to acquire the skills they need in a given purpose. It encourages individuals and oping Countries"(RPO 676-48). Copies of occupation. Ziderman and Horn provide firms to sacrifice trips when they would this paper are available free from the an occupational training map format to prefer those sacrifices to those of higher WorldBank, 1818 HStreetNW Washing- analyze these training paths. spending an abatement. The instrument ton, DC 20433. Please contact Carlina They conclude that strong public inter- exploits privately held information about Jones, room N10-063, extension 37699 vention that narrows the effective range which trips can be saved at a low social (132 pages). of available training should be discour- cost. aged; such intervention will not only re- Other weaknesses of a program based duce choices but will also lead to a less on indirect instruments - as opposed to 1077. Risk Management Prospects flexible and efficient training system. one induced by a theoreticalLy conceived for Egyptian Cotton * A reduction in training alternatives is pollution tax - remain. One of these is the result ofthe manpower requirements that the agency may have poorerinforma- PanosVarangis,EltonThigpen, andTakamasa forecasting approach to planning for the tion than individuals and firms about the Akiyama provision of national vocational education status ofvehicles and the effectiveness of (January 1993) and training -yet that approach is still individual abatement options. Such an popular in the planning ministries in de- information gap-which couldbebridged The New York futures market does not veloping countries by a true pollution tax - is abstracted provide an appropriate mechanisms for The more training options available to from the analysis. hedging the price risk in Egyptian cotton workers, the better they can arrange their Eskeland shows that the tax rate that under present procedures for determining own training packages. belongs in a cost-effective pollution con- prices. Establishing a domestic spot mar- This pape-- - a product of the Educa- trol program is independent of the price ket (while privatizing the industry), fol- tion and Employment Division, Popula- elasticity of demand for the polluting lowed by a forward market, may provide tion and Human Resources Department good. But the higher the demand elastic- the best interim mechanism. - is part of a larger effort in the depart- ity, the higher are the costs of not includ- ment to study the operation of the labor ing a presumptive tax on the polluting Varangis, Thigpen, and Akiyama exam- market and its impact on human re- good in the tool kit of the pollution con- ine risk management optionsfor Egyptian sources development. Copies of the paper crol agency. cottons, the export prices for which are are available free from the World Bank, Eskeland estimates the cost savings volatile. They use regression analysis to 1818 H Street NW Washington, DC available when an optimal gasoline tax is establish whether Egyptian cotton's prices 138 Policy Research Working Paper Serles can be effectively hedged by using exist- Bank,1818HStreetNW,Washington,DC ees and those working in the informal ing futures contracts on the New York 20433. Please contact Dawn Gustafson, sector were hardest hit. Farmers appear Cotton Exchange. room S7-047, extension 33714 (26 pages). to have benefited during the final years They find no relationship between the of the a4justment phase, while poverty movements in prices ofEgyptian long and incidence among them increased sharply extra-long cottons and prices for the base 1078. The Evolution of Welfare and in 1987-88, especially among export crop quality of U.S. medium staple cotton Poverty Under Structural Change farmers. This occurredin spite ofcontin- traded on the New York futures market. and Economic Recession In COte ued maintenance ofproducerprices, sug- (Probablybecause Egyptian cotton prices d'lvolre, 1985-88 gesting that price support alone is not are government-determined, U.S. me- sufficient to protect farm incomes. The dium staple cotton prices are influenced Christiann Grootaert entire system of agricultural support by price support policies unrelated to the (January 1993) must be maintained and improved. longer staple markets, and the fiber of the Grootaert found thatbasic needs fulfill- cottons analyzed have different physical The need for poverty alleviution is greater ment did not decline as much as expendi- characteristics.) than ever The priority should be not so ture.Buttheburdenofwhatever declines So, the New York cotton futures much to change distribution as to gener- did occur fell disproportionately on the market's No. 2 contract is not an appro- ate growth, although it is crucial to target very poor- The targeted provision ofpub- priate mechanism for hedging the price basic needs services (education, health, tap lic services (health, education, tap water, riskfacingEgyptiancottonunderpresent water to the very poor - especially in and so on) is thus a high priority. procedures for determining prices - and rural areas ofthepoorSavannah.one, but Thispaper-aproductofthePovertyand probably not under market-determined also in the West Forest Social Policy Division, Africa Technical prices. Department-is part of the output of the Ifthe cottoniarketin Egypt is liberal- Groorertdemonstrates whateenhappen research project 'Poverty and the Social ized, cotton prices there may correlate to the welfare of households andindividu- Dimensions of Structural Adjustment in more with prices elsewhere - especially als, and to poverty, in a low- to middle- Cote d'Ivoire, 1985-88:Apolicy-Oriented for the longer staple cottons, income country, under structural adjust- Analysis' (RPO 675-26). Copies of this Varangis, Thigpen, and Alciyama ex- ment andrecession. COte d'voire was one paper are available free from the World tendtheirregressiananalysistotheprices of the first African countries to launch a Bank, 1818HStreetNWWashington,DC ofother medium staple cottons-Austra- structural adjustment program with sup- 20433. Please contact Elena Vitanor, lian, Central Asian, Mexican, Pakistani, port from the World Bank and the IMF. room J2-241, extension 38400 (114pages). and Turkish - to determine how they The program was sustained for six years behave relative to U.S. medium staple (1981-86), then abandoned in 1987-88 cotton prices. None of these prices had when a severe recession hit the country. 1079. How Useful Are Integrated short-term movements closely related to A new economic recovery program was Household Survey Data for Policy- U.S. cotton prices, indicating mainly the initiated in 1989. Oriented Analyses of Poverty? influence of domestic policies on the U.S. Cite d1voire presents a unique case LesSOnS from the CMte d'lvolre market. Again, theNewYorkfuturesNo. study-certainlyinAfrica-becausefour Living Standards Survey 2 contract does not provide a satisfactory endofasustainedadjustmenteffort,when hedge for these cottons. consecutive years of comprehensive data Christiman Graotaert The cotton futures contract recently on levels of living are available, for the (Janary 1993) introducedinNewYork(worldcotton con- period 198548, from the C6te dIvoire tract) - based on the Cotlook A Index - Living Standards Survey (CILSS). The Simpler and bigger are better, for house- may prove useful for hedging the price risk first two years of data capture the situa- hold living standards surveys. And better for some cottons (especially Australian, tion at the economy was growing moder- collection ofprice data, ina independent Central Asian, and Paidstani) but appar- ately-, the last two years capture a period survey, should be a priority. ently not Egyptian cotton. ofpronouncedmacreeconomic decline and Varangis, Thigpen, and Aliyama rec- destabilization. Grootaert reflects on the pros and cons of ommend (together with privatizing the Grootaert foundthat in the firstperiod, usingintegratedhouseholdsurveydatain industry) establishing a domestic spot the incidence of poverty remained steady empirical analysis aimed at providing a market to give transparency to the price- and the welfare level of the poor actually quantitative basis for policy decisions af- forming process. When the spot marketis rose. In 1987, on the other hand, poverty fecting welfare, poverty, and the fulfill- functioning well, establishing a forward and extreme poverty both became more mentofbasicneeds.Theexperience exam- market could provide a hedging instru- widespread - a trend that accelerated medisthatofusingfouryearsof datafrom ment for Egyptian cotton. dramatically in 1988, when the incidence the Cote d7voire Living Standards Survey This paper-a product of the Interna- of poverty rose from 35 percent to 46 (1985-88) to link changes in poverty and tional Trade Division, International Eco- percent. welfare to macroeconomic trends. nomics Department - is part ofa larger Over 1985-88, theregional and socioeco- Grootaert groups the lessons learned effort in the department to explore possi- nomic patterns ofpoverty changed mark- from this work around four themes. bilities for commodity risk management edly. The most important shift was the Suruey content. When survey data are in developing countries. Copies of the pa- rapid increase in urban poverty. Especi- $ich, transparency of methodology is im- per are available free from the World ally households of public sector employ- portant. Itis essential that analysts pro- Policy Research Working Paper Series 139 vide explicit information about how their 1080. A New Regional Price Index 1081. Correcting for Sampling Bias income and spending aggregates were for COte d'Ivoire Using Data from In the Measurement of Welfare and constructed. These aggregates must be the International Comparisons Poverty: The Case of the Cte deflated with a regional price index, but Project d'lvoire Living Standards Survey prices should be collected separatelyfrom householdsurvey data. Dataon household Christian Grootaert and Ravi Kanbur Lionel Demery and Christian Graotaert spending and basic needs fulfillment are (Januay 1993) (January 1993) the key information for poverty analysis. Samplesizeand design. Biggerandsim- Data from a survey on household spend- Analysts must pay close attention to sam- pler is better. Grootaert recommends in- ing patterns are combined with price data pling procedures used to collect survey creasing(atleast doubling) sample size in from the International Comparisons data. This casestudy illustrates how ob- futurelivingstandards surveys; this could Project to produce a regional price index served changes in household welfare and be done withoutincreasingthecostofthe deemed superior to previous estimates intheincidenceofpoverty can vanish when survey by reducing or eliminating the in- based solely on data fro theLiing Stan- corrections are applied to the data fir cqne modules of the questionnaire. dards Survey, changes in sampling procedures - and It is important to involve analysts and how even the direction of the trend may he policynakersin survey design. They need Grootaert and Kanbur report on an exer- reversed. to identify up front, usingcurrent Inowl- cise in economic statistics. They develop edge, the important socioeconomic and a regional price index for CMte d1voire Over the years, household surveys have target groups on which the survey must buildingon the strengths oftwoindepen- become apopular, valuable datasourcefar Zz able toreport. The sample designercan dent data sources: the Cate d7voire Liv- empirical research inmicroeconomics. In .n compose the sample in such a way ing Standards Survey (CISS) and the developing countries, household survey t certain groups will be undersampled International ComparonsProjee:(ICP). data have become more available in the I others oversampled, to make the The CLSS collected detailed informa- past decade, as a result of several inter- lysis ofthe resultingsample as useful tion on household incomes, spending, national programs. This has spurred in- possible. employment, and so on, but its coverage terestin the economics of the household Frequency ofdata collection. Grootaert ofprices left much to be desired. The ICP in the context of development economics. ommends that an integrated survey of collectedawealthofinformationcnprices Many analysts give little attention to - CLSS type be undertaken every four across the country, but collected no infor- the sampling design of the surveys they Ive years, to provide benchmark data mationanhouseholdspendingpatternsor use, takingthe data producedby statisti- I co permitin-depth analysis ofhouse- other socioeconomic data. cians and survey practitioners 'as is.! At & behaviorand responseto policy, ifthe Grootaert and Kanbur bring together best, sampling weights are applied to en- ntry has the capability tofullyanalyze these two sources to produce a regional sure that the results are representative. - data. Intheinterveningyears, amuch price index that they argue is superior to Demery and Grootaert illustrate the ipler collection of household spending previous estimates based solely on the needtopaycloseatentiontothesampling Ibasieneeds data can be usedto moni- LivingStandards Survey. Theprocedures aspects of a household survey used in changes in welfare and poverty. they follow shouldbe ofinterest to practi- applied microeconomic analysis - par- The role ofpanel data. To be really use- tioners faced with similar data shortcom- ticularly for comparisons over time. This panel data collection should be ex- ings,particularlywhenworkingonAfrica. case study shows that observed changes ded overlongerperiods than two years, They show this to be no mere statisti- in household welfare andin the incidence hough this increases the costs and dif- cal exercise. Using the new price index of poverty in CMte dvoire between 1985 ities of finding the same households. can have a significant effect on earlier and 1988 vanish when corrections are a country undertakes an integrated evaluations of poverty in C6te d1voire. applied to the data for changes in sam- vey every four to five years and a They also use the new price information pling procedures; even the direction ofthe [iter monitoring survey in between, a toconstructdisaggregatedindicesbycom- trend isreversed. Similarly, the cross-see- all, parallel, panel survey could he modity category and by poverty group. tional patterns of welfare and poverty rducted- The monitoring sample and This paper - a product of the Poverty observed in earlier analyses for 1985-86 panel sample should be drawn from and Social Policy Division, Africa Techni- prove to be incorrect. same master sample. cal Department -is part ofthe output of The CMte d7voire Living Standards This paper - a product of the Poverty the research project "Poverty and the So- Survey, conducted between 1985 and I Social Policy Division, Africa Techni- cial Dimensions ofStructuralAttustment 1988,bas providedapopular, fruitful data Department-is partof theoutputof in CMte d7voire, 1985-88: A Policy-Ori- set for policy analysis. But according to research project "Poverty and the So- ented Analysisr (RPO 675-26). Copies of Demery and Grootaert, the recorded de- 1 Dimensions of StructuralAdjustment this paper are available free from the cline in mean household size during this Cte d1voire, 1985-88: A Policy-Ori- World Bank, 1818HStreetNW, Washing- period is due to samplingbiasinthe early 'ed Analysis! (RPO 675-26). Copies of ton, DC 20433. Please contact Elena years of the survey. If this is tre, the ro- s paper are available free from the Vitanov, room J2-241, extension 38400 ( business of the analyses based an these rld Bank, 1818 HStreetNW, Washing- 21 pages). data is questionable. , DC 20433. Please contact Elena This paper - a product ofthe Poverty anov, room J2-241, extension 38400 (23 and Social Policy Division, Africa Techni- es). cal Department-is part ofthe output of 140 Portcy Research Working Paper Series the research project "Poverty and the So- Department-is part of alarger effortin that the services provided by financial in- cial Dimensions of Structural Atjustment the department to analyze public expen- termediaries stimulate long-run growth. in Cote d7voire, 1985-88:APoicy-Oriented diture policies in developing countries. This paper-aproductoftheFinancial Analysis" (RPO 675-26). Copies ofthis pa- Copies of the paper are availablefree from Policy and Systems Division, Country perareavailablefreefromttheWorldBank, the World Bank, 1818 H Street NW, Economics Department - is part of a 1818HStreetNW,Washington,DC20433. Washington, DC 20433. Please contact larger effortin the department to under- Please contactElenaVitanov, roomJ2-241, Carlina Jones, room N10-063, extension stand the ways policies can affect long- extension 38400 (39 pages). 37699 (40 pages). term growth. The study was fundedby the Banks Research Support Budget under research project "How Do National Poli- 1082. What Do Governments Buy? 1083. Finance and Growth: ciesAffectLong-Run Growth?*(RPO676- The Composition of Public Schumpeter Might Be Right 66). Copies ofthis paper are available free * Spending and Economic from the World Bank, 1818 H Street NW, Perftormance Robert G. King and Ross Levine Washington, DC 20433. Please contact (February 1993) Daniele Evans, room N9-057, extension . ShantayananDevarajan,VinayaSwazoop,and 38526 (43 pages). Heng-f1 Zon Pinance matters. The level of a country's (February 1993) fAnanWial development helps predict its rate of economi growth fpr the foUwing 1084. Stock Market Development The traditional views that public cupital 10 to30yearm The datu are consistent with and Financial Deepening spending strengthens economic growth Schampeter's view that the services pro- In Developing Countries: Some and current spending does not are not vided by financial intermediaries stimu- Corelation Patterns borne out by experience in developing coun- late long-run growth. tries. In fac4 the only category of public DongHe and Robert Pardy spending associated with highereconomic Joseph Schumpeter argued in 1911 that (February 1993) growth is current spending - although theservicesprovidedbyfinancialinterme- spending on preventive care and "other diaries-mobilizing savings, evaluating Correlation analysis of cross-sectional education" has some positive effect projects,managingrisk,monitoringman- data fron 32 countries for 194-90 shows agers, and facilitating transactions - a significant relationship hetwean stock Devarajan, Swaroop, and Zou develop a stimulate technological innovation and market deuelopment andfinancial depth. simple analytical framework that shows economic development. But time-series datafor1978-90shovsig- bow the composition of public spending King and Levine present evidence that nificant corelations only forAsian ewno- affects economic growth- supports this view. mie Distinguishingbetween productiveand Examining a cross-section of about 80 unproductive governmentspending (that countriesfortheperiodl960-89,theyfnd Programs to develop securities markets which complements private sector produc- that various measures of financial devel- are now a common feature of World Bank tivity and that which does not), they show opmentare strongly associated with both financial sectorloans.Stockmarket devel- that increasing the share of productive current and later rates of economic opment in particular is receiving consid- spending leads to a higher steady-state growth. Each measure has shortcomings erable attention, especially the legal and economic growth rate. but all tell the same story- Finance mat- institutional underpinnings required for They use data from 69 developingeoun- ters. successful stock market development tries over 20 years to determine which King and Levine present three main The financial underpinnings needed componentsofpublicspendingareproduc- findings, which are robust to many speci- have received less study. tive.They findthatanincreasein the share fication tests: He andPardy contribute to suchastudy of current spending has positive and sta- * The average level of financial devel- by exploring the relationship between the tistically significant effects on growth. opment for 1960-89 is very strongly asso- degrees offinancial depth and stock mar-, Otherwise, the newsismainlynegative. dated with growth for the period. ket development in an economy. The relationship between the capital com- * Financial development precedes Using a simple indicator of stock mar- ponent of public spending and per capita growth. For example, financial depth in ketdevelopmentandseveralindicatorsof growthisnegative. The sameis true ofthe 1960 (theratio of broad money to CDP)is financial depth, andusing cross-sectional share of spending on transport and com- positively and significantlyrelatedtoreal data from 32 developing countries for munications. The shares spent on health per capita GDP growth over the next 30 1984-90, they find a strong correlation and education have nosignificantimpact, years even after controlling for a variety between the two factors. although parts of those shares-the parts of country-specific characteristics and Time-series datafrom 19 ofthese conn- spent on preventive care and 'other edu- policy indicators. tries (for 1978-90) show similar correla- cation" - do. * Financial developmentis positively tionsformostAsian countries, but notfor These results raise the question associated with both the investment rate other countries in the sample. Also, the whetherpublic spendingactuallyleadsto and the efficiency with which economies correlations of the Asian data are stron- a flow of public goods and services. use capital. gest after the mid-1980s. This paper - a product of the Public Much work remains to be done, but the He and Pardytest athreshold bypoth- Economics Division, Country Economics dataare consistentwithSchumpeter'sview esisthatacertainlevel offinancial depth Policy Resewah Working Paper Series 141 may be necessary to allow stock market With respect to the choice of modeling worked, and gender composition between development to take off. They find that paradigm, he notes that static lifetime the teachers group and the comparator available data do not support the hypoth- choice models, while relatively easy to group, much of the earnings differential esis. implement, are restrictive in scope. The disappears. Theresultssuggestthatfinancial depth lifetime decision framework abstracts Psacharopoulos, Valeazuela, and is a significant factor in stock market de- from the sequential nature of the fertility Arends conclude that the data do not sup- velopment in most developing countries, decision and cannot therefore adequately port the position that teachers are either but that country-specific factors (such as address how changes in the time profile overpaid or underpaid. industrial policy and structure, foreign of costs of contraception, wages, incomes, This paper - a product of the Office of investment controls, and stock market mother's education, or mortality risks of- theDirectorTemicalhDepartment,Lain regulatoryandoperationalinfrastructure) fect fertility variables. Static models also America and Caribbean Region -is part have an equally strong influence on stock cannotexplainstylizedempiricalregulari- afalargerefforttodocumentthe condition market growth. ties with time dimensions, such asconver- of teachers' salaries in the region. Copies Case studies of economies in which gence of fertility rates across countries, of this paper are available free from the stock market development has been sc- the tendency for womento spacebirthsas WorldBank, 1818HStreetNW,Washing- cessful would help eluddate the interplay their number ofchildren increases, or the ton, DC 20433. Please contact George between these factors. counter cyclicality of U.S. fertility to the Psacharopoulos, room 14-187, extension This paper--a product ofthe Pinancial business cycle. 39243(37 pages). Policy and Systems Division, Country Arroyo recommends that for the most Economics Department - is part of a completetreatmentoffertilityissues, the largereffortin the departmentto promote analyst should adopt a dynamic-stochas- 1087. Exchange-Rate-Based the development of sound securities mar- tic view of the fertility decision. Stabilization: Tales from Europe kets. Copies of this paper are available This paper - a product of the Popula- and Latin America free from the World Bank, 1818 H Street tion Advisory Service, Population and NW, Washington, DC 20433. Please con- Human Resources Department -is part AlbertoF. Ades. MgueA.Eigoel, andNisan tactPriscillalnfante,roomN9-005,exten- of a larger effort in the department to Liviatan sion 37665 (39 pages). explore the determinants ofcon..ceptive (February 1993) use. The study was fundedby the Bank's ResearchSupportBudgetunderresearch Inhighinfatineconomiesezhange-rae- 1085. Economic Approaches project "Impediments to Contraceptive basedstabilizations typically start itha to Modellng Fertility Determinants: Use in Different Environment (RPO boom, with the recession coming later. In A Selective Review 675-72). Copies ofthe paper are available contrast, in similar programs in the mod- free from the World Bank, 1818 H Street orate inflation European conomies, the Cristino R. Arroyo III NW Washington, DC 20433. Please con- recession generaUy appears upfint. When "Vebruary 1993) tact Otilia Nadora, room S11-219, exten- suckprograms resultinaboom,it is driven sion 31091 (70 pages). by different foces than in the high infla- r the most complete treatment offertil- tion economies. j issues, the analyst should adopt a dy- imic-stochastic viewofthefertility dec- 1086. Teachers' Salaries In Latin There is convincing empirical evidence America: A Comparative Analysis that the cycle for exchange-rate-based disinflationinldgh-inflationLatinAmeri- royo reviews critical models offertility GeorgePsacharopoulos,JorgeValenzuela, and can economies typically begins with ex- -which the fertility decision isregarded Mary Arends pansionandendsinrecession-asurpris- the outcome ofeconomic choice behav- (February 1993) ing pattern. Ades, Kiguel, and Liviatan -r. He considers, separately, two classes explore whether a similar cycle can be 'models. The first are static lifetime fer- Acomparisonofteachers'salariesagainst observedin exchange-rate-based disinfla- -Ity models chat explain lifetime fertil- the salaries of other workers did not sup- tion in low-inflation economies. r aggregates and are exemplified by the port the position that teachers are either They draw an empirical evidence from _rk of Easterlin-Crimmins (1983), overpaid or underpaid in Latin America stabilizationprogramsinthreeEuropean :>senweig and Schultz (1985), and Mont- countries in the early 1980s-in Denmark mery (198T). The second are dynamic Data from household surveys of 12 Latin (1982), Treland(1982),andFrance (1983). chasticfertilitymodelsthathavebeen American countries were used to assess In these programs, the authoritierfixed ed to analyze intertemporal or how teachers' salaries compare with those the central parity of the exchange rate tergenerational decisions on birth-tim- of workers in other occupations. band against the European currency unit g and birth-spacing. These are repre- The results show that salaries vary (ECU)- This represented a break from nted by the work of Wolpin (1984), among countries, rangingfrom an appar- previous years when this rate was often !wman (1988), and the macroeconomic ent 35 percent underpayment in Bolivia realigned to accommodate inflation. del of Barro and Becker (1989). (compared with the control group) to a 65 They find that the Iish and French Arroyo discusses issues concerning the percent overpayment in Colombia. pograms followed the more traditional soretical specifications and the econo- But when statistical controls are intro- pattern. In the initial phase, there was a -tric implementation of these models. duced for differences in education, hours recession accompanied by a continuous, 142 Policy Research WorkIng Paper Series gradual reduction in inflation-followed ral shift in comparative advantage from 1089. Equity Portfolio by a second, more expansionary, phase. industrial countries to developing coun- Investment In Developing The initial recession was attributable to tries. But there is quite a bit of disagree- Countries: A Literature Survey a lack of credibility about the pace of dis- ment about how restrictive the Multi-Pi- inflation (reflected in an increase in real bre Agreements (MPA) are. Stin Claeusen wages) and a reduction in aggregate de- Faini, de Melo, and Takacs address the (February 1993) mand resulting from tight monetary and potential sources ofallocative inefficiency fiscal policies. occasioned by the MFA and search for Empirical research about equity portfolio Stabilization in Denmark, on the other evidence that the MFA has indeed led to investment in developing countries is hand, wasexpansionary. Thekeyquestion such inefficiency. needed to faciitate policy decisions about is whether this expansion was similar to In a theoretical section, they identify liberalizing capital accounts, reforming thatin the high-inflation Latin American five sources ofinefficiency relating to al- financial markets, and coping with the * economies, in origins and characteristics. locations across countries, acrossconsum- potential volatility of these financial flows. It has been argued that expansion in the ers, and among firms within constrained high-inflation economies was caused by countries. Claessens surveysthe literature on equity a the perception thatthe program was tem- In the empirical part of the paper, first portfolioinvestmentto develop aresearch porary. Expectations ofa future reversal they provide evidence of the restrictive- agenda that could help developing coun- led toanincreasein spendingandoutpuL ness of the quota arrangements from tries interestedin attractingequity part- By contrast, expansion in Denmark ap- trendsinimportshares foraggregate cat- folioflows. pears to have been driven by opposite egories oftextilesand clothing, before and He finds that a broad literature exists forces - by overconfidence about the during the MFA. Then they provide evi- on equity portfolio flows, but that most speed of disinflation. dence from a detailed examination of empirical tests have focusedonindustrial These findings supporttheviewthatthe quota utilization rates andprice differen- countries. Although some of the analyti- high-inflation economies are a group to tials among EC importing countries. cal papers may be applicable to develop- themselves. In particular, disinflation in Among their findings: ing countries, Claessens identifies areas these economiesislikely to face obstacles * Relatively high utilization rates of empirical research of specific interest inherently different from those observed across exporters suggestarelativelyhigh to developing countries: inmostindustial,ow-inflationcountries. degree (andstability)ofquotabindingness * Identifying barriers that prevent a In addition, the costs ofexchange-rate- across exporters. free flow of (equity portfolio) capital be- based disinflation are typically experi- * Oversbipment was highest for the tween industrial and developing coun- enced at different times. The recession mostimportant(byshipmentvalue) prod- tries. appears upfront in industrial countries, nets. * Quantifying the opportunity costs of and at a later stage in the high-inflation * There is concentration among a few these barriersinhigherzisk-adjustedcost economies. leading exporters (China, Hong Kong, of capital and lower flow of capital. This paper - a product of the Transi- Taiwan, and Thailand) and afewimport- * Analyzing the optimal amount of tion and Macro-Adjustment Division, ers (Benelux, Germany, and the United portfolio investment and the degree to CountryEconomicsDepartment-ispart Kingdom). whichinvestorsinindustrialcountriesare of a larger effort in the department to * The data suggest a positive correla- currently (under-) investedin developing study adjustment policies. Copies of the tion between the coefficients ofrvariation countries. paper are available free from the World in prices and quota utilization rates for * Analyzing the efficiency of the var- Bank, 1818 HStreetNW,Washington,DC China, Hong Kong, and Korea. This sug- ousstockmarketsin developingcountries, 20433. Please contact Raquel Luz, room gests thatprices are related, asone would as inefficient stock markets could be a N11-059, extension 34303 (39 pages). expect, to the degree ofbindingness. barrier to foreign flows. * The data suggest that binding quo- This research could help policymakers tas would be associated with higher im- in developing countries make decisions 1088. A Primer on the MFA Maze port prices- about liberalizing capital accounts, re- This paper - a product of the Trade forming financial markets, and coping Riccardo Faini, Jaime deMelo, Policy Division, Country Economics De- with the potential volatility ofequityport- and Wendy Takacs partment-is part ofalargereffortin the folio flows. (Febmuary 1993) department to evaluate trade policy mea- This paper- a product of the Interna- sures and recommend methods of trade tional Trade Division, International Eco- The MFA results in inefficient resource policy reform. This paper was presented nomics Department - is part of a larger allocationacrosscountries, across consum- at the Ford Foundation Conference on effort in the department to study alterna- ers, and among firms within constrained US.-EC Trade Relations (in Brussels) and tive forms of external financing to devel- countries. Euidence indicates that quotas at the OECD Conference on Trade Policy, oping countries. Copies of the paper are tend to be binding, and many consumers Productivity, and Foreign Investment (in available free from the World Bank, 1818 pay more for products as a result Paris). Copies of this paper are available H Street NW, Washington, DC 20433. free from the World Bank, 1818 H Street Please contact Rose V room S8-042, It is generally agreed that the arrange- NW, Washington, DC 20433. Please con- extension 31047 (25 pages). ments that have regulated trade in tex- tact Dawn Ballantyne, room N1O-029, tiles and clothing have slowed the natu- extension 37947 (45 pages). Policy Research Working Paper Series 143 1690. Government Expenditures Asia, Country Department II-is part of (RPO 676-72). A preliminary version of As A Citizens' Evaluation of Public a larger effort in the department to ad- the material was presented attheconfer- Output: Public Choice and the dress issues of economic policyin Central ence, "The Impact of Financial Reform," Benefit Principle of Taxation European countries through analytical heldattheWorldBank,Washington, DC, techniques based on market economic in April 1992. Copies of this paper are Ananos Catsambas principles. Copies of the paper are avail- available free from the World Bank, 1818 'Febrmary 1993) able free from the World Bank, 1818 H H Street NW, Washington, DC 20433. Street NW, Washington, DC 20433. Please contact Wilai Pitayatonakarn, RIP-nnts from the theories ofpublicchoice Please contact Anita Correa, room E11- room N9-003, extension 37666 (30 pages). ---hon,mt toationare combined tofarm 107, extension 38549 (16 pages). a conceptual framework for quantifying *itizens'preferences about privately avail- 1092. The Effect of Financial =;leandpubllyprovidedgoods andser- 1091. Capital Market Imperfections Liberalization on the Allocation vices. When the theoretical results were Before and After Financial of Credit: Panel Data Evidence --iAld to four Central European coun- Liberalization: A Euler-Equation for Ecuador "ims, under certain behavioral and sta- Approach to Panel Data F'!-y assumptions, both the evaluation of for Ecuadorian Firms Fidel Jaranillo, Fabia Schiantareli, - - I desired level ofpublic output by indi- and Andrew Weiss 'uals was found to be lower than that Fidel Jaramillo, Fabia Schiantarelli, (Februazy 1993) mallyprouided by government and Andrew Weiss (FebruWar 1993) The evidence suggests that iberaization :.bining elements from the theories of resulted in a reallocation of resources to- - ¾licchoiceandbenefittaxation,Catsan- Econometric results suggest that increas- ward older, larger, and more eicient - developsaframeworkin which private ing borrowing costs at the margin and a firms. -zens can evaluate public activities. ceiling an leverage affect small, young Why, and under what circumstances, do firms, but not large, old firms. And there Jaramillo, Schiantarelli, and Weiss dis- aureaucrats" increase the size ofthe pub- is no evidence that financial reforms in cuss two effects offinancial liberalization, lie sector and the amount ofpublic spend- Ecuador ha ve relaxed these financial con- using panel data for Ecuadorian firms. . - in their own self interest? straints. After describing the main thrust of the What does the private sector thinkpub- reforms and the general macroeconomic ie output shouldbe, whatis actual public Using a large set of panel data for Ecua- developments, they document the changes -put, and how does the private sector dorian firms, Jaramillo, Schiantrelli, and that occurred infirmsfinancial struere --]uate that output? Weiss analyze the role of capital market andin the allocation of credit. Catsambas applies the theoretical re- imperfectionsininvestmentdecisionsand Descriptive evidence suggests that -'ts of an attempt to answer these ques- investigate whether the financial reforms there has been a reallocation ofresources is in four Central European countries introduced in the 1980s in Ecuador suc- towardolder,largerfirms afterliberaliza- -echoslovalia, Hungary, Poland, and ceeded in relaxing financial constraints. tion. The authors also investigate econo- -venia), using actual data for 1989-91 To facilitate capital accumulation and metrically whether financial reform has I projections for 1992. Interpreting in- growth, the Ecuadorian government re- helped directcredittomoreefflicientfirms. Lct evidence, he shows that the private moved administrative controls on the in- The results, based on measures oftechni- tar would preferless government activ- terest rate and eliminated or scaled down cal efficiency obtained from estimating in all countries, from alow of 5 percent directed credit programs. stochasticproductiaonfrontiers, show that ; public spending (in Poland) to a high The model used here allows both for an this has indeedbeen the case in Ecuador. ne-thirdless(in Slovenia).Ifthose gov- increasing cost ofborrowing, as the degree This paper -aproduct ofthe (former) ments were to follow those guidelines, of leverage increases, and for a ceiling on Financial Policy and Systems Division, ir spending-to-GDPratios would more leverage. The econometric results suggest Country Economics Department - was ,ely resemble the 1987-89 average for that both types of capital market imper- prepared under funding for the World jelected gn..ip of European market fectionsareimportantforsnall andyoung Bank research project, "Investment Deci- nomies. firms, but not for large and old firms. sions, Capital Market Imperfections, and Catsambas also introduces a more rig- Moreover, the estimated equations do not the Effects of Financial Liberalization: us, if not necessarily more objective, provide evidence that financial reform in The Ecuadorian and Indonesian Case? ..)roach to determining "optimal" gov- Ecuador has helped to relax these finan- (RPO676-72).Apreliminaryversionofthe ment spending. This approach re- cial constraints material waspresentedatthe conference, res little information, but uses a static This paper- a product of the (former) "The Impact ofkinancial Reform,"held at del and requires faith in the direction Financial Policy and Systems Division, theWaLdBankWashington,DC,inApril ausality forsome key variables. To the Country Economics Department - was 1992. Copies of this paper are available -ent that one can accept those limita- prepared under funding for the World free from the World Bank, 1818 H Street is, the model may be a useful opera- Bank research project, ainvestmentDeci- NW, Washington, DC 20433. Please con- ial tool in public spending evaluation. sions, Capital Market Imperfections, and tact Wilai Pitayatonakarn, room N9-003, This paper - a product of the Country the Effects of Financial Liberalization: extension 37666 (41 pages). - arationsDivision, Europe and Central The Ecuadorian and Indonesian Case? 144 Policy Research Working Paper Series 1093. Swiss Chilanpore: The Way * Asecondpillarconsistingofacentral An empirical evaluation of existing Forward for Pension Reform? agency, which could be public or private, schemes produces no evidence that mem- for record-keeping and other centralized bership in integration schemes has any Dimitri Vittas functions, and private fund management effect on growth. (February 1993) companies for investing funds. The point Finally, the authors note that recent wouldbe tolceep operatingcosts down and attempts at regional integration have Swiss Chilanpore is a proposal for a pen- achieve high investment returns, different starting points and objectives sion reform strategy. It is based on a * A third and fourth pillars based on than past efforts - so history is a poor multipillar structure andaims to combine occupational pension schemes and per- guide tothefuture ofregionalintegration. the best features of the pension systems of sonal savings. This paper - a product of the Trade Switzerland, Chile, andSingapore-leau- The proposed structure would aim to Policy Division, Country Economics De- ing behind their weaknesses. combine the strengths and avoid the partment-is partofalarger effortin the- weaknesses of the three countries' sys- departmenttaoimprove ourunderstanding Many countries are consideringfar-reach- tems, but Vittas cautions that no reform of the economics of regional integration- ing pension reform. This is happeningin proposal would apply equally well in all Thepaper was revisedtoreflectcomments response to growing demographic pres- countries, regardless of local circum- received atthe Conference onNew Dimen- sures in some countries (especially in stances and conditions. sions in Regional Integration, (funded by Western and Eastern Europe), to This paper-a product of the (former) the Bankes Research Support Budget un- unsustainably generous benefits in others Financial Policy and Systems Division, der RPO 675-31). Copies of this paper are (especiallyin Latin America), ortofailure Country Economics Department-ispart available free from the World Bank, 1818 to ensure the profitable investment of of a larger effort in the department to H Street NW, Washington, DC 20433. accumulated funds (as seems to be true studyhow pension systermsfunction. Cop- Please contact Dawn Ballantyne, room with national provident funds in African ies ofthe paper are available freefrom the N1O-029, extension 37947 (47 pages). countries). World Bank, 1818 HStreetNW, Washing- Given the worldwide interestin reform, ton, DC 20433. Please Contact Wilai one could asl: Is there a blueprint for Pitayatonakarn, room N9-003, extension 1095. Are Faliproof Banking pension reform? Can lessons learned in 37666 (27 pages). Systems Feasible? Desirable? different countries be combinedin abest- practice structure usable in different Samuel H. Taley countries pension systems? 1094. The New Regionalism: (February 1993) Vittas reviews the experience of Swit- A Country Perspective zerland, Chile, and Singapore, countries Apraposedfailpmof-banking system that with relatively successful economies and Jaime de Melo, ArvindPanagariya, could both benefit and harm developing pension systems. He suggests a and Dani Rodrik countries. multipillar pension system - which he (Febmuary 1993) dubs "Swiss Chilanpore" - that would In recentyears, instabilityofthebanldng blend the hard-headed softness of the Regional integration is on the rise again system has returned as a major problem Swiss, the expensive yields of the Chilean - but fom different starting points and in many countries, particularly in the scheme, and theruthless efficiency ofSin- with different objectives than in the past. developing world. In many cases, this in- gapore. He emphasizes thatz stabilityhasbeensothreateningtofinan- * There is no perfect pension system. Regional integration is on the rise again, cialintermediationandthe functioningof All systems suffer from the problems of despite its apparent failure among devel- the payments system that governments moral hazard, adverse selection, agency oping countries in the past. have felt compelled to intervene and re-, costs, and free riders. De Mel, Panagariya, and Rodrik sur- structurebanks, often atconsiderable cost * All well-functioning pension systems vey the ambiguous economics of customs to the public budget. require good government and good man- unions, emphasizing that the traditional One response to these problems has agement. dichotomy between "trade creation" and been a proposal to create failproof bank-' * All pension systems have tocope with "trade diversion" is not particularly help- ing systems -to radically transform the the problems of long-term uncertainty. fulforpolicy. In a world with trade restric- structure, priorities, and operation of the For these reasons, Vittas favors a tions, regional integration presents cer- banking and financial systems. Banks multipillar approach that diversifies tain advantages,includingenhanced bar- wouldbelimitedtoissuingdeposits, hold- across different providers. Swiss gaining power and market access. ing essentially riskless portfolios, and Chilanpore would have two compulsory The authors point out that integration operating the payments system- To mini- and two voluntary pillars: enforcesarbitrageininstitutionsaswell as mize the resulting disruptions to the fi- * A first pillar (drawn from the Swiss inmarketsforgoodsandfactors.Thisldnd nancial system, banks would be autho- model) consisting of two parts: a flat-rate ofarbitrage can lead to improved economic Tized (and encouraged) to set up bolding pension proportional to the length of a outcomes by making decision-makingless companies and then transfer to holding person's career and an earnings-related sensitivetoeconomicallyharmfulfactional company affiliates all the functions - pension based on annual actualized life- interests-especiallywhenregionalinsti- includinglending-thatbanks wouldno time earnings. tutions are designed properly. longer be permitted to perform. So while Policy Research Working Paper Series 145 the failproof-banking proposal would se- they could exploit their comparative ad- research project, Industrial Competition, verely restrict the activity of banks, it vantage and compete better with foreign Productive Efficiency, and Their Relations would not restrict the activities of bank- firms. to Trade Regimes (RPO 674-46). Copies of ing organizations that convert to a hold- the paper are available free from the ing company form of organization. The economic literature nowaccepts theo- World Bank 1818 HStreetNW, Washing- This proposal would produce major retical arguments that liberal, outward- ton, DC 20433. Please contact Dawn public benefits. It would assure a nation orientedtrade policyis better than restric- Ballantyne, room N10-023, extension of a smoothly functioning banking and tive, inward-oriented policies. Tradition- 37947 (39 pages). payments system, would substantially ally such arguments for the gains from reduce the resources committed to bank- trade have rested on the concept ofalloca- ingsupervision, would preventbank-type tive efficiency. But a new argument for 1097. A Production Function- regulation from expanding to the rest of liberal tradehasemerge&increasedtech- Based Policy Simulation Model the financial system, and would place nical efficiency or productivity. The best- of Perennial Commodity Markets banking andnonbankingorganizationson known attempts to link trade policy and a level playing field for the financial ac- productivity are based on 'X-efficiency," TakamasaAliyamaandJonathanR. Coleman tivities in which they compete. economies ofscale, capacity use, increased (Febrmary 1993) There are two major problems with the competition, and technological catch-up. proposal. First, it might be difficult to Haddad estimates total factor produc- Policy variables greatly influence the implement because of too few riskless tivity (TFP) at the firm level using panel growth and development of the coffee sec- assets in a nation's financial system. datafrom the Moroccan industrial census tor in Nicaragua. Nicaragua could in- (Talley suggests several modifications in a production-fimction framework dur- crease its coffee production and exports that wouldalleviate thisproblemin some ingMorocco'speriodoftradeliberalization substantially by the end of the decade if countries.) Second, the proposal might (1984-89). Haddad corrected for several there were a favorable economic climate, hurt the financial market by (1) increas- problems that usually bias the estimate especially in terms of internationalprices ing interest rates for higher-risk borrow- of productivity. The use of panel data al- and investment incentives. ers, forcing them out of the market, and lowed Haddad to take into account the (2) transferring greater risk to the heterogeneity across firms. These firm- Inmodelingthe supplyofperennial crops, nonbank sector of the financial system, specific effects were tested for random- manyresearchershaveusedthe"vintage- making it more susceptible to crisis. ness. Differences between large firms and capital production approach," most re- Although the proposal would benefit small firms were checked. She also cor- cently formulated by Aldyama and developirgceountries (more prone tobank- rected for errors in measuring capital Trivedi. inginstability) more than industrial coun- stock, so common in datafrom developing Implementing this approach requires tries, it would also be more difficult to countries, and for simultaneity bias be- reliable time-series data on production, implement in developing countries. And canse of the endogeneity of factor inputs total area planted, new planted area, the adverse effects of the proposal would or because managers have some knowl- yields, real producer prices, and credit be felt more severely in the financial mar- edge about the noise in the production availability. For many producers, these kets of develepingicountries than in indus- function. data are not available, and-nany produc- trial countries, which have deeper, more Haddad then estimated the effect of ers of perennial crops face substantially responsive financial markets. various trade and market-structure vari- changedincentivestructuresincountries This paper - a product of the (former) ables on the level ofTFP, as well as on the undergoing structural adjustment. Financial Policy and Systems Division, deviation of firm TFP from the efficiency So,AldyamaandColemandevelopedan CountryEconomicsDepartment-ispart frontier. The results are notvery sensitive alternative method for modeling peren- of a larger effort in the department to tothe differentmeasuresofTEPand show nial crop subsectors. Ittakesintoaccount study issues associatedwith the structure, thattrade opennesshasa significant posi- past investment decisions and other dy- operation, and soundness ofbanking and tive effect on firm productivity through: namics of supply response, captures all financial systems. Copies of the paper are * Outward orientation from export important features of the market, should available free from the World Bank, 1818 promotion. be consistent with economic theory, H Street NW, Washington,, DC 20433. * Importliberalization. shouldrequire nmnimal data, and should Please contact Bobo Lu, room N9-005, * More direct foreign investment. notrely on time-series data or economet- extension 37664 (19 pages). By splitting the sample into protected ric estimates. and unprotected sectors, Haddad showed This production function-based model lower productivity in protected sectors. uses a Cobb-Douglas production function. 1096. How Trade Uberalization The results are clear. Trade liberaliza- The model is based on partial equilibrium Affected Productivity in Morocco tion in Morocco improved productivity in and does not take into account the impact manufacturing firms, so they could exploit on individual subsectors on such aggre- Mona Haddad their comparative advantage and compete gate variables as wagesandinterestrates. (February 1993) better with foreign firms. The authors apply the model to the cof- This paper - a product of the Trade feesectorinNigeria, whichisundergoing TradeiberalizationinMoroccoimproved Policy Division, Policy Research Depart- mqjorreform,btthemodelcanbeapplied Droductivity in manufacturing firms, so ment-was prepared for the World Bank - with only minor modifications - to 146 Policy Research Working Paper Series other types of crops, in other countries. Despite the march toward a frontier- developing countries carry similarly low The model results show that- less Europe, EC manufactures imports benefits. Theyhelpnascentexportersben- * Policy variables greatly influence the from nonrmembers rose faster than intra- efit from good policies, but they do not growth and development of the sector. A EC trade, and imports from developing overcome the handicap of bad policies. 10 percent increase in the price of coffee, countries rose fastest. Similar tendencies This paper is a product of the Geneva for example, would increase demand for prevailed in North America. This pattern Office. Copies of the paper are available labor 19 percent and that for fertilizer 29 of imports contradicts the myth of wide- free from the World Bank, 1818 H Street percent and would expand the area ofcof- spread, effective, and growing barriers to NW, Washington, DC 20433. Please con- fee investment 17 percent. manufactures imports. Protectionist tact Mona St. Leger, room R8-063, exten- * The sector would substantially ben- rhetoricis up because imports are increas- sion 37148 (40 pages). efit from greater labor efficiency, lower ing, not because trade barriers are rising. real interest rates, and a reduction in the The rising share of developing countries, real value of the cordoba against the US. despite their often weak bargaining posi- 1099. Trade Unions and Collective dollar. tions, shows that multilateral rules, Bargaining * Nicaragua could increase its produc- rather than bargaining, threats, and tion and exports substantially by the end counter-threats, still drive the system. Harry C. Katz, Sawash Kuravilla, of the decade, if there were a favorable In the 1980s, manufactures imports and Lowell Turner economicclimate-especially intermsof rose to 40 percent of manufacturing pro- (February 1993) international prices and investment in- duction in the United States and to 25 centives. percent in the European Communiry (not The ability ofdeveloping countries and the This paper-a product of the Interna- including imports from EC members; in- new transitionaleconomies to compete in tional Trade Division, International Eco- cluding those, manufactures imports rose the global marketplace will depend on nomics Department- is part of a larger to 87 percent of manufactures production their ability to transform industrial rela- effortin the department to analyze policy in the United Kingdom, 67 percent in tions policies involuing trade unions and impacts on agricultural supply. Copies of France, and53 percentinWestGermany). collective bargaining so that theypromote the paper are available free from the But in Japan, manufactures imports in flezibility in the workplaceand encourage World Bank, 1818 H StreetNW, Washing- 1990 were less than 12 percent of manu- the formation and effective use of human ton, DC 20433. Please contact Grace facturing production, and their dollar resource. Ilogon, room S7-033, extension 33732(30 value was smaller than Italy's. pages). Granted, some protectionism persists Katz, Kuruvilla, and Turner assert that everywhere, but it is an irritant rather changing world markets and new tech- than a true obstacle to trade. For that nologies are drivingindustrialrestructur- 1098. Fortress Europe and Other reason, further trade liberalization can ing. The ability of developing countries Myths Concerning Trade bring the industrial countries little addi- and the new transitional economies to tional benefit in terms of faster growth, compete in the global marketplace will Jean Baneth though retreatfrom free trade holds huge depend on their ability to transform indus- (Febmary 1993) potential losses. Only improved domestic trial relations policies involving trade policies -structural and macroeconomic unions and collective bargaining so that Free trade in manufactures is a reality in - can raise investment, accelerate they promote flexibility in the workplace most industrial countries. There is little growth, reduce unemployment, and con- and encourage the formation and effective moretogainfrom furthertrade liberaliza- solidate support for free trade. use of human resources. tion. But there is nuch to lose from any Developing countries should view the History has shown, they say, that there retreatfrom the open multilateral trading United States and the European Commu- are certain key moments of transition in system, or even from threats to it. To pre- nity as open markets for their manufac- industrial relations systems. After that serve the system, the benefits offree trade tures exports. Even in egriculture, policy time, systems get set and are hard to should be made more tangible through reform over the present decade should modify. Often these key moments are the better domestic structural and macroeco- reduce inefficiencies. Meanwhile, analysts result of legislative changes (such as thd nomic polfeies that would raise growth should be careful to disaggregate: indus- National Labor Relations Act and the rates and lower unemployment. trial countries! agricultural policies that emergenceofpublic sector unionsafterthe have truly harmed food exporters, like burgeoning of public sector legislation in Developingcountries sometimes still resist Thailand, should not be blamedfor theills the United States). Sometimes they are free tradebecause ofthe allegedprotection- of food importers, like most African coun- the result of key historical or economic ism of industrial countries - a myth be- tries. junctures (such asthepostwarreconstruc- lied by facts, says Baneth. Selective trade restraints may have tion in Japan and Germany, andindepen- Importgrowthintheindustrial countries blunted but not countered the dynamism dence movements in the developing acceleratedduringthe 1980s, whileincome ofnewly industrialized countries and ac- world). growth slowed. Outside ofagriculture (only celerated their shift toward more sophis- Recent pressures for structural change about 2 percent ofGDP) and with the pos- ticatedexports. As their barrierstomanu- in the developing world present an oppor- sible exception of Japan, free trade - not factures imports are generally low, the tunity for major transitions in industrial protectionism -is the reality. preferences industrial countries grant to relations. Policy Research Watring Paper SerIes 147 Drawing on the Japanese and German laws in Latin America) and a model pro- experiences, as well as experiences in the posedbyindigenous organizationsinLatin developing world, Katz, Kuruvilla, and America. Turner focus on lessons that can be ap- The conventional models emerged dur- plied in guiding this transformation. ing an era when most governments were Worker participation in more concerned with the rapid occupation decisionmalcing, they contend, is critical and exploitation of frontier zones and the for bringing about the essential popular assimilation ofindigenous peoples. Recent acceptance of changes that will come with attention to the environmental degrada- industrial restructuring. tion of these areas and the need to create It is also important to coordinate and alternative models of land use and devel- integrate industrial relations policy with opment have directed attention to the po- other social, legal, economic, and educa- tential contribution of indigenous peoples tional policies. The education system, for tothe conservation andmanagementofthe example, should not be overproducing vast tropical forests of Latin America. college graduates when there is an Davis and Wali find that indigenous undersupply of unskilled and skilled peoples must be given some degree ofcon- workers. trol over their territories and resources. This paper - a product of the Educa- They contend that for successful manage- tion and Social Policy Department - is mentoftropicalforeststheremustbeanew part of a series of state-of-the-art studies type of partnership between indigenous on employment and labor market issues peoples, the scientificcommunity, national and reform programs. Copies of this pa- governments, and international develop- per are available free from the World mentagencies.Thisrelationshipsbouldbe Bank, 1818HStreetNW,Washington,DC a contractual one, in which indigenous 20433. Please contactESP, room 86-035, peoples are provided withjuridical recog- extension 33680 (39 pages). nition and control over large areas of for- est in exchange for a commitment to con- serve the ecosystem and preserve 1100. Indigenous Territories biodiversity. and Tropical Forest Management This paper -a product of the Environ- In Latin America mental Assessments and Programs Divi- sion, Environment Department - is part Shelton H. Davis and Alaka Wali ofalargereffortin the departmentto seek (February 1993) ways of incorporating indigenous peoples and their traditional cultural knowledge For successful management of tropical into biodiversity conservation and natural forests there must be a new type of part- resources management Copies of the pa- nership between indigenous peoples, the perareavailablefreefromtheWarld Bank, scientific community, national govern- 1818 H Street NW, Washington, DC 20433. ments, and international development PleasecontactSheltonDavis,roomS5-109, agencies. This relationship should be a extension 33413 (31 pages). contractual on, in which indigenous peoples are provided with juridical recog- nition and control over large areas of for- est in exchange for a commitment to con- - serve the ecosystem and preserve biodiversity. Using datafrom Latin America, Davis and Wali argue that fundamental changes must take place in the legal recognition and demarcation ofindigenous territories if indigenous peoples are to fulfill their potential asresource managers for threat- ened tropical forest ecosystems. Davis and Wali compare different na- tional land tenure models forforest-dwell- ing indigenous peoples (contained in na- tional Indian, agrarian,andprotectedarea Volume XII Numbers 1101 - 1200 Policy Research Working Paper SerIes 151 1101. Transfoming State The authors discusskey transfomation pecially the relative price ofmachinery (a Enterprises In Poland: issues: the disappearance of such safety traded good in Mexico). Moreover, the Microeconomic Evidence valves as easy bank loans and interfirm decline in trade (driven by falling world on Adjustment credit, hardening of the microaconomic oil prices) explains much of the increase budget constraint, excess-wage tax re- in this relative price. Brian Pinto, Marek Belka, form, and, most important, managerial The decline in Mexico's international and StefanKrjewnki attitudes and incentives, terms of trade was probably the most (Febmary 1993) To complete the picture, they correlate importantultimate cause of theincreased theresults ofmanagerinterviews with the relative cost ofmachinery, but the rever- Poland!s state sector is far fiam a write- quantitative performanceoffirms. Essen- sal in net capital inflows to Mexico prob- off Success stories among state-owned tialy, firms have learned a good deal ably also played a role in increasing this enterprises are emerging in all manufac- about operating in a market economy in relative price. On this point, the evidence turing sectors, contradicting negative ste- the past three years, and managers have is not as clear. rotypes. The industrial revival showing matured. The industrial revival showing After controlling for these effects, up in economywide statistics can be re- up in economywide statistics can be re- Warner finds little evidence that the ef- - garded as a sustainable trend born of garded as a sustainable trend born of fectsofdebtoverhanganduncertaintyhad genuine microeconomic adjustment. genuine microeconomic a"ustment. much to do with the investment decline. This paper is a product of the Poland Warner points out that investment in Basing theirreportonrepeatvisitsin late Resident Mission, CountryDepartmentII, Texas and Louisiana (which were also 1992 to 75 large state-ownedmanufactur- Europe and Central Asia Region. The riding the oil boom of 1973-81) also fell in ing enterprises (which had been earlier studywas fundedby the BankesResearch 1981-86, and adverse commodity price surveyed in mid-1991), Pinto, Belka, and Support Budget under research project shocks also affected many other heavily Krajewsl present optimistic new evi- 'State Enterprise Behavior in Poland indebtedcountries.Attheveryleast, com- dence about the transformation of state- During the Economic Transformation modity price shocks (such as Mexico's owned enterprises in Poland. Program (RPO 677-58). Copies of this decline in oil prices) as a direct cause of Thisevidence shows state-owned enter- paper are available free from the World declining investment levels in the 1980s prisesinamuchmorefavorablelightthan Bank, 1818HStreetNWWshington,DC have been insufficiently emphasized in the stereotype of myopic decapitalizing 20433. Please contact Marylou Kam the literature on the effects of the inter- companies that dominates discussion of Cheong, room K6-115, extension 39618 national debt crisis. Poland's statemanufacturing sector. Suc- (43 pages). This paper- a product of the Interna- cess stories are emerging, and the state tional Economic Analysis and Prospects sector is far from a write-off. Division, International Economics Do- Moreover, favorable evidence is drawn 1102. Did the Debt Crisis partment-is part cfalarger effortinthe from all manufacturing sectors, attesting or Declining Oil Prices Cause department to examine the impact of ex- to the potential fora diversified manufac- Mexico's Investment Collapse? ternal shocks on low and middle-income turing base. The state-owned enterprises' countries. Copies of the paper are avail- operations are Iargelyautonomous, so the Andrew M Warner able free from the World Bank, 1818 H positiveadjustmentsindicatethatdeen- (Febmry 1993) Street NW, Washington, DC 20433. tralized approaches to transformation Please contact Mila Divino, room 88-013, could work -if bolstered by appropriate Commodity price shocks (such as the de- extension 33739 (31 pages). managerial incentives. But several prob- cline in oil prices) have been underesti- lems remain, andmanyissues have yet to matedas a direct causeofideclining invest- be addressed. ment in the 1980s. 1103. Capital Mobility Pinto, Bella, and Krajewsi examine In Developing Countries: variousa4 justmentindicators(aborshed- Warner proposes and estimates a Some Measurement issues ding, material and energy costs, bank microeconomicinvestmentmodeltodeter- and Empirical Estimates borrowings, and export performance) and mine the relative importance of three ex- correlate these with firms classified by planations for Mexico's investment de- Peter J. Montiel 1992 financial performance. (By 1992, cline in the early 1980st (Febmary lMS) presumably, the transitional measure- * The decline in oil prices. ment distortions of 1990 and 1991 had * The termination of capital in flows. f is rare for developing countries to be disappeared.) They show that significant * The effects of debt overhang and un- strongly integrated with world financial differencesexistetweensuccessfil and certainty. markets, but most developing countries 'unsuccessful firms. Managers in sac- He uses investment data for private must be regarded as financially open, ac- cessful firms have tended to stress a industriesbetween 1981 and 1985, which carding to new estimates. change in product mix, have generally haveyettobousedinaddressingtheques- become more efficient in the use ofmate- tion under discussion. An economy's financial integration with rials and energy, have maintained labor The data indicate that the main the outside world (the extent of capital productivity,andhaveshownrestraintin microeconomic mechanism driving the mobility acrossitsborders)isakey deter- setting wages and in borrowing from decline in investment was a rise in the minant of some of its most important banks. relative price of investment goods - es- mcenomic properties. 152 Policy Research Working Paper Series Yet little is known about this character- nature ofthe trade regimes in these coun- 1105. Estimating Quasi-Fiscal istic of many developing economies. An tries and are particularly significant be- Deficits !n a Consistency important stumbling block in the empiri- cause they were undertaken duringsevere Framework: The Case cal assessment of financial integration economic crisis and uncertainty. of Madagascar (openness) is the many approaches to Alam and Rajapatirana show that the measuring it. average levels and the growth rates of Philippe LeHonera and Hector Sierra Montiel describes and evaluates differ- imports and exports were substantially (February 1993) ent tests of capital mobility, surveys ex- higher during the reform period. But im- isting evidence, and applies four tests of ports did not show the surge many had To assess fully the effect of adjustment capital mobility- to assess the degree to expected, possibly because of low domes- prcgrams and development strategies, it is which the many developing countries tic demand. Domestic demand was low essential that the fiscal deficit include tested have achieved integration with because of stabilization and structural quasi-fiscaldeficit-the losses ofpublic world financial markets. adjustment policies, real exchange rate financial institutions such as the central The four tests are the: (1) magnitude of devaluations, andlimited access to fareign bank. A flow-of4-fuds format may be the gross capital flows; (2) uncovered interest loans. best approach for doing so, as this case rate parity- (3) strength of saving-invest- All the trade reforms were preceded or shows. ment correlations; and (4) behavior of accompanied by restrictive fiscal and domestic consumption over time monetary policies and by devaluations of In practice, conventional measures of the The evidence suggests that most devel- the real exchange rate. The reform period fiscal deficit exclude the activities of pub- oping countries can be considered to be also moved toward the unification and lic financial institutions. As a result, fis- financially open - in only 18 of the 57 floating of exchange rates. cal policies may be applied inappropri- developing countries classified did the The trade reforms were associated with atelywhen these institutions-especially datafail to showfinancial openness-and changes in the political regimes. In most the central bank - run large losses (the that many countriesmaybe experiencing countries, the reforms began under the quasi-fiscal deficit). an increased degree of integration with auspices of democratically elected govern- The macroeconomic effects ofthe quasi- world financial markets. ments, despite resistance - belying the fiscal deficit are similar to the effects of This paper-aproduct oftheDebtand conventional wisdom that democratic the deficit from other public entities - International Finance Division, Interna- leaders are particularly vulnerable to and should therefore be included in the tional Economics Department - is part powerful special-interest groups and are public deficit. of a larger effort in the department to thus less able to sustain reforms. Crucial Conceptual and practical difficulties study the effects of external financing on to the success in implementing these re- have so far precludeda definition ofquasi- developing countries. Copies ofthe paper forms was the boldness with which the fiscal deficits that is operationally usefal are available free from the World Bank, governments pursued them. and comparable across countries. After 1818 H Street NW, Washington, DC Alam and Rajapatirana point out that studying the methodological and practi- 20433. Please contact Rose Vo, room S8- the success of the trade reforms lies in cal problems oftreating quasi-fiscal defi- 042, extension 31047 (57 pages). ensuring their domestic viabilitythrough cits, Le Houerou and Sierra propose us- macroeconomic stability and growth. A ing aflow-of-funds format, which in prin- successful conclusion of the Urugany ciple could be standardized across coun- 1104. Trade Policy Reform Round of multilateral trade negotiations tries. In Latin America and the Caribbean would also enable the countries to realize UsingMadagascar as an example, they in the 1980s greaterbenefitsfrom their trade reforms, show that the public sector deficit is sig- making them more sustainable. nificantlyundervaluedifquasi-fiscal defi- Asd Alam and SarathfRajapadrana This paper - a product of the Trade, cits are not considered. (Febrmary 1993) Finance, andPrivate Sector Development They contend that such deficits mustbe Division, Latin America and the Carib- taken into account in assessing the suc- Most Latin American and Caribbean bean Technical Department - is part of cess ofadjustmentproblems and develop- countries havc undertaken far-reaching a larger effort in the department to dis- mentstrategies supportedby the IMF and and fundamental reforms of their trade seminate lessons of policy reform in the the World Bank. policies. These reforms have been under- Latin America and the Caribbean region. This paper - a product of the Private taken unilaterally under extenuating eco- Copiesofthe paper are availablefree from Sector DevelopmentEconomics Division, nomicconditions. Theirsuccess lies in bold the World Bank, 1818 H Street NW, AfricaTechnical Department-is partof and consistent implementation, coraple- Washington, DC 20433 Please contact alargareffortinthe departmentto assess mentary macroeconomic and exchange Joy Troncoso, room 14-059, extension the macroeconomicimpact ofquasi-fiscal rate policies, and political will and resil- 37826 (25 pages). deficits. Copies ofthe paper are available ience. free from the World Bank, 1818 H Street NW,-Washington, DC 20433. Please con- Alamand Rajapatiranaexaminethewide- tact Nydia Velasco, room JS-283, exten- ranging and fundamental trade reforms sion 34346 (26 pages). undertaken in 16 Latin American and Caribbean countries in the 1980s. These reforms have dramatically altered the Itcy Research Working Paper Series 153 *6. Improving Women's Access specific interventions, 62 percent were 1107. Financial Reform Lessons Higher Education: A Review developedinthepastfiveyears(1987-92). and Strategies World Bank Project Experience Somerecent Bankprojectshave multiple, interrelated interventions. Gerard Capria, Jr., Isak Atlyas, 2 Dandar and Jennifer Hiworth Initial project results indicate that one and Jamcs Hanson bmury 1993) for inaction, as the conclusions of this study suggest that financial reform is Financial reform calls for manre nuances jects toincreasefemalepartipatdon in worth the effort and that, with due atten- than simply "letting the market workAn *;hereducation are most likely to succeed tion to the institutional environment, the eclectic approach to financial reform is 're there is a strong demand for edu- lessons can be applied elsewhere. more difficuleto managethanimmediate, 'ed women in the labor market, com- Authoritiescan domuch toincrease the complete deregulation, but it appears to ed with a high private demand for market orientation of their financial sys- have more chance of success. Unless a .,her education by women (and their tem, with all its benefits, even without a countrycn countongood fortune,itseems ents). "big bang." They can eliminate the gross- wiset to move gradually and improue the est interest subsidies, move toward mar- fundamentals, until certain basic condi- rld Bank project experience on what ket financing of government debt, and tions are met-especiallygivenmostgou- -.rks to improve women's access to ter- raise deposit rates at least to only slightly ernments'explicitarimplicitcommitment sy education is so limited that it may negative or modestly positive levels, pay- to providing deposit insurance. premature to draw firm conclusions. ing attention to budget realities. In sev- ny of the projects with interesting eral countries, authorities ended modest The argument in favor of gradual - but Itiple interventions are ongoing. But financial repression early in their reform sustained -financial reform is based on ) conclusions emerge. efforts, whilestillretainingsome controls. twofadtors. First, the developmentofbor- First, the most essential factor for suc- Of those that moved fastest on interest rowernet worth will determine the health sful intervention seems to be a strong rate deregulation, Indonesia and New of the real and, ultimately, the financial nand for educated women in the labor Zealand met most of the foregoing condi- sector- Thus, speeding up reforms when rket combined with a bigh private de- tions, with some uncertainty about the borrower net worth is subject to positive ndforhighereducationbywomen(and health of their banks at the point of de- shocks-or slowing them when itis sub- ir parents).Howwellaprcject succeeds regulation. Butinboth cases banks hada jecttonegativeshocks-appears sensible ends on the extent to which project window of a few years before new entry andappearstobavewakedbetterinprac- aponents are sensitive to the local situ- was permitted, allowing them time to tice. Second, the initial conditions of the Dn in terms of these factors. adjust before competition intensified. bankingsector-notjustitanetworthbut Projects with often only a single inter- Caution regarding entry helped to limit its stockofhuman capital, the initial port- ition were successfulin societies where the reduction in the franchise value of folio mix, and the internal incentive sys- formal labor market is growing and banklicenses, especially given the limita- tems-will also determine the success of -re are few social constraints or quali- tions en supervisory skills. And in both any reforms. Thus the speed of financial Ltionstoinhibitwomtn'sparticiprtion. cases, deregulationcoincided withfalling reform mustberelatedto these conditions -fects with single interventams are world interest rates, rapid reform with unskilled bankers, un- likely to succeed with such pervasive Although an eclectic approach to finan- balanced portfolios, and perverse "bank ial factorsas low secondaryenrollment cil reform is more difficult to manage cultures"is a sure recipe for financial cri- es for women, high direct costs for fe- than one of immediate, complete deregu- sis. Ofcourse, political factors can present le educatinn, and heavy cultural re- lation, it appears borne out by the coun- unique opportunitiestopointaneconomy ictions in the labor market- try cases and the theoretical approached rapidly and permanently toward a more Second, the link between programs of- reviewed here. market-basedsystem. Andtheseopportu- ed and labor market demands is criti- This paper-a product of the (former) nities should be seized. But where pos- . High secondary enrollment rates, Financial Policy and Systems Division, sible financial reforms should consider ivy private demand for women's edu- Country Economics Department - pre- links to the real sector and institutional -ion, and the availability of student sents lessons on financial reform derived development. res do not necessarily guarantee an from two World Bank research projects on The case for gradual reforms is not one rease in women's participation in both the real and financial sector effects for inaction, as the conclusions of this ,her education -unless the programs offinancial reformsinselected countries. study suggest that financial reform is ! dovetailed to meet the specific de- This paper is adapted from chapter 7 of worth the effort and that, with due atten- nds of the labor market. It is not the draft manuscript, Financial Reform: tion to the institutional environment, the mgh to overcome social barriers Theory and Experience. Copies of this lessons can be applied elsewhere. ough policy interventions. Proects paper are available free from the World Authorities can do muchtoincrease the st takeanintegratedviewofsocialand Banklr,1818HStreetNW,Washington,DC market orientation of their financial sys- or market constraints. 20433. Please contact Wilai Pitayato- tem, with all its benefits, even without a The Bank seems tobe movingin a posi- nakarn, room N9-003, extension 37664(35 "hig bang." They can eliminate the gross- - direction as more projects are ad- pages). est interest subsidies, move toward mar- ssingandtaking action againstgender ket financing of government debt, and quities today than they did in the raise depositrates atleastto only slightly 7s.Oftheprojectsintroducinggender- negative or modestly positive levels, pay- 154 Pollcy Research Working Paper Series ing attention to budget realities. In sev- sues relevant for fiscal policy. He exam- 1109. Risk Management eral countries, authorities ended modest ines theories of public sector growth, the and Stable Financial Structures financial repression early in their reform evaluation of benefits from government efforts, while still retainingsome controls. spending, and the response of the private Andrew Sheng andYbon Je Cho Of those that moved fhstest on interest sector to government activities. (March 1993) rate deregulation, Indonesia and New Three principal reasons have been sug- Zealand met most of the foregoing condi- gested to explain public sector growth: National risk management and stable fi- tions, with some uncertainty about the conscious government choices, political nancialstructures are essentialtothe long- health of their banks at the point of de- pressure from interest groups, and the term economicgrowzthofdevelqpiuwcoun- regulation.Butin both cases bankshada self-interest of bureaucracies. One may tries. The 1980s taught many nations the window of a few years before new entry ask Is the growth of the public sector a heavy cost ofthefinancial distress associ- was permitted, allowing them time to response to public demand or the result ated with poor national and sectoral risk aijust before competition intensified. of government waste and inefficiency? In management. Caution regarding entry helped to limit terms of the agent-principal theory, ba- the reduction in the franchise value of reaucrats who are supposed to serve as Conventional development economics has bank licenses, especially given the limita- agents for citizens may not necessarily do focused mainly on generating economit tions on supervisory skills. And in both so - which is where waste comes in. If growthbymobilizingsavingsandallocat- cases, deregulation coincided with falling bureaucrats are interested in the ingthemwiselyamonginvestmentoppor- world interest rates. nonpecuniary benefits of their bureaus, tunities. Savings(external and domestic) Although an eclectic approach to finan- they will have an incentive to mainmize were to be mobilized through tax incen- cial reform is more difficult to manage their activities and budgetary allocation tives, income, and interest rate policies. than one ofimmediate, complete deregu- rather than their operating efficiency- Their allocation ofteninvolved direct gov- lation, it appears borne out by the coun- In discussing the evaluation of public ernment intervention in the investment try cases and the theoretical approached programs, Catsambas focuses on the process. reviewed here. "true benefits, as perceived by citizens After the disastrousresults ofthe l980s, This paper- a product of the (former) Would a well-to-do citizen, who could af- the new wisdom is to let the private sec- Financial Policy and Systems Division, ford private security guards, make the tor generate growth, while the govern- Country Economics Department - pre- same evaluation about public security ment provides the regulatory and super- sentslessons on financial reform derived that a poor citizen would make? In gen- visory framework for competitive mar- fram twoWarldBankresearchprojectson eral, whatconsiderations affeetaperson's kets, ensures the existence of level play- both the real and financial sector effects desire for a given amount ofpublic spend- ing fields, and removes obvious cases of offinancial reforinsin selected countries, ing, and what are the important param- moral hazard. Butthe private sector work- This paper is adapted from chapter 7 of eters that analysts should take into ac- ing under an inappropriate financial the draft manuscript, Financial Reform- count in their investigation? structure may dono better than the gov- Theory and Experience. Copies of this Catsambas also explores the issues be- ermnent in making right investment paper are available free from the World hind the private sectors response to gov- choices for long-term growth. So govern- Bank, 1818HStreetNWWashington,DC ernment activities and argues against a ments (which in a financial crisis are re- 20433. Please contact Wilai Pitaysto- mechanistic approach to the interaction sponsible for all national debts) should nakarn, room N9-003, extension 37664 between the private and the public sectar. have an effective national risk manage- (February 1993, 35 pages). Unless decisionmakers are relatively car- ment strategy, with an understanding of tain about how citizens evaluate govern- the national balance sheet, and the neces- ment actions, citizens may respond in a sity of _t stable financial structure for 1108. Publc Output and Private way that nullifies the government action steady long-term economic growth. Decisions: Conceptual issues Catsambas concludesthatmoreempiri- Sheng and Cho argue that it is not only in the Evaluation of Government cal workis needed on measuring citizens' how much investment is mobilized and Activities and Their Implications response to public sector activities. And allocated but also how investments are for Fiscal Policy fiscal policy, especially on expenditures, financed that matters for an economy's should be modeled on a disaggregated long-term growth. Finance and develop- Thanos Catsambas basis to isolate hypotheses about poten- ment are inextricably linked with risk (Februery 1993) tial private sector responsesto individual management (both at the sectoral and public programs. national levels). We need to know more about individual This paper - a product of the Country Development is a function not just of citizens' responses to macveconomic Operations Division, Europe and Central promoting the right industries and allo- choices - about the political economy of Asia, Country Department 1-is part of cating capital for the high-return invest- public economics. a larger effort in the department to de- ments (asset management) but also of velop background conceptual frameworks choosing the right financial str-cture (Ii- In this essay, Catsambas explores theo- for operational activities. Copies of the abilitymanagement)-andofthe related reticalconceptsbehindthecurrentdebate paper are available free from the World risksarisingfromtheliabilitymixchosen. on government growth, public sector in- Bank, 1818HStreetNW,Washington,DC Sheng and Cho argue that one of the efficiency, and the role offiscal policywith 20433. Please contact Anita Correa, room ingredients of the East Asian success is a view to raising the most important is- H11-107, extension 38549 ( 9 pages). prudent risk management by these gov- Pollcy Research Working Paper Series 155 ernments. Sheng and Cho present five the analysis). Even the export growth been the region'sopeningtoforeign direct rules for national risk management, con- rates are far too small to replicate the investment. CEE states saw foreign in- cluding, among other things, to: essential East Asian experience. And vestment climb from minuscule amounts * Establish fiscal discipline and price whenall developingcountries participate in 1989 to more than $7 billion in 1992. stability as the anchor ofoverall financial in static trade liberalization, the small All CEE states have enacted newlawson stability- welfare gains diminish slightly. foreign investment as well as relatedleg- * Encourage asset diversification Underthemorerealistic assumptionof islationinareas suchastazation and com- through industrialization and export ori- dynamic export growth driven by produc- pany and environmental law. entation,financedbyforeigndirectinvest- tivity gainsfor manufactured exports, the Gray and Jarosz describe these efforts ment; welfare effects are much greater and the atlegal reform and assess theirimpacton * Avoid sectoral imbalances, such as efforts of developing countries are mutu- foreign investment in light of what is excessive domestic or external borrowing, ally reinforcing. Because of strong South- known about investor motivaoLn. They including the developmentofinstruments South trade links, and developing coun- concentrate on the role of foreign invest- and institutions to absorb shocks; tries' dependence on manufactured im- ment law, referring occasionally to other * Establish stronginstitutional capac- ports, developing countries buy more aspects oflaw that apply to domestic and ity to assess and contain systemic risks; manufactured goods from each other. foreign investors. They find that special- and Martin accepts the view of "export pes- ized foreign investment laws can play a * When the above conditions are not simists" that a country expanding its useful role duringthe transition to amr- adequately met, retain some policy mea- manufactured exports will receive de- keteconomy. Ofparticularimportanceis sures to handle the risk. pressed prices for those exports. But his their role in sending a strong signal to Thispaper-aproductofthe Financial results differ because he uses a general foreignentrepreneursthatthehoeteoun- Policy and Systems Division, Policy Re- equilibriumframeworkwithintra-indus- try is serious about economic reform and search Department - is part of a larger trytraderather than apartial equilibrium iswillingtoworkwithinvestorstoestab- effort in the department to study issues model of the export market The general lish mutually beneficial arrangements. associated with the structure, operation, equilibrium model captures the fact that Foreigninvestment laws are also often and soundness offinancial systems. Cop- developing countries still import most usedtotargetspecial incentives tofareign- ies of the paper are available free from the manufactured goods, often from each ers and create an island oflegal develop- World Bank, 1818 H StreetNW, Washing- other. They will suffer, but they will also ment that may differ from - and some- ton, DC 20433. Please contact Maria benefit, from decliningprices. So theyare times outpace-otberlegal development Raggambi, room N9-033, extension 37664 better offif they all expand those exports. In such ways they tend to create invest- (20 pages). This paper- a product of the Interna- ment"enclaves."Butto the extent that an tional Trade Division, International Eco- enclave separates foreign from domestic nomics Department - is part of a larger investors,itcanquieklyoutliveitsuseful- 1110. What Would Happen if All effortinthe departmenttoanalyzedevel- ness. The incentives it fosters may not Developing Countries Expanded oping country trade in manufactures. only bleed domestic treasuries, but may Their Manufactured Exports? Copiesofthepaperare availablefree from also lead tobureaucratic structures that the World Bank, 1818 H Street NW, complicate the investment environment Will Martin Washington, DC 20433. Please contact and elevate information and transaction (March 1993) Dawn Gustafson, room 87-044, extension costs for foreign investors. As quiddy as 33714 (28 pages). possible, the transforming economies As more developing countries expand their should dismantle the enclave and put manufactured exports, all developing domesticandforeigninvestorsananequal countries benefit, because theprices oftheir 1111. Foreign Irwestment Law footing. This may well mean that foreign -manufactured imports (purchased from In Central and Eastern Europe investmentlawsarenolongerneeded.The each other) decline. Czech and Slovak Federal Republic was Cheryl W. Gray and William Jaroe the first CEE country to abolish specific zDespite the achievements of the export- (March L993) foreigninvestmentlegislationinfavorof oriented economies of East Asia, many a broad commercial code covering all in- policyrnakers doubt that a development Policymakersshouldfacus on reducingun- vestors. path led by manufactured exports is fea- certainty and transaction costs through If an enclave does exist, policymakers sible for all developing countries, clear and simple legislation, the enface- should focus on the concerns critical to Martin examines what happens if all ment of contracts, the use of arbitration foreignfirms. Inthe designofinvestment developing countries, rather than merely and other alternative dispute resolution laws to date,the CEE countrieshaveper- a few, expand manufactured exports. He mechanisms, siranger protection ofprop- haps paidtoomuch attention to preferen- considers two driving forces for export erty rights, the dis-emination ofinforma- tial tax schemes, ignoring other costs for- expansion: theliberalizationoftradebar- tion on laws and on business opportuni- eigninvestorsface.Policymakers should riers, and productivity growth in the pro- ties, and an end to unnecessary bureau- focus on reducing uncertainty and trans- duction of manufactured exports. crtic intervention. action costs through clear and simple leg- With only tradeliberationalization, the islation, contractenforcement, arbitration static welfare gains are small (with the One of the mostremarkable developments and other alternative dispute resolution standardArmingtonspecificationusedin inCentralan-dEastcr.IEurope CEE)bas mechanisms, strongerprotection of prop- 156 Policy Research Working Paper Series erty rights, dissemination of information tives for the Argentine industry to seek incidence of poverty climbed from 30 per- on laws and on business opportunities, protection -particularly as afixed-ratio cent in 1985 to 35 percent in 1987, and and an end to unnecessary bureaucratic quota - are greater, the more concen- jumped to 46 percent in 1988. intervention. Complex regulations not trated the industry is. Buthow widespread was the collapsein only increase investor uncertainty but The lesson for policymakers - who living standards? Did a lucky few escape divert bureaucratic resources that the should be trying to minimize economic the decline? host country cannot afford to squander. distortions -is that if protection is nec- Using panels of data from the Cfte This paper -a product of the Transi- essary, tariffs are preferable to import d7voire Living Standards Survey (for tion and Macro-Aiustment Division, quotas, perhaps even to the point ofmak- 1985-86, 1986-87, and 1987-88) allowed Policy Research Department-is part of ing quota-type restrictions unconstitu- Grootaert and Kanbur to track the level a larger effort in the department to anm- tional. of living for the same households over lyze the economicimpactoflegal reformin The simulation results for Argentina successiveyears. Thesa panelshadnotyqt Central and Eastern Europe. Copies of the confirm thattheless substitutable domes- been used to examine the dynamics of paper are available free from the World tic and foreign goods are, the higher the poverty in the second half of the 1980s. Bank, 1818IIStreetNW,Washington,DC rents the domestic industry can extract. Theyfindthat"two-period"povertywas 20433. Please contact Maxine Berg, room So,itisimportantforpolicymakersimple- generally less than poverty measuret N11-057, extension 31450 (21 pages). mentingprivatization schemestoease any from single-period snapshots. Surpris- explicitorimplicitobstacles toimportsby ingly, a significant number of the poorest such measures as: ofthe poor improued their status over the 1112. Privatizatlon, Concentration, * Standardizing domesticproductclas- two years ofthe panel, even though there and Pressure for Protection: sifications with international classifica- was a downturn in the average fortunes A Steel Sector Study tions. of the poor. * Modernizing transportationfacilities AndGrootaertandKanburflndthatthe Tng Qin and Ronald C. Duncan toimprove the speed of'shipment andcom- 'luckyfew"arenotsofew They were wide- DMarch 1993) munication. spreadregionally-thoughin some socio- * Reducing bureaucratic practices re- economic groupings, the poor had a icentivesfarseekingprtection in thesteel lated to trade in goods and services. greater chance to escape poverty amidst industy-particularly import quotas as * Releasing foreign exchange restric- the general decline in living standards. afcxedproportionofdomesticsales-seen tions. Finer investigation of the characteristics toincreasewithindushry cncentrati If The goal should be to make a foreign ofthese groupings ishampered somewhat protection is necessary, tariffs are prefer- transaction as easy as a domestic trans- by the small sample sizes of the panels. able to import quotas. action. This paper-a product of the Poverty This paper- a product of the Interna- and Social PolicyDivision, Africa Techni- Incansideringwhethertoprivatizealarge tional Trade Division, International Eco- cal Department - is part of a study state-ownedsteelenterpriseinArgentina, nomics Department-is part ofalarger funded by the Bankes Research Support the questionarose:Wouldits sale toacon- effort in the department to analyze the Budget under research project 'Poverty sortium aflarge domestic enterprises, and effects of trade distortions on developing and the Social Dimensions of Structural the resulting increase in firm concentra- countries. Copies of the paper are avail- AAjustment in ate dIvoire, 1985-88: A tion,inevitablyleadtocriesfarprotection? able free from the World Bank, 1818 H Policy-Oriented Analysis" (RPO 675-26). To shedlighton the question, Qian and Street NW, Washington, DC 20433. Copies ofthis paperare available freefrom Duncan examine data for steel industries Please contact Sarah Lipscomb, room 87- the World Bank, 1818 H Street NW, in the major industrial countries. They 062, extension 33718 (31 pages). Washington, DC 20433. Please contact also constructasimulationofArgentina's Elena Vitanov, room J2-241, extension steel sector to study the relationships be- 38400 (36 pages). tween levels of industrial concentration, 1113. The Lucky Few Amidst substitutability between domestic and Economic Decline: Distributional imported steels, trade policyregimes, and Change in COte d'lvoire As Seen 1114. Does Price Uncertainty mark-upsofdomesticpricesoverinterna- Through Panel Data Sets, 1985-88 Really Reduce Private tional prices. Investment?: A Small Model Their simulation results show that Christisan Grootaert and Ravi Kanbur Applied to Chile heavierrentoandeconomiedistortionsare March 1993) generated through fixed-ratio import quo- Anita George and Jacques Moriseet tas (quotas that are a fixed proportian of Panel data sets show that a lucky few (March 1993) domestic sales) than through use ofatar- bucked the general trend ofeconomic de- iff or afixed-quantity import quota. cline in Cte dloire - that among the Uncertainty about the cost of capital The results show why industries seek- poorestofhepoor someactualyimproned should be compared with uncertainty ing protection prefer a fixed-ratio import their standard of living, despite a great about the price ofoutput. The efficiency ot restraint-apracticebeing usedincreas- increase in the incidence ofpoverty. policies to reduce the price of capital may ingly often inindustrialcountries. Ifthere be enhanced ifthe volatility of the output is not perfect substitutability between Cate d'Ivoire's economy declined drasti- price is greater than the volatility of the domestic and imported steels, the incen- cally in the second half of the 1980s. The price of capital, and if there is a positive Policy Research Working Paper Serles 157 correlation between changes in prices for 1115. Looking at the Facts: What Policy Research Department-is partof output and capitaL We Know about Policy and Growth alargereffortinthedepartmenttounder- from Cross-Country Analysis stand the determinants of long-un Understandinghowprices andquantities growth. The study was funded by the affectinvestmentdemandisimportantin Ross Levine and Sara Zervos Bank's Research Support Budget under analyzing adjustment policies in many (Math 1993) research project "How Do National Poli- developing countries. cies AffectLong-Run Growth? (RPO 676- Recent literature emphasizes that un- Cross-country regressions should not be 66). Copiesofthispaperareavailablefree certainty curtails private investment, used to predict by how much lorg-run from the World Bank, 1818 H StreetNW, adding a risk premium - the price of growth will change when policies change Washington, DC 20433. Please contact waiting. Several recent empirical studies -at best, they suggest interesting empiri- Daniele Evans, room N9-089. extension bave confirmed this result cal regularitie& But beliefs about policy 38526 (45 pages). This new developmenthas been used to and growth that are not supported by challenge one of the most popular policy cross-country evidence will tend to be recommendations derived from the tradi- viewed skeptically. 1116. Implications of Agricultural fional literature on investment- increas- Trade Lberalization for the ing investment by reducing the cost of What has the profession learned from Developing Countries capital through tax incentives orexchange cross-country regressions about the links rate policies. Because such policies are between long-run growth and indicators AntOnio SalzarP. Brandao and Will Martin likely to increase uncertainty about the of fiscal, monetary, trade, financial, and Olanrh L993) price of capital, their effect on private in- exchange-rate policies? vestment is ambiguous. The popular in- Levine and Zervos find that: Global tade liberalization - reducing tuition is that privateinvestors care more * Indicators of financial development both negative and positive protection in about the uncertainty ofthe price ofcapi- are strongly associated with long-run line with the Dunkel proposal - would tal than its level. In other words, incen- growth. gain developing countries an etinmated tives would have tobe unreasonablybigh * Otherindividualpolicyindicatorsare $60 billion a year. to bolster investments. only weakly linked to growth. George and Morisset argue that uncer- * It is particularly difficult to find a Brandio and Martin examine the impli- Lainty about the cost of capital should be consistentrelationship between inflation cations for the developing countries of a :znpared with uncertainty about the and long-ran growth. For example, the range ofliberalizationproposalsalongthe prace ofoutpuLUsingasimple analytical inclusion or exclusion of one or two coun- lines of the Dunkel proposal. First, the ....udel, they conclude thatthe effEciencyof tries (Nicaraguaand Uganda) out ofmore analysis considers liberalization in the p%liciee aimed at reducing the price of than 100 countriesinthe sample can lead OECD countries alone, then global Ilber- -zital may be enhanced it toreach three quite differentconclusions: alization of all (positive and negative) * The volatility of the output price is (1) that only veryhigh inflation is bad for protection. Since the currentDunkel pro- -aeater than the volatility of the price of growth, (2) that verybighinflation in it- posal requires reduction only in positive :-pital. self is not bad for growth, but small in- assistance, this specific proposal is as- * And there is a positive correlation creases in inflation in moderate-inflation sessed. Finally, the implications of the -'ween changes in prices for output and countries slow growth, or(3)thatinflation developing countries acting alone, per- p:ital. is unrelated to growth. haps in the absence of a successful Uru- In both cases, private investment will The connections between policyindica- guay Round, are evaluated. hamore responsive to changes inthe price tars and growth are quite sensitive to Virtually all research on agricultural o capital (or in aggregate demand) be- slight alterations in the right-hand-side trade liberalization has focused on the ise firms will minimize profit fluctua- variables and to small changes in the case of total liberalization, an unlikely Lions. sample of countries. outcome in the near future The earlier They apply this model to Chile for 1980- And the daunting arrayof methodologi- work provides useful insights into the ef- SChile is the reputed "success story"of cal problems limiting our ability to inter- fects of partial liberalization on world uctural adjustment and has achieved pret cross-country regressions implies prices, butmay be misleading as a guide " 'rly stable growth in the past eight that, at bes4 they suggest interesting em- to the welfare implications of partial lib- Years. (The results correspond to the pre- piical regularities. Cross-country regres- eralizationinasecondbestcontextofcon- 1:tions of the analytical model.) sions should notbe used topredictbyhow tinuingdistortionsinbothagricultureand This paper a product of the Country much long-run growth will change when manufacturing. Crerations Division, Country Depart- policies change. But beliefs about policy Brandio and Martin consider partial nt IV, Latin America and the Carib- andgrowththatarenotsupportedbycross- liberalizationalongthelinesofthe Dunkel -im - is part of a larger effort in the country evidence will tend to be viewed proposal-areductionof36perentin(posi- Ldartment to understand private invest- skeptically. So, future work on the policy- tive) border protection and 20 percent in ntindevelopingcountries. Copies ofthe growthnexusshouldintegratebroadcross- domestic support in industrial countries, er are available free from the World country analyses with country case stud- with smaller reductions in developing sik,1888HStreetNWWashington,DC ies and investigations of specific firms. countries. This partial reform would pro- --433. Please contact Diane Bievenour, This paper - a product of the Finance duce gains of $20 billion a year for devel- m 16-011, extension 37899(13 pages). and Private SectorDevelopmentDivision, opingcountries.Thesebenefitsarewidely 158 Policy Research Woking Paper Seres spread among developing countries. Few The 1990s brought developing countries determine whether these inflows from regions would suffer overall losses, and the heaviest private capital flows since the abroad are intended to be short-term or those would be small in relation to over- early 1980s, says Cooptu - mainly bond long-term. all gains. and equity financing, rather than me- Gooptuprovidesacomprehensive data- If developing countries had chosen not dium- and long-term lending by commer- base of transaction-level information on to participate in the Round, and torely on cial banks. different types ofinstruments andaglos- liberalization onlyby the industrial coun- flows were mainly to Asia in the first sary of portfolio investment terms. tries, their gains would have been less halfand Latin Americain the secondhalf. This paper-aproductofthe Debt and than $1 billion -and anumber ofimpor- Market participants believe that most International Finance Division, Interna- tant regions would have suffered signifi- inflows ofportfolioinvestment(especially tional Economics Department -is part cant welfare losses, in Latin America) reflected the return of of a larger effort in the department to The gains to developing countries could flight capital by domestic residents with study alternative forms ofexternalfinanc- be greatlyenhancedbyamore comprehen- overseas holdings. ing to developing countries. Copies ofthe siveliberalization. Ifdevelopingcountries This and possible 'herding" by foreign paper are available free from the World reduced all agricultural distortions, in- investors in a few countries, such as Bank 18181H StreetNW, Washington, DC cluding agricultural taxation, by the pro- Mexico, could at the margin make securi- 20433. Please contact Rose Vo, room S- portions specifiedin theDunkel package, ties prices volatile in the emerging mar- 042, extension 31047 ( 68 pages). their total gains would increase to almost kets and cause rapid switching af portfo- $60 billion ayear-even without produc- liosbetweenmarkets(between developed tivity gains stimulated by rising world and emerging markets and between 1118. Trends In Retirement prices for agricultural commodities. emergingmarkets). This couldmakemac- Systems and Lessons for Reform With productivity gains taken into ac- roeconomic management difficult for count, total gains from partial reform policymakers. Olivia S. Mitchell wouldbemore than $130 billionayearfor Some contend that if external portfolio (March 1993) non-OECD economies. investment flows into an emerging mar- The predicted gains are greater here ket am the result of external factors - Aging populations, high unemployment, than in earlier studies because Brandio such as the US. recession and low inter- and changes in economic structure P. andM rtinhaveincludedmorecommodi- national interest rates - the increased require fAndamental reform of both bc ties and the welfare measure explicitly demand for shares in arelativelyilliquid efltformulasandapproachestotheftnar-- considers the partial natu of the liber- emerging stock market may "overheat" ing of rairement systems. One thing l. alization being considered. the stock markets and lead to an appre- clear: using high-cost long-term refti-- This paper - a joint product of the ciation ofthe real exchange ratesin these meat systems to mitigate short- and m= Agricultural Policies Division, Agriculture countries. Any attempt to counteract this dium-terrm unemployment problems i--. and Natural Resources Department, and appreciation of the domestic currency by cotly, inefficient solution to the problems the International Trade Division, Interna- the monetary authorities, by devaluing faced by economies in transtion. tional Economics Department -is part the nominal exchange rate, will increase ofalargereffortinthe Banktoassessthe international reserves and perhaps be Inmultiple-pillarretirement systems, th implications of trade policy reforms. The inflationary. government provision of old-age inca= study was funded by the Bank's Research If, on the other hand, policymakers di- support plays a very different role fr Support Budget under research project lute the effect of the real appreciation by vehicles for encouraging private reti= 'Implications of Agricultural Policy Re- sterilizing incoming resources through ment savings - and for the goverruni-- formforDevelopingCountries7(RPO 676- open market operations, this could in-. regulation and insurance of private sa- 11). Copies of this paper are availablefree crease domestic debt and possibly domes- ings. from the WorldBank, 1818 H Street NW, tic interest rates. This might attract fur- Despite the diversity of public and pi Washington, DC 20433. Please contact ther inflows from abroad and create a vi- vate retement systems, and despite th-Z Dawn Gustafson, room S7-044, extension cious cycle of expected devaluations - wealth and their potential impact on l- 33714(39 pages). whichcouldfurtherappreciatethe domes- bar and capital markets, they are oft tic currency. overlookedin structural analysesofcon What is crucial is the policymakers try problems and prospects. 1117. Portfolio Investment Flows perceptionofwhetertheinflows are tem- Mlitchell examines important institt to Emerging Markets parary.Thatiswhyitisimpartanttoknow tional features of retirement systems the source of portfolio inflows. industrial and developing countries a Sudarshan Goopta Ifthe inflows are comingfrominvestors outlines what is known about their ea: (March 1993) with long-term capital appreciation mo- nomic effects. She also identifies ways ' tives, suchas thelargeinstitutionalinves- which public and private retirement w;= It is important that policymakers know the tors, and the developing country remains tems affect economic adjustment, payi--- source ofportfolio intlows totheir countries on a path of sustained market-oriented special attention tothe costsandbenef7 - to help them gauge whether they are reform aimed at long-ran growth, these of encouraging early retiremenL temporary, and to make policy decisions inflows should continue and even growin Shefndsthatacoherentplanfarret!= for dealing with large future inflows and the near future. As more comprehensive mentreformmustidentifyhowmnuchold outflows. data become available, it is important to age income security is affordable, how C-t Policy Research Working Paper SerIes 159 government and private sector can ad- world trade in manufactured goods and nomics Department -is part ofa larger dress failures in the private market to about 46 percent of total world trade. effort in the department to analyze and provide this security, and how these ob- Free trade agreements discriminate in predict structural changes in trade and to jectives can be attained given available favor of member countries, so other ex- quantifyfactorsaffectingexportsordevel- financing mechanisms. porters are naturally concerned about oping countries. Copies of the paper are She finds evidence that many retire- their trade being displaced. Safadi and available free from the World Bank, 1818 ment systems will be forced to change a Yeats try to quantify the adverse third- H Street NW, Washington, DC 20433. great deal in the nextfew decades. In some party effects of the recently concluded Please contact Jean Jacobson, room S7- cases: North American Free Trade Agreement 035, extension 33710 (34 pages). * Retirement benefits will have to be (NAFTA) on the developing countries of reduced (perhaps by imposing a means South Asia. test). They find that because the NAFTA 1120. PolIcies for Coping with * The age forearlyretirementwill have countries and SouthAsiaexport different Price Uncertainty for Mexican to be raised. types of goods, exports from South Asia Malze * Multiple-pillar plans will have to be will be displaced for only a narrow range integratedandstreamlinedto rationalize of products (probably little more than 10 DonaldP..Larson work incentives. four-digit SITC groups). The sector most (March 1993) * Incentives and opportunities for pri- affectedistextiles and clothing ,given that vate saving will be increased. the preferential removal of tariffs (in the More efficient, market-based policies In any case, using high-cost, long-term 15 to 30 percent range) and MFA quotas should be introduced for coping with un- retirementsystemstomitigate short-and could give Mexico a formidabl. competi- certainty about international prices for medium-term unemployment problems tive advantage in the U.S. market. maize in Meica will probably prove costly and inefficient But domestic supply constraints as a solution to problems faced by econo- (Mexico seriously and consistently The three goals ofrecentagriculturalpric- mies in transition- underutilizes its textile and clothingquo- ingpoliciesin Mexicoformaize have been This paper - a product of the Educa- tas), and NAFTA's domestic import con- to raise farm income and crop profitabil- tion and Social Policy Department - is tent regulations should limit the amount ity by boosting domestic prices through part of a series of state-of-the-art studies oftrade thatMexicomay displacein these trade restrictions, to provide some price on employment and labor market issues sectors. certainty at planting time, and to reduce andreform programs. Copies of the paper Using a partial equilibrium trade pro- year-to-year variations in maize prices. are available free from the World Bank, jection model developed byUNCTAD and The government pursued all goals 1818 H Street NW, Washington, DC the World Bank, Safadi and Yeats try to jointly, using import quotas and a state 20433. Please contact the Education and quantify the trade diversion South Asia marketing agency to implement a man- Social Policy Department, room 86-035, could experience in North America as a dated pan-Mexico price for maize. Farm- extension 33680 (52 pages). result of NAFTA. The model focuses on ers benefited primarily from the price NAFTA's short-run impact on South support, and very little from the other Asian trade. This study does not address goals. Maize policies were unsustainable 1119. The North American dynamiclong-run effects, suchas changes and enormously expensive, sothe govern- Free Trade Agreement: Its Effect in terms of trade, investment diversion, ment has decided to reform the sector. on South Asia and externalities associated with the [The reforms will be institutionalized in growth dividend. the North American Free Trade Agree- Raed Safadi and Almander Yeats The results suggest that the total export ment (NAFTA).] PlMrch 193) decline could be about 1 percent, with Larson shows that the same price en- projectionsfor Bangladesh slightlyhigher hancement and stabilization could have South Asia's loss of exports to North (because textiles and clothingrepresenta been achieved at less cost by using vai- America as a result ofthe NorthAmerican higher-than-average share of Bangla- able border tariffs within a price-band 1ree Trade Agreement (NAFDU4 is likely desh's exports). mechanism. Moving immediately to such to besmal concentratedinthetextiles and Safadi and Yeats argue that successful a policy can lower costs yet produce the clothing sector. The trade gains South completion of the Uruguay Round would same effects as current policy. The mul- Alean countries could experience from suc- considerably reduce South Asia!s potential tiple effects ofpolicy on price can be mea- cessful completion of the Uruguay Round losses, as it would lower the preference sured separately, and a variable tariW are about 100timesgreaterthanthelosses margins that NAFTA could provide its price-band scheme can be used to target they might incur from NAFTA_ member countries. both price levels and price variability. To put the two events in perspective, International markets in commodity Over the past three decades, free trade Safadi and Yeats note that the tradegains futures and options (through millers and agreements were mostlyaEuropean phe- South Asian countries could ecperience banks) could offerfarmers an inexpensive namenon (EFTA, EEC, and theirregional from successful completion ofthe Uruguay way to provide in-season price stability. arangements). Recently, this phenom- Round are about 100 times greater than But the farm sector can take advantage enon has reached the Americas and is the losses they might incur from NAFTA. of these instruments only if the domestic growing. Safadi and Yeats show that free This paper - a product of the Interna- distribution system is reformed -by lib- trade agreements now cover about halfof tional Trade Division, International Eco- eralizing interstate trade, harmonizing 160 Policy Research Working Paper Series standards and measures (including sani- theimportance ofthe conceptual approach Bank, 1818 HStreetNW, Washington,DC tation standards), andprivatizing storage to its measurement. 20433. Please contact Hedwig Abbey, facilities. First, they did not try to separate enor- room D8-099, extension 80512(52 pages). Nomarketmechanismsexisttoeasethe mal" capital flows from capital flight. A underlying year-to-year price variability capital shift outward because ofexpected for wheat and maize. But the benefits of taxation is as much a response to antici- 1122. Fiscal Decentralization governmentinterventiontosmooth prices pateddevelopmentsinrateofreturnasis and Intergovernmental Relations are small and, in themselves, do not jus- a shift out in response to lower interest In Transition Economies: Toward tify using a price-band mechanism. . rates at home. a Systemic Framework of Analysis Still, a price-band system might be con- Noris it satisfactory to directly measure sideredas atransitional tool. NAPTAcalls capital flight by taking short-term asset Richard Bird and Christine Wallich for slow liberalization of the maize mar- changes and the balance of errors and (MNrh 1993) ket, but the Mexican government could omissions from the balance of payments. liberalize its markets more aggressively. Neither is necessarily related to the un- Designig a well-functioning intergovern- Levels of transfer under current policies reported private accumulation of foreign mental fiscal system is essential to the, remain high and the costs of adjustment assets. success of all the transitional economies may depend on the path of international They chose the residual approach, major refbrmgoals:privatizaion, macro- prices during the transition. The advan- whichassumes thatcapital inflows in the economic stability, more efficient perfor- tage of the price-band mechanism is that formofincreasesin external indebtedness mance and economic growth, and an ad- reliefis granted (transparently and auto- and foreign direct investment should fi- equate social safety net. matically) to consumers when prices are nance either the current account or re- abnormally high and to producers when serve accumulation; any shortfall in re- ThedecentralizationofgovemmentinEastern they are abnormallylow. This would help ported use can be attributed to capital Europe represents a reaction both from below forestall political pressures for ad hoc flight. (to tight central political control) and rom measures. Implementing the residual approach above(toprivatizetheeconomyandrelievethe This paper- a product of the Interna- requires careful dataselectionandseveral central governments fiscal stress). tional Trade Division, International Eco- adjustments. The authors contend that* In all transitional economies, the devel- nomics Department-is part of a larger * Introducing debt stock data into the oping structure of intergovernmental re- effort in the department to improve the analysis -instead of the changesin debt lations is intimately related to such criti- developingcountricamanagementofcom- recorded directly in the balance of pay- cal policy issues as privatization, stabili- modity price risk. Copies ofthe paper are ments - requires many difficult adjust- zation, and the social safety net. In the available free from the World Bank, 1818 meats and should be avoided, fiscal sphere, tax reform, deficit control, H Street NW, Washington, DC 20433. * Foreign asset changes of public cor- and intergovernmental finance are a tri- Please contactDawnGustafson, room S7- porations must be subtracted. pod. Unlesseachlegis setupproperly, the 044, extension 33714 (27 pages). * Rather than eliminate interest re- whole structure could collapse. ceived on foreign assets from the current The present strategy of devolvingepen- account, as some have done, earnings on ditures downward while holding back on 1121. Measuring Capital Flight: private assets held abroad shouldbe con- revenue flowsandtransferstobalance the A Case Study of Mexico sidered part of the "flight capital" that central budget is unlikely to succeed for mighthave beenrepatriated, given differ- more than a year or two at best. Harald Eggeratedt, Rebecca Bridean Hall, entincentives and macroeconomic condi- -Net spending reductions at the and Sweder van W(inbergen tions. subnational level may be difficult to (MOrch 1993) * The effecton capital flight of the fak- achieve. From 10 to 40 percent of outlays. ing of trade invoices should be assessed, go to the subnational sector, and in many The wrong conceptual approach can dis- since import overinvoicing and export countrieslocal governments providemuch tort estimates of capital flight. The debt- underinvoicing can be used to channel of the social safety that makes the pain of stock-based estimates widely used in dis- capital abroad. the economic transition politically toler- cussions of Mexico's debt crisis largely They demonstrate the empirical impor- able. And, mosthousingand manyenter- understated capital flight in the early tance of these choices with a new set of prises have been shifted to local owner- 1980s, but overstated it in the mid-1980s. capital flight estimates for Mexico, based ship, with the maintenance and subsidy Other estimates significantly understate on the recommendations they present. costtbisinplies. Since therevenue sources the foreign asset accumulation in the sec- They contrast the results ofthis approach assigned to local governments cannot fi- ond halfofthe 1980s by not including in- with those ofother approaches, to demon- nance expected levels of local activity, the test earnings. strate the effect of conceptual choices. result of shifting spending downward is This paper -a product of the Country likely to be strong demands forincreased, Eggerstedt, Hall, and van W-jnbergen Operations 1 Division, Country Depart- rather than decreased, transfers. Alterna- showhow the various methods commonly ment II LatinAmericaandthe Caribbean tively, subnational governments may look used to measure capital flight produce - is part of a larger effort in the depart- to 'coping mechanisme such as holding vastly differentestimates (with a l00 per- ment to understand the macroeconomic onto theirenterprises(which provide vital cent differencebetween the lowestand the effects of capital f lows. Copies of the pa- social services), developingextrabudgetary highest,inMexico'scase).Theyemphasize per are available free from the World revenues, or borrowing. These coping Policy Research Working Paper Series 161 mechanismsthreatenprivatization,reduce Birdsall makes four main points in this human capital. The series are built from budgetary transparency, and impede sta- paper. enrollment data using the perpetual in- bilization policies. * Social development, in addition to ventory method, adjusted for mortality. Bird and Wallich describe the risks to improving human welfare directly, is an Estimates are corrected for grade rep- privatization, tomacroeconomic stability, excellentinvestment.Thehard-nosedeco- etition among school-goers and country- and to an adequate social safety net that nomic fact is that it contributes to eco- specific drop-out rates for primary and present policies toward local government nomic growth. Even a narrow interest in secondary students. Enrollment data so- may imply. Its themes are that the growth for growth's sake dictates putting ries used startas farback as 1930 formost subnational sector needs to be more real- your money into social development pro- countries, and even earlier for others. This istically factored into national plans - grams. reduces the needfor backward extrapola- and that subnational expenditures be * But investing in social development tion of enrollments to provide the initial more clearly assigned and revenue needs does not guarantee growth all by itsel& so estimates of the investment inventory. more realistically assessed. Such assess- those concerned with social progress can- This paper describes anew database on meats are likely to acknowledge a larger not absent themselves from the larger human capital stock in developing and !phere for subnational governments and debate about other aspects of economic industrial countries prepared by the In- the need for access tomorerobustrevenue policy in their countries. ternational Economics Department(IEC) - -:rces. Giving local government a share * Moreover, making social programs and undertaken as part of a larger IEC ; the personal income taxis one possible work is not simple - not politically, not research project on total factorproductiv- 4 perhaps desirable approach to meet- technically, and not administratively- ity growth. Copies of this paper are avail- ;,E these revenue needs. * Still, we know from the experience of able free from the World Bank, 1818 H Careful attention needstobe paidto the some of the poorest countries that it can Street NW, Washington, DC 20433. design and implementation of the be done. Please contact Moira Coleridge-Taylor, ;-1ergovernmental fiscal transfers likely This paper - a product of the Office of room 88-049, extension 33704 (19 pages). to remain prominent features of the the Director, Policy Research Department intergovernmental landscape for years to - was presented to the Delegates of the come. Caution is also needed on barrow- Social Committee at the United Nations 1125. Industrial Development ing by subnational government. Consoli- General Assembly on October 19, 1992- and the Envimnment In Mexico dating and integrating extrabudgetary Copiesofthepaperareavailablefreefrom funds at the subnational (and national) the World Bank, 1818 H Street NW, Adrian Ten Kate levels is crucial to enhanced budgetary Washington, DC 20433. Please contact (April 1993) asparency and macrostability. SoledadRothsciild, room N11-05., exten- This paper - a joint product of the sion 37460 (20 pages). Postwar Endustrialiiation has moved ilic Economics Division, Policy Re- Mexico's manufacturing industry toward rch Department, and the Infrastruc- more polluting activities, partly through ! Division, Technical Department, 1124. A New Database heavy public investment in heavily pofft- opeandCentralAsia,andMiddleEast on Human Capital Stock: Sources, ingsubsectors and pardy through below- I North Africa Regions - is part of a Methodology, and Results market pricing policies for petroleum 14- rer effort in both departments to ana- els. issues relating to decentralization, ViammNebr, Erie Swanson, I in particular, the role of subnational and Ashutosh Dubey Postwar industrialization has moved ernments in the reform process. Cop- (April 1993) Mexico's manuficturingindustry toward if the paper are available free from the more polluting activities. Fairly indepen- ?d Bank, 1818HStreetNW,Washing- A brief review of the method and data dentofebangesinforeigntradepolicy,this , DC 20433. Please contact Bonnie sources used to prepare the International process was induced by expansive public heco, room H11-065, extension 37033 Economics Department's estimates of the investments in heavily polluting pages). stock ofeducation. Analysis suggests that subsectors, especially petro- and agro- it is not unreasonable to use education chemicals. stock as a proxy for human capital in pro- Below-market pricing policies (implicit 23. Social Development duction function analysis. subsidies) for petroleum fuels contributed Economic Development to anincrease in industrial energy inten- Nehru, Swanson, and Dubey describe the sity -in sharp contrast with the perva- Acy Birdsall techniques and data adopted for the con- sive energy-saving transition in OECD -1-n1 1993) struction of a new series of estimates of countries in the last two decades. Energy the stockofeducationin 85 countries over intensity in Mexican industry increased eases by the World Bank in support of 28 years (1960-87).It covers all the impor- 5.7 percent between 1970 and 1990, com- al investment - from $1 billion for tant developingregions excepttherepub- pared with a decrease of 35.3 percent in 7-89 to more than $3 billion for 1990- lics of the former Soviet Union. OECD industry. - indicate growing awareness that IEC continues a well-established trend This paper - a product of the Public al development is economic develop- in growth research of using educational Economics Division, Policy Research Do- t, bothasanendinitselfandasagood stock (measured as mean school years of partment-ispartofalargereffortinthe -stment in economic growth education of the labor force) as a proxyfor department to study pollution control 162 Policy Research Working Paper Series policiesin developingcountries.The study currency and achieve macroeconomic sta- Philippines) it could maintain access to was funded by the Bank's Research Sup- bility, for example. This can work only if external capital flows during the world port Budget under research project "Pol- the local political constellation is not con- years of the debt crisis. lution and the Choice of Policy Instru- trolledbycoalitionsbentonpreservingthe East Asia's close economic links with ments in Developing Countries" (RPO old system of redistribution and is not the rest of the world makes the region 87648). Copies of the paper are available hamperedby majorpolitical divisions that particularlyvulnerable to shocks originat- free from the World Bank, 1818 H Street paralyze decisionmaking. ing externally. Simulations suggest that NW, Washington, DC 20433. Please con- In short, secession can be beneficial if its growth rate is closely related to the tact CarlinaJones, room N10-063, exten- the new state is more homogeneous and growthrate of the OECD economies, even alon 37699(76 pages). functions more coherently than the old ifits export markets are more diversified state. than those of other developing regions. * Not all newly independent states Similarly, given the strength of its ex- - 1126. The Costs and Benefits would face the costs Slovenia has faced. port drive to the indnaiwl '-conomiesin of Slovenlan Independence In the Czech-Slovakbreakup, for example, the last two decades, especially in labor- political risk and refugee costs (or rather, intensive products, EastAsiawould stand. Milan CvikLEvanKraft. and Milan Vodopivec the costs ofmigration) were much smaller to gain the most from a successful Urn- (April 1993) thanin Slovenia. Indeed, the Czechrepub- guay Round. By the same token, it would lie may also expect short-term costs but also be hurt the most were the Uruguay Decining trade with the rest of Yugosla- long-term gains. Round to fall and were industrial protec- ia hurts Slovenia's short-run prospects. This paper - a product of the Transi- tion to increase as a result. But in the long run Slovenia may benefit tion and Macro-Adjustment Division, So, East Asiamust closely watch devel- fmmgreatermacnecmomicstabikty,fle- Policy Research Department-is part of opments involving the North America dom front subsidizing less-developed re- alarger effort in the department to imves- Free Trade Agreement (NAETA). Al- gians of Yugoslaoia, and speedier integra- tigate the transition of economies ofEast- though preliminaryanalysis suggests that tion with Western Europe. ern Europe and the former Soviet Union. the immediate trade consequences of Copies of the paper are available free from NAFTAwould be negligible for East Asia, One year is not enough time to draw con- the World Bank, 1818 H Street NW, the longer-run consequences for foreign clusions about independent Slovenia's Washington, DC 20433. Please contact direct investment and trade flows are prospects, anditmaynotbeeasy for other Sabah Moussa, room N11-017, extension more difficult to predict. countries to copy Slovenia's model. 39019 ( 36 pages). Finally, theregion's strong physical and Slovenia is ethnically homogeneous, cul- institutional infrastructure, its outwardly turally and historically compatible with oriented trade policies, andits well-devel- the West, and near (and somewhat pro- 1127. How Internatlonal Economic opedbumanresourcebase,bavestracted tected fram) friendly Western neighbors. Unks Affect East Asia alarge share ofincremental private capi- And despite sharp political divisions, it talflows to developingcountries.Butsuch has shown apolitical will tofight counter- VIkramNehra flows are volatile and sensitive to macro- productiveredistribution. Still, Slovenia's (April 1993) economic conditions and the regulatory experience may offer insights for other environment inhostcountries. Were these new post-Communist economies: An anatomy of economic links between conditions to change in East Asia andin- * Despite the obvious short-run costs of East Asia and the global economy -and hibitforeigndirectinvestmentandprivate the brutal breakup of Yugoslavia's federal a description of how those links shape the portfolio f lows, the region's rapid transfor- structure, Slovenia's medium- and long- region's exposure to risks from the global mation into a competitive producer of run economic prospects are fairly good. economy. manufactures would be affected ad-, Declining trade with the rest of Yugosla- versely. via dims Slovenia's short-run prospects. Nehru applies the theme of the last two This paper -prepared by the Office of But in the long run it may benefit from papers in the Global Economic Prospects the Regional Vice President, East Asia greatermacroeconomic stability, freedom series, written by the International Eco- and Pacific Region - was written as a from subsidizingless-developedregionsof nomics Department, to the case of one background study for the East Asia and Yugoslavia, and speedier integration with developing region- East Asia. the Pacific Regional Development Review. Western Europe. He documents the rapid integration of Itreflects the Bank's recent emphasis on * Whathashappenedto Slovenia does the East Asian economies into the world analyzing the effect of the external eco- not prove that separation necessarily im- economy through trade and foreign direct nomie environment on developing country proves welfare. In fact, had forces ame- investment, and suggests that this has prospects and policies. Copies of this pa- nable to rational debate and compromise helped create arelatively well-diversified per are available free from the World prevailedinYugoslavia,Slovenia'sseces- structure of production and of external Bank, 1818HStreetNW,Washington,DC sion might have decreased welfare. markets. As a result, East Asia wasrela- 20433. Please contact Moira Coleridge- * Slovenia's experience suggests that tively unaffected by the great terms-of- Taylor,roomSB-049,extension33704(21 secession from a lar>ir entity that is trade shocks experienced by other devel- pages). wrecked by political instability may pro- oping countries in the 1980s. East Asia's due economic benefits. Local autonomy creditworthiness in international finan- gives Slovenia achance tointroduceanew cial markets meant that (except for the y Research Walking Paper Serles 163 Thel International Ocean deal of overaged tonnage must be re- jor cocoa producers that undertook struc- -port industry In Crisis: placed, maintenance must be improved, tural adjustment programs), as well as on - ssing the Reasons and new tonnage has to be added. The Mbte d'Ivoire and Cameroon. utilook estimated cost almost US$400 billion in The impact on world cocoa prices of constant 1992 prices. structural adjustmentprogramsinGhana Torgen Peters But traditional financing, through and Nigeria was relatively small. There- 1993) mortgage lending and government sub- sults imply that, without structural ad- sidy, is becoming scarce. Leasing or justmentprogramsinGhanaandNigeria, orld's ocean transport industryfaces cashflow-based lending are promising al- world cocoa prices in the late 1980s would iprecedented crisis. Fundamental ternatives, but they require predictable have been about US$1,060/ton (in 1985 _es in the seatrade markets and con- revenue streams based on long-term constant dollars), instead of US$850/ton. ble discrepancies between tonnage freightcontractspredicatedon car-own- So without the structural adjustment ly and the demand for transport are ers'cooperation, which remains doubtful, programs, 1989-90 world prices in real -yreasons. The international fleet has No effective arrangements have been terms would have been about 45 percent e critically oueraged and suffers made to meet the industrys capital re- lower than they were in the early 1980s, : deteriorating safety recant Serious quirements, and doubts are more numer- compared with an actual decline of 55 chingandsharp Long-termplanning ous than assurances in the industry. percent. eded but - hampered by reduced The crisis that has developedis unprec- Much more important in depressing r earnings, rising insurance costs, edented. pricesinthisperiodwastherapidincrease shortage of investment capitaL This paper-aproduct ofthe Transport in production in Brazil, Cbte d'Ivoire, In- Division, Transportation, Water, and donesia, and Malaysia (which together 1980, the world merchant fleet ex- Urban Development Department - was accounted for about 75 percent of the in- A rapidly in response to thriving prepared in the course of the department's creased production in that decade). That -de markets. Since then, it has not efforts to monitor developments in inter- increased production resulted largely 1 much- The industry did not adust national freight markets and the trans- from tree planting in response to higher -vely to periodic globalrecession, and port industries that serve them, as a ba- world cocoapricesin the late 1970s-and et's earnings deterioratedasthegap sis for advising the Bank group? opera- subsequent increases in productivity. ad between the supply of tonnage tional units about policy implications. The results of counterfactual simula- 'xe demand for transporL Copies of the paperare available free from tions suggest that cocoa production in ___! unpredictability of seatrade mar- the World Bank, 1818 H Street NW, Ghana would have been at almost halfits md the changing structure of de- Washington, DC 20433. Please contact 1989-90 level if Ghana had not imple- * for ocean transport complicated Joanne Lucas-Walker, room S10-022, ex- mented its structural adjustment pro- wners' efforts to retrench and draw tension 31078 ( 49 pages). gram. The producers'surplus would have "ensive strategies. Advances in ship been lower without the program, and ilh& -iard ocean transport technologies governments budget deficit would have -d shipowners to adjust to the 1129. How Policy Changes been unsustainable. r need for specialized vessels, but Affected Cocoa Sectors The effects of the structural ajustment toretaintheirassetsandtheiradop- In Sub-Saharan African Countries program in Nigeri are mixed. The simu- Pas expensive. lation results showlowercocoa production -t shipowners added only afew new Jonathan I. Coleman, Takamasa Akiyama, but higher government revenue without s after 1980, often supported by and Panos N. Varangis the reforms. But the program was evalu- m=ent subsidies. Government rega- (April 1993) ated onlythree years after the reforms, so - screatedserious distartionsin ocean the full effects on production had not been ort and impeded free market ad- Ghana's structural adjustment program realized. -ents. was very beneficial to its cocoa sector. Al- The structurala4justmentprogramsin * most serious issues the industry though world cocoa prices fell as a result Ghana and Nigeria had a negative effect are a critically overaged fleet and of Ghana's expansion, the decline was on other cocoa-producing countries in Sub- tge of capital. Because of reduced much less than that from production ex- Saharan Africa and the rest of the world t earnings, maintenance has been pansions by other major producers. -producinganestimatedloss (in govern- ted, leading to frequent structural ment revenue from cocoa exports and pro- e. Ship casualties-often with seri- Structural adjustment programs in Sub- ducersurplus) ofabout 15 percentin other environmental damage - have Saharan African countries in the 1980s Sub-Saharan African countries. d alarming levels. The deteriarat- removedtraderestrictions, price controls, Results show that both Cote dvrire ifety record has caused insurance and export taxes and abolished state- andCameroonwoulMhavebeenbetteroff oescalate andhasprovoked callsfor owned commodity marketing bodies. hadtheyset export taxes atabigherlevel rliabilityrules, stringenttechnical Coleman,Akiyama, and Varangis studied (closer to an estimated optimal level) at ' rds, and rigorous inspection. En- the effects of these policy changes on the the same time that they depreciated the tent would make ocean transport cocoa sector, using a global econometric real exchange rate. Producer prices could mcpensive. model gpecifyingmqjor producer countries have been sustainedat theirearlierhigher meet expected demand for ocean through the vintage-capital approach. level,orevenraisea,withouthurtinggov- oort safely and efficiently, a great They focused on Ghana and Nigeria (ma- ernment revenues. 164 Policy Research Working Paper Series Structural adjustment programs in biases. Looking ahead(far ahead, in some highlights the effect on these rules of dif- Ghana and Nigeria had a negative effect cases), it is less clear how much further ferent assumptions aboutthe objectives of on producers in other countries, but not gain to the poor can be expected from in- government (health versus welfare), the adopting such policies would have been troducingabiasin the opposite direction. limits ofavailable policyinstruments, and economicaflyirrational, contend Coleman, Neutrality should be the aim. the market environment in which the Alciyama, and Varangis. We need good data and measurement public system operates. This paper - a product of the Interna- to identify which public actions are effec- One recurrent finding: Policy reform tional Trade Division, International Eco- tive in fighting poverty. There have been must be assessed in relation to the nomics Department -is part of a larger a number of advances in household data changes it induces relative to the status effort in the department to evaluate the and analytic capabilities for poverty quo before reform. This point may seem impact of policy changes in primary com- analysis over the last ten years. We are in obvious, but it represents a distinct gap modity producing countries. Copies ofthe a better position than ever to devise well- in the literature on resource allocation in' paper are available free from the World informed policies. health. Bank, 1818HStreetNW, Washington, DC LiptonandRavallionidentifytwoimpor- To assess changes, the behavior of the 20433. Please contact Grace 11ogon, room tant roles for public action. One is to foster private sector must be Imownin the type, 87-033, extension 33732 (71 pages). theconditionsforpro-poor growth, partica- of care given in a system and on how this larly by providing wide access to the nec- care will change in response to the policy. essary physical and human assets, clud- Substituting for a reasonably well-fuie- 1130. Poverty and Policy ing public infrastructure. The other is to tioningprivatesectorisnotasvalunbleas help those who cannot participate fully in providing services that the private sector Michael Upton and Martin Ravallion thebenelitsofsuchgrmwth,rwhodosowith cannot be expected to sustain. (April1993) continued exposure tounacceptable risks. Research is needed to characterize Here there is an importantrole for aim- market equilibrium for medical care and Healthy economic growth is crucial to the ing interventions by various means to its response to policy measures. Hammer well-being ofpoor people who derive in- improve the distribution ofthe benefits of could not examine many issues - most come mainly from their labor. Alleviating public spending on social services and important, those related to uncertainty povertyhouldbegin with reducing biases safetynetsin developingcountries. Those andinsurance. Butiftheresearchbe calls against the rural sector and the urban means range from the selection of key for in this paper is pursued, those issues informal sector - not reversing the bias, categories of public spending (such as pri- must figure prominently as major deter- but aiming for neutrWlity. Public action mary education andbasic health care) to minantsinthe demandforcare.Thisneed should foster the conditions for pro-poor more finely targeted transfers (including was originally identified by Arrow, and growth, andshouldprovideasafetynetfir nutritionandhealthinterventions)based there is still a long way to go. those who cannot benefit frormsuckgrowth on povertyindicators, or on some self-tar- Hanmer's analysisisnotdonein terms or who do so only with exposure to unac- getingmechanism.Thoughdisappointing of spreventive" or curative" care, andhe ceptable risks. outcomes abound, many countries have argues for assessing interventions on the demonstrated what is possible with timely basis of changes in the stated objectives In this analysis of public policy to reduce and well-conceived interventions. of a public system. But there could well poverty, Lipton and Ravallion point out, This paper - a product of the Poverty beaconnection with the preventive-cura- among other things, that typically the and Human Resources Division, Policy tive dichotomy if there were reason to highest incidence and severity of poverty ResearchDepartment-ispartofalarger believe that preventive care will system- are still found in rural areas, especially if effort in the department to review and atically lose out to curative care in amar- ill-watered. Formanyofthe rural poor, the disseminate research findings on poverty ket setting. On the basis of people's gen- only immediate route out of poverty is by in developing countries, and the implica- erally adcnowledged undervaluation oE migration to towns, to face a higher ex- tions for policy. Copies of the paper are preventive services, this may well be the pected income, although often amore un- available free from the World Bank, 1818 case. certain one. This may or may not reduce H Street NW, Washington, DC 20433. Other prevention activities also have aggregate poverty. We can be more confi- Please contact Patricia Cook, room S13- many "public good" features, with fewg dent, theysay,thatgrowthinagricultural 064, extension 33902 (120 pages). private alternatives, and will look good output -fueled by investment in human when improvements over status quo are and physicalinfrastructure-ispro-poor, examined for all interventions. But all though not because the poor own much 1131. Prices and Protocols activities must be evaluated in their im- land. In Public Health Care provementovermarketprovision.Itisnot The policies pursued by most develop- necessary to prejudge the case for certain ing countries up to the mid-1980s - and Jeffrey S. Hammer types of intervention. by many still-have been biased against (April 1993) This paper - a product of the Popula- therural sectorinvariousways. The same tion, Health, and Nutrition Department is true - although different policies am An attempt to derive price and rationing - is part of a larger effort in the depart- involved - of the other major sectoral rules for public health facilities. ment toapplyprinciplesofpubliceconom- concentration of poor, namely, the urban ics to the health sector. The study was informal sector. There are clear prospects Hammer tries to derive price and ration- funded by the Banks Research Support for reducing poverty by removing these ing rules for public health facilities. He 21dget under research project!Determi- cy Research Working Paper Serles 165 s ofNutritional and Health Outcomes demand for money was mostly for trans- the solution exhibitsbubbles-fiscal and idonesia and Implication for Health action purposes and inflationary expec- currentaccountimbalancesthatwouldbe y Reform'(RPO 676-27). Copiesofthe tations were almost myopic. unsustainable over time. Meanwhile,real r are available free from the World * In Poland, repressed inflation was appreciation of the diner would suppress A, 1818 H StreetNW, Washington, DC significant but decreasingafter 1987, and non-oil exports. As a result the need for 3.Please contactJae Shin Yang, room inflationary expectations adjusted fairly foreign borrowing wouldbe more pressing. 031, extension 81418 (35 pages). rapidly. In an attempt to restore the equilibrium, * In Romania, repressed inflation was the government would need to contain serious throughout the period, and infla- aggregate demand by compressing im- 2. An Analysis of Repressed tionary expectations adjusted quite rap- ports and investment, thereby worsening Ition in Three Transitional idly. the economic situation. nornles This economicmodel needs to berefined Path two is based on a reform strategy and the data used need to be improved. that includes policies to raise the domes- ew Feltenstein and Jimingl1a But the paper's findings are broadly con- tic savings rate, improve the fiscal situa- 11993) sistentwiththeresultsofmostotherstud- tion (by rationalizing expenditures and ies. introducing income taxes and cost recov- ssessment of the extent of repressed This paper - a product of the Socio- erymeasures), and correct theimisaligned tion in Czechoslovakia, Polan, and Economic Data Division, International exchange rate. ania between 1980 and 1990. Economics Department - is part of a The results show that the expenditure- study funded by the Bank's Research switchingeffect ofthe exchangeratealign- ntrally planned economies, domestic Support Budget under research project mentwouldshiftresourcesinfavorofthe is do not respond flexibly to market "Accountingfor Economiesin Transition" tradable sectors.n-oil GDPandexports s,soeconomiedisequilibria-includ- (RPO 676-18). Copies of this paper are would register high growth rates while repressed inflation - persist. available free from the World Bank, 1818 economic diversification, inthe context of mrstein and Ha assess the extent of H Street NW, Washington, DC 20433. a growing and more dynamic economy, ssed inflation in Czechoslovakia, Please contact Estela Zamora, room SI- would foster investment efficiency. This ad, and Romania between 1980 and 136, extension 33706, (32 pages). would help Babrainis maintain a high . standard of living as the oil income dries Firs, they develop a simultaneous up, without toomuchloss ofconsumption Lion model, which stipulatesthat the 1133. Macroeconomic Framework for the present generation. assedinflationiscausedbythe differ- for an Oil-Based Economy: This paper - a joint product of the in growth rate between households' The Case of Bahrain Transition and Macro-Ajustment Divi- ey holdings and retail sales in the sian,PolicyResearchDepartmentandthe omy. Pollowing are the model's basic Ibrahim A. Elbadawi andNader Mid. International Trade Division, Interna- mptions: (April 1993) tionalEconomicsDepartment-was pre- * A stable demand for money function pared as background material for s where the demand for real quasi- Alternativesavailabletoanol-dependent Bahrain's Country Economic Memoran- ey depends on the level ofreal income economy with esessiue producer and con- dum. Copies of this paper are available the expected rate of inflation. anmer subsidies and possibly misaligned free from the World Bank, 1818 H Street Inflationaryexpectationsareformed currency. NW, Washington, DC20433. Please con- r an adaptive scheme in which ex- tactAnnaMaranon,room N11-025,exten- Ed inflation for the next period do- Bahrain's economy is characterized by sion 31450 orMariaTeresaSanche,room Is on the error made in predicting the producer and consumer subsidies and, 87-022, extension 33731 (56 pages). ant period's -true inflation. possibly misaligned currency. These sub- The real stock of quasi-money bal- sidieshaveresultedinlowersavingsrates s adjusts to the desired level, after a than would be consistent with the 1134. Managing a Nonrenewable lag. country's endowment in oil and gas. In Resource: Savings and Exchange- Itenstein and Ha then derive a re- addition, the misaligned real exchange Rate Policies In Bahrain d-form equation on real quasi-money rate has encouragedimports, at the same ings, and estimate it with quarterly time creating incentives biased against Ibrahim A. Elbadawi and NaderMid for Czechoslovakia and Poland, and the non-oil tradable sectors. So, Babrain's (April 1993) annual data for Romnia. Based on economy remains largely dependent on a stimated equation, they derive the rapidly depleting hydrocarbon resource Thmi model predicts that a red depret- inflation rate for each economy. Ei- base. tion of about 31 percent wilt be needed *_r, they determine the significance of Elbadawi and Maid espouse a macro- between 1992 and 2005 to auert serious epressed inflation in each economy economic consistency framework to focus real overvaluation of the exchange rate. ugh statistical tests on parameters of on the behavior of Bahrain's economy istimated equation. along two paths. Bahrain's ail-producing economy is vul- lese are their main findings: Path one is based on the assumption nerabletoterms-of-trade shocks fi oil in During 1980-90 in Czechoslovakia, that the government's present macroeco- the shorttomediumrun.Butthecountry's assed inflation was insignificant, the nomic policy will continue. In that case, dependence on nonrenewable hydrocar- 166 Polcy Research Working Paper SerIes bon resources represents a more basic 1135. Inflation in Czechoslovakia, But the extent to which official price constraintonBahrain'sprospectsforlong- 1985-91 indices understated inflationary pres- term economic growth and welfare. To mires was not serious in Czechoslovakin, maintain economic growth and welfare in Zdenek Drabek Kumil Janacek compared with other centrally planned the post-oil era, Bahrain must save more and Zdanek Turn economies. Estimates of hidden inflation ofitsoil revenuesandassets andusethem (April 993) for 1985-89 range from 0.5 percent to 2 to invest abroad and to support economic percent a year in consumer markets and diversification. Hidden and suppessed inflation in about 3 percent in the industrial sector. Elbadawi and Maid derive optimum do- CzechOslouakia in 1985-91 - reflected in Estimates for suppressed inflation were mestic savings rates for Bahrain in the long waiting lists for cars and state and less than 5 percent. The relatively small context of a two-assets (oil and non-oil) cooperatine flas-was relatively slightfor inflationarygapisindirectlyconfirmedby intertewporal welfare-maximizingmodel. the economy as a whole, and it virtually the sharp inflation associated with the- Based on these derived rates, theyrecom- disappeared when prices rose after prices recent price liberalization that subsided mend that the current suboptimal savings liberalized in 1990-9. in arelatively short period, and both sup- ratiosberaisedbyabout0percentofGDP. pressed andhiddeninflationshave virtu-. Achieving such a bigh savings rate is Drabek, Janacek, andTumaassessinfla- ally disappeared. probably not economically feasible or po- tion in Czechoslovakia between 1985 and Estimates of bidden inflation were litically sustainable in a stagnant 1991 and identify the main causes of in- based on benchmark price comparisons economy, because itimplies significantly flation through a literature survey and betweenCzechoslovakinandsuchmarket reducing absolute levels of real consump- empirical studies. economies as Austria. Those for sup- tion. Such austerity would not be neces- The official prices in centrally planned pressed inflation were based on disequi- sarynagrowing,effcientlyrestrcrd, economieswereneverperceivedbycentral libriumeconometricmodelsofassethold- and diversifiedeconomy.inwhichthereal planners tobefullymarcetclearing. Only ings and on 'conjecture tests. exchange rate policy played a key role by by coincidence would the overall price This paper is a product of the Socio- stimulating non-oil tradable sectors that level correspond to the level associated Economic Data Division, International couldreplace alwhenit dries out.Butthe with general equililbrium. Economics Department. The study was success afreal exchange rate depreciation Whatis missingin official price indices funded by the Banks Research Support itself depends on a sufficiently high sav- in centrallyplanned economies-indud- Budget under research project 'Account- ingsrate, tofree up resources to switch to ing the consumer price index -is 'sup- ing for Economies in Transition (RPO the production of other tradables. pressed"inflation,manifestin queuingfor 676-18). Please contact Estela Zamora, Elbadawi and MaJd present an empiri- products, forced substitution of demand, room 87-136, extension 33706 (33 pages). calthree-sectormodel ofthereal exchange and forced savings. Also missing is "hid- rate, which permits links between the den7 inflation, associated with practices equilibrium real exchange rate and the that disguise price increasesbehind"cos- 1136. The Dynamic Behavior optimum savings rate. They use this metic or other changes in product qual- Of Quota Ucense Prices: Theory model to compute what real deprecation ity. and Evidence from the Hong Kong is required consistent with the derived Drabek,Janacelc,andTumaargue that Apparel Quotas optimum savings ratios. inflationary pressures in Czechoslovakia Their model predicts that areal depre- in 1985-89 originatedmainlyin the invest- Kala Krishna and Ling Hui Tan ciation of about 31 percent would be ment sector. Even though the investment (May 1993) needed between 1992 and 2005 to avert sector was strictly controlled, making it serious real overvaluation over this pe- difficult for open inflation to emerge, the Welfare evaluations and reform recon- riod scope forinflationary pressures was great mendations in many studies may need to- This paper - a product of the Transi- in Czechoslovakia. Such pressures arose be reworke4 to account for the possibility tion and Macro-A4justment Division, from a mixture of factors, including poor that the quota license market - usually Policy Research Department, and the In- investment planning, accommodating assumed to be perfectly competitive for. ternational Trade Division, International government finance, and the high prior- Hong Kong -is not perfectly competitive- Economics Department -was prepared ity given to investments and social con- as background material for Bahraizs sumption. Empirical studies of the welfare conse- Country Economic Memorandum. Copies For Czechoslovakia, the official price quences of quotas often assume perfect of this paper are available free from the indices show virtually no inflation be- competition everywhere. If this assump- WorldBank, 1818 HStreetNWWashing- tween 1985 and 1989, when there were tion is not valid, welfare estimates and ton, DC 20433. Please contact Anna longwaitinglistsforsuchproductsascars policyrecommendationsmayerrdramati- Maranon, room N11-025, extension andstateandcooperativeflats.Trendsin cally. Thepopularpress often argues that 31450,arMaiaTeresaSanchez,room87- these price indices do not seem to depend market power is being exercised in mar- 022, extension 33731(47 pages). anthemethodusedfor constructingthem, kets constrained by import quotas according to the sensitivity tests con- Krishna and Tan develop a framework ducted by Czechoslovakia's Federal Sta- for testing the hypothesis of perfect com- tistical Office. Obviously, the official price petition in the market for apparel quota indices failed to capture the full extent of licenses. Drawing on simple models, they economic disequilibrium in that period. predict the behavior oflicense prices, tak- y Research Working Paper Series 167 o accountfourinfluencee on prices: In May 1992, the World Bank hosted a remain in public hands. The objective is y value, option value, renewal Railway Roundtable in Vienna, Austria, to change the enterprises! authority and , and asset value. They explore the attendedby transportministers,advisors, enhance their commercial orientation. tXimperfections in the license mar- and senior railway stafffrom the Central * Have the explicit mission of the rail- license price paths. and Eastern European (CEE) countries. way be to operate freight and intercity --y test allegations thatthereis price The Roundtable reviewedrecent trendsin passengerservices on acommercial basis, in the market for Multi-Fibre Ar- the railways roles in these countries and with revenues from services covering all nent (MPA) apparel quota licenses identified appropriate actions to address costs, including a return on investment. ig Kong. (Hong Kong often serves emerging transport issues in the CEE Social" services, such as urban passen- enchmark case for the welfare con- region. The Bank prepared this strategy gers, should be identified and supported rces ofthe MFA.) They use monthly paper based on the discussions and the by the appropriate govern- mental agen- nlicense prices and use rates to test apparent widespread consensus that cies. tpresenceofimperfectcompetition. emerged at the Roundtable. This paper - a joint product of the irgue thata concentrationoflicense The financial situation of the CEE rail- Transport Division, Transport, Water, g could affect both the supply side ways is beginning to deteriorate rapidly, andUrbanDevelopmentDepartment and edemandside,byaffectingthecosts and the CEE railways are not well posi- the Technical Department, Europe and reh. tioned to provide good, reliable service to Central Asia Regional Office -is part of se results accord well with their theirincreasinglymarket-driven custom- a larger effort in the Bank to clarify and tical discussion, inwhichthey point ers. These countries are thus under in- refine the Bank's approach to institutional at license use and price paths with creasingpressure to restructure theirrail- reform. Copies of the paper are available rect competition in the license mar- ways to relieve financial pressures and free from the World Bank, 1818 H Street aybe quite different from the corre- meet future needs. NW Washington, DC 20433. Please con- 'ingpaths in the case ofperfect com- Railways in market economies have tact TWUTD, room S1O-029, extension in - even though the total use of facedasteadilydecliningroleinthetrans- 31005 (18 pages). as is the same. portmarket, andhavetypicallydealtwith y estimate the structural demand emerging problems by "tinkering at the ipply equations of the model, which margi" -for example, by debt write-offs 1138. The Economic Impact le frtherevidence ofimperfect com- - and thus delaying attacking their un- of Military Expenditures in in thelicensemarket. Inparticu- derlying structural problems. Many of ie intra-year path of quota license these governments have come to the con- Daniel Landan and of quota use are found to be clusion that "drastic surgery' is required (May 1993) ad by concentration in license hold- -as illustrated by the British, German, and Japanese railways. Levels ofmi&tary speding in deaeloping results, in short, suggestthatmar- The agenda for change that emerged countries have been falfing and are rela- wer exists in Hong Kong's quota li- from this Roundtable emphasized devel- tiuely low in areas with economic prob- market Hong Kongis often consid- opingastrategic plan forrestructiningthe ens. Generally, military spending (typi- -he prime example ofperfect compe- railway. This plan should define the mar- caUy about 4 pertent ofGDP) is not asso- - so this has major implications for ket; project the level of activity (tons, ton- cat withlouwrrates ofeconomicgrowth, developing countries, kalometers and freight tariffs, passenger- of capital formation, or of gouernment s paper-a product of the Interna- kilometers and passenger fares) for all spending on health, education, and infra- Trade Division, International Eco- business activities; include afive-year fi- structure or withhigherrates ofinflation. s Department - is part of a larger nancial plan for the different lines ofrail- in the department to assess the way business (to make options concrete); Landau addresses three questions about n imposed on developing country and define all government policies and militaryspendingindevelopingcountries tersby trade barriers. Copies ofthe changes that would put the railway on a * What are levels of (and trends in) are available free from the World level playingfield with competingmodes military spendingasapercentage ofgross 4,1818HStreetNW,Washington,DC of transportation. national product? . Please contact Dawn Gustafson, Two items on the agenda for change * Whatimpactdoespeacetimemilitary 37-044, extension 33714 (52 pages). (among many others) are to: spending have on growth, government * Convert the current railway "enter- spending on social welfare andinfrastrue prise or ministry into a joint stock com- ture, and other key economic variables? - Railway Reform pany (JSC) or, at least, an independent * What major factors influence the e Central and Eastern enterprise operating under normal com- 'evel ofmilitary spending? pean Economies mercial law. The boardofdirectors should Landaufinds thatmilitaryspendingas include representatives from government, a share of GNPgenerallyfellin the 1980s, W. Blackshaw and Louis S. Thompson therailway executive and high-level busi- even in the MiddleEast andNorthAfrica. 99s) ness or public representatives from out- Therneanlevelofmilitaryexpenditureas side of government. Formation of a JSC a share of GNP (MES) was 39 percent, iqgypaperforrestructuringrailways orindependent enterprise does not neces- well belowthepeakof5.3percentin 1976. t the changing needs ofthe Central sarily imply privatization of the railway In 1989, MES averaged only 2.7 percent 'astern Eumpean countria because the underlying assets may well in Latin America and 2.0 percentin Sub- 168 Policy Research Working Paper Seo SaharanAfrica-thetworegions with the with only 1.2 percent for 1964-79. At the impact on worldmarkets of policy char most severe economic problems. same time, cotton exports grew an aver- in primary commodity-producing coen He finds no evidence ofa negative rela- age 8 percent a year, compared with al- tries. Copies ofthe paper are available? - - tionship between military spending as a most no growth between 1964 and 1979. from the World Bank, 1818 H StreetNW share of GNP and the peacetime growth Concern has been expressed, at the Washington, DC 20433. Please con - rate of developing countries - except World Bank and elsewhere, about the Grace Ilogon, room S7-033, extent where military spending is high. radding-up problem'ofexpanding exparts 33732 (40 pages). He finds that higher shares ofMES are for commodities that are highly price-in- not associated with lower shares of gov- elastic. The concern has been that export ernment spending on education, health, expansion - as a result of project loans 1140. How Retail Food Markets and infrastructure. As MES increases, or structural adjustment programs - Responded to Price Iberaization government spending as a share of GNP could lead to afall in world prices and an In Russia after January 1992 increases, whichallows thelevelofspend- overall reduction in export revenues- ing on health, education, and infrastruc- Coleman and Thigpen assess whether Bruce Gardner and Karen M. Brooks ture to be maintained. expansion of cotton exports in Sub-Sa- (May 1993) He finds some evidence that increased haran African countries has produced an military spendingin the developingcoun- adding-up problem. They test thehypoth- Progress was made toward market i.*- tries has a weak negative impact on in- esis that export expansion hasled, or will grationin thesevenmenths afterprice- vestment and the balance of trade. He lead, to a decline in thr terms of trade, eralization. Further development off findsnoevidenceofa statistically signifi- which would offset any benefits from ex- markets will require deeper price libe.- cantrelationshipbetweenmilitaryspend- port expansion. ization, removal of local controls, con ing and inflation. Their results reject this hypothesis. ued enterprise reform, privatizat' The most important determinant of Usingcomparativestaticanalysis-com- demonopolization,andentryofnewfir---- peacetimernilitaryspendingis the spend- paring Sub-Saharan Africa's export share ing level of neighboring countries - in with estimatedworlddemandelasticities Underadministeredpricestbroughthe other words, the potential external threat. -they showthat Sub-Saharan Africas 14 of 1991, Russia's food distribution sys Regional conciliation and disarmament percent share ofworld exportsis too small broke down, anditwasfearedthatthef maybe an important step towardreduced relative to the estimated price elasticity supply would be inadequate in the wii military spending. of demand (ranging from -0.2 to -0-3) to of 1992 and thereafter. In January This paper - a product of the Public produce an adding-up problem. March 1992, price ceilings were remc Economics Division, Policy Research De- Using an econometric model of the onmostitemssoldinstate-ownedRus.- partinent-ispartofalarger effort in the world fibers market, Coleman and stores. PriceliberaliUzation wasintendt department to study public expenditure Thigpen show that maintaining the high return food to shelves and to improve issuesin developingcountries.This study 1980s growth rate ofcotton exports in the flow of food among regions through - was funded by the Bank's Research Sup- 1990s would increase Sub-Saharan Afri- sponsestoprice differentials.Privatiza- part Budget under research project 'The canexportrevenuesmore than 50 percent of the distribution system did not b Economic Impact of Military Expendi- by the end of the decade, compared with until October 1992. At the time ofprice tures (RPO 676-85)- Copies ofthis paper base-case projections. And, except when eralizationtheenvironmentwasstilldk are available free from the World Bank, the price elasticityof worldcotton demand natedbyunrestructuredstateenterpri 1818 H Street NW, Washington, DC is lowered substantially below its esti- Retail prices immediatelyrose sha 2043. Please contact CarlinaJonesroom matedvalue, estimates ofthe elasticity of andfluctuated.Becausefoodpricesdid N10-063, extension 37699 (45 pages). export revenue relative to export volume stabilize after the initial jump, in were close enough to unity for Coleman people questioned whether price libe and Thigpen to conclude that an adding- ization accomplished anything posit' 1139. Should Sub-Saharan Africa up problem does not exist for expanded Gardner and Brooks examine data Expand Cotton Exports? cotton exports in Sub-Saharan Africa. movements in food prices and volu Their analysis alsoshowsthatthe struc- betweenfDecember l991andAngust 1 Jonathan R. Coleman and M.Elton Thigpen tural adjustment programs implemented to -xamine how retail food markets Ofay1993) in the 1980s are unlikelytohavehadasig- sponded to liberalization. They add nificant adverse impact on the world cot- the following questions: Sub-SraranAfrica's recent rapid expan- ton market A 20 percent real devaluation Is there any evidence that afterlibe sion of cotton exports has not caused an forallofSub-SaharanAfrica,forexample, izationfoodreturnedtoretailoutletsV "adding-up'problem. And further expan- leads to an average 0.4 percent decline in were essentially bare in December 1E sion of Sub-Saharan Africa's cotton ex- the world price of cotton, while a 20 per- Is there evidence that transactions t ports is unlikely to have a significant im- cent increase in producer cotton prices in placeinresponse toprice differentials pace on the world cotton market all Sub-Saharan Africancountriesleadsto markets begin to emerge despite the ? a 0.8 percent decline in the world price. of privatization and demoncpolizatio In the 1980s, cotton production in Sub- This paper- a product of the Interna- Did city-to-city price differentials e_' Saharan Africa expanded significantly. tional Trade Division, International Eco- to reflect a price surface explainablt Annual production growth averaged 4.7 nomics Department -is part of a larger transportation costs and other econe percent between 980 and L990, compared effort in the department to evaluate the variables? If not, why not? Policy Research Working Paper Series 169 Gardner and Brooks conclude that flows. For the five Pacific Basin market long run they have a negative efect on the progress was made toward market inte- economies, however, FDI raises domestic growth rates of output and exports. grationin the seven months after pricelib- investment by the full extent of the FDI eralization. The volume of food sold in inflow. Using a time-series approach, Ramanna- monitored shops increased substantially. Fry finds that FDI has a significantly lyzes the relationship between the extent The geographic dispersion of prices de- negative impact on national savingin the of rent-seeking trade policy and both po- clined over time. But large price differ- sample ofall 16 developing countries. For litical and economic variables. For rent- ences between cities persisted that cannot the control group, this negative effect is seeking trade policy, the indicatorhe uses be explained in terms of available eco- similar in magnitude to FDrs negative isthenumber offoreign-trade regulations nomic variables. effecton domestic investment-implying passed eachyearforthebenefitofa single Largeeconomic gains couldbeachieved a zero effect on the current account But firm or industry. .by further market integration. FD1s negative effect on national saving RomausesdatafromUrugnayforl925- This paper - a product of the Agricul- in the five Pacific Basin developing mar- 83. Uruguay, which experienced an im- tural Policies Division, Agriculture and keteconomiesimpliesthatFDicouldhave pressive economic decline, isanoutstand- Rural Development Department-is part more of a negative effect on the current ing example of a rent-seeling society. ofalargereffortinthe departmenttoana- accountthan throughincreaseddomestic After being a wealthy economy in lyze changes in agriculture in economies. investment alone. midcentury, it suffered almost complete This research was supported by a grant Fry also investigates the impact ofFDI stagnation, which led to social and politi- to the University of Minnesota from the on economic growth in these 16 countries, cal disintegrationbythe end of the 1960s. National Council on Soviet and Eastern taking into account distortions in the Threedecadesafrestrictiveregulationson European Research, and by the World economies. He estimates reduced-form foreign trade had created a nearly closed Bank. Copies of the paper are available current account equations, and presents economy by the end of the 1960s. It was free from the World Bank, 1818 H Street an analytical framework for estimating worth analyzing whether policymakers' NW, Washington, DC 2043 Please con- FDrs effect on economic growth in the greatreceptivenesstodemands forprotec- tact Cicely Spooner, room N8-039, exten- presence of incentive-disincentive pack- tion could account for Uruguay's dedine. sion 32116 (66 pages). ages and other economic distortions. Over the period 1925-83, Rama finds He illustrates his framework using in- almost4,000 laws, decrees, and adminis- dicators offoreign trade andfinancial dis- trative resolutions that create, maintain, 1141. Foreign Direct Investment tortions. His main conclusion: the effect or modify a foreign-trade regulation for in a Macroeconomic Framework: ofFDIdiffersmarkedlyfromone group of the benefit of a single firm or industry. Finance, Efficiency, Incentives, countries to another. About half of them explicitly identify the and Distortions FDI has a negative effect on economic petitioner-usuallyafirm orguild- Since growth in the control group. It has the the size of the Uruguayan economy Maxwell J. Fy same positive effect on growth as domes- changed over the period studied, Rama (may 1993) tically financed investment does in the scales the annual number of regulations Pacific Basin countries. The main cause by output or exports to measure the ex- Does foreign direct investment affect na- for the different effect is the low level of tent of rent-seeking trade policy. tional saving both directly and indirectly distortion in the Pacific Basin countries. Rama shows that the extent of rent- through the rate of economic growth? It This paper -a product ofthe Debt and seeking trade policyincreasedwith discre- depends on which countries you're talking International Finance Division, Interna- tionary policies and under dictatorship. about. Pacific Basin countries appear to tional Economics Department - is part (In the period studied, there were two differ markedly from some other develop- of a larger effort in the department to stages of democracy - until 1932 and ing countries. study the benefits offoreign directinvest- from 1943-72 - and two stages of dicta- ment. Copies of the paper are available torship.) He also shows that rent-seeling Does foreign direct investment (FD1) in- free from the World Bank, 1818 H Street traderestrictionsincreasedunderimport- crease domestic investment, or does it NW, Washington, DC 20433. Please con- substitution strategies and, more unex- iprovide additional foreign exchange fora tact Rose Vo, room 88-042, extension pectedly, under active export promotion. pre-existing current account deficit, or 31047 (May 1993, 30 pages). This suggests that discretionary power some linear combination of the two? Pry leads to wasteful distribution, whether it investigates this question for a group of is used to support inward- or outward- five Pacific Basin countries and a control 1142. Rent-Seeking Trade Policy: oriented policies. group of 11 other developing countries. A Time-Series Approach Finally, Ramaanalyzes the correlation For the sample of all 16 developing between innovations in the trade policy countries, Fry finds that FDI does not Martin Rana indicator and innovations in the growth provide additional balance of payments (May 1993) rates of output and exports, with alag of financing for a pre-exicting current ac- up to 20 years. Surprisingly, he finds a count deficit In the control group of 11 Foreign -trdebarriersthatbenejtasingle positive correlation with output growth developing countries, PDI is associated firm or industry are more likely to increase rates after two or three years. But the with reduced domestic investment-im- with discretionary trade policies and un- correlation becomes negative some years plying that FDI to those countries is sim- derdictator3hipsAndalthough these bar- later, particularly in the case of exports. ply a close substitute for other capital in- riers may produce short-run benefts, in the The short-run positive impact on growth 170 PolCy Research Working Paper Series rates, together with the surprisingly long est changes in the system of exemptions, represent a dramatic acceleration of the time lag before the negative impact, may for example. The benefit of eliminating trends in exports observed between 1984 account forpolicymakers'receptivenessto exemptions is primarily transparency. and 1989. Contrary to expectations, the demands for protection. The costs ofprograms thatprovideimport driving force behind the export upswing This paper - a product of the Trade exemptions for, say, regional promotion, were manufactures - not raw materials, Policy Division, Policy Research Depart- are often hidden in customs statistics. mineral fuels, or agricultural products. ment-is part of a larger effort in the de- * Ifpressures that cause collectedrates Exports expanded because of the efforts partment to understand the political nottoincrease one-for-one with tariffrates ofstate-owned enterprises toexportmore economyofprotection. Copies ofthe paper will continue to be present in any tariff in metallurgy, electro-engineering, and are available free from the World Bank, regime, then these must be factored into chemical and light industries. 1818HStreetNW,Washington, DC20433. tariff reform design. Evidence on the relationship between Please contact Dawn Ballantyne, room This paper - a product of the Trade Poland's export performance in the West. N10-023, extension 37947 (17 pages). Policy Division, Policy Research Depart- (especiallytrade with the EuropeanCom- ment - is part of a larger effort in the munity) and the collapse of the CMEA department to assist in the design of tar- seems to suggest that the fall in Polish. 1143. Tariff Rates, Tariff Revenue, iff reforms. The study was funded by the exports to the CMEA was smaller than and Tariff Reform: Some New Bankes Reseach Support Budget under expected. TheredirectionofPolishexports Facts research project"DesignofTariffReform: from the CMEAfneled onlylimitedexport Theory, Evidence, and Implication" (RPO expansion to the West Lant Pritchett and Geeta Sethi 676-77). Copies ofthe paper are available The developments in Polish trade dur- (May 1993) free fro.- the World Bank, 1818 H Street ing the first two years of the transfrma- NW, Washington, DC 20433- Please con- tion program suggest that attempts to Tariff rates on specific products and the tact Maria Fernandez, room S9-035, ex- recreate the CMEAarrangementsn some ratio of tariff revenue to import value are tension 33766 (23 pages). new guise would have unnecessarily onlytenuouslyrelated Abovea50percent weakened incentives to restructure the rate, collected .-tes do not increase at all economy with its comparative advantage. despite increases in official rates. 1144. The Foreign Trade This paper - a product of the Interna- Dimension of the Market Transition tional Trade Division, International Eco- Theadvalorem tariffrateson specificprod- In Poland: The Surprising Export nomicsDepartment-is arevisedversion ucts and the ratio of tariff revenue to im- Performance and Its Sustainability of a paper presented at the conference portvalue, the collectedrate, are only tenu- "Transition to Democracy in Poland," or- ously related, contendPritchettand Sethi. Bartlomiej Raminski ganizedby the Hoover Institution onWar, Using tariff and revenue data (at the (June 1993) Revolution, and Peace, Stanford Univer- tariff code line level of detail) for three sity, California, in November 1992. Cop- developing countries, Pritchett and Sethi Contrary to expectations, the driving force ies ofthis paper are available free from the compare the statutory ad valorem tariff behind the export upswing were manufac- WorldBank,1818 HStreetNW Washing- rates (official rates) with the ratio of tar- tures - not raw materials, mineral fuels, ton, DC 20433. Please contact Pauline iff revenues to import values (collected or agricultural products. Kolila, room S7-040, extension 33716(27 rates). They document four facts: pages). * The collected rate for any given item To the extent that foreign trade has been of the tariff code has almost no relation- discussed in the debate about the trans- ship to the official rate for that item. formation of former centrally planned 1145. The SImple(r) Algebra * The variation of collected rates economies, discussionhasfocusedonwhat of Pension Plans around the official rate increases as the should be done to minimize the costs of level of the official rate increases, external acjustment through managed Dimitri Vittas * The collected rates increase much foreign trade and exchange rate policies. (June 1993) less, on average, than one-for-one with the little attentionhOs been paidto the 'sup- official rates. ply-side" forces behind export expansion. Unless the real rate ofinterest exceeds the * Above a certain level, collected rates Kaminski addresses questions that growth rate ofreal wages by a significant do not increase at all despite increases in have been ignored& What product catego- margin, payment afa reasonable pension official rates. Collection rates appear to ries were the driving force behind the ex- rate requires a high contribution rate ora level offatroughly 50 percent. (In Kenya, pansion of exports to the OECD? To what high active worklife rato collected rates are lower for high-tariff extent were exports from the CMEA than formoderate-tariff items. Assigning reoriented to the West? What was the fac- Chile's success with pension reform in the lower rates for high-tariff items would tor content of exports to the OECD? Was early 1980s and the continuing financial actuallyincreaserevenue on those items.) export expansion accompanied by a shift pressures facing the social security sys- The implications of these findings are in relative comparative advantage? Will tems ofmanydeveloping(and some indus- twofold for calculating general revenue: the Central European econones preserve trial) countrieshave elicitedconsiderable * Rates are not the critical determinant their recent gains in OECD markets? interest in the mechanics of pension sys- ofrevenues. The revenue implications of He finds that developments from the tems that are based on fully fundedindi- large rate changes can be offset by mod- beginning of the transformation program vidual capitalization accounts. Policy Research Working Paper Serles 171 Vittas sets out the simple(r) algebra of to studypension systems and contractual 1147. Interest Rates, Growth, and both defined contribution and definedben- savings. Copies ofthe paper are available External Debt: The Macroeconomic efit plans. He notes the following-results: free from the World Bank, 1818 H Street Impact of Mexico's Brady Deal * Unless the real rate of interest ex- NW, Washington, DC 20433. Please con- ceeds the growth rate of real wages by a tactPriscillaInfante, room N9-03, exten- StUn Claes.en, Daniel Oks, significant margin, payment of a reason- sion 37664 (35 pages). and Sweder van W-4nbergen able pension rate requires a high contri- (June 1993) bution rate or a high active worklife ratio (theratioofworkinglife toretirementlife). 1146. Is Poverty Increasing The debt-retfpackage worked in Mexico * It is more difficult for a high-growth In the Developing World? because it reduced uncertainty, not b-cause economy to provide a high pension rate, it reduced transfers. dthough the absolute level ofthe pension Shohun Chen, Gaurav Datt, could be higher than the pension level in andMartin Ravallion Interest rates fell sharply after Mexico's alow-growthecononywithahigh pension (June 1993) Brady deal, and private investment and rate. growth recovered. * Whenpensionsareindexedtoprices, Neodatasuggestthattheaggregatenum- Claessens, Oks, and van Widnbergen thelevelofimterestratesandgrowthrates herofpoor is ineasingatroughly theate show that the main benefit of debt relief affects positively the level of the pension of population growth. Poverty measures was not to lower expected payments but rate. But when pensions are indexed to are highest in either South Asia or Sub- to reduce uncertainty. Reduced uncer- wages, only the difference between inter- Sahara Africa, dpendingon thepoverty tainty was found to be the dominant fac- est rates and growth rates has an effect line used The only rqgions with faling tar in explaining the positive macroeco- on pension rates. In all cases, the active povertymeasuresareSouthandEastAsia. nomic response (largely because ofitsfa- worldife ratio has a positive effect on the vorable effect on exchange rate crises). pension rate. Chen, Datt, and Ravaillion assess the de- Econometrically, theyfindthat the vari- * The timing of contributions, and veloping world's progress in reducing ab- ability of the future net transfer had a therefore the pattern of earnings over a solute-consumption poverty during 1981- significant impact but the average of the pmso!n's full career, has a significant but 91, using new data on the distribution of future net transfer itself did not nut major effect on pension rates- household consumption or income per Their results confirm that debt reduc- * Employer-based, final-salary, de- capita for 40 countries (at two points in tion has a positive macroeconomic effect, ..ed-benefitplans penalizeearlyleavers time for 18 of the countries). They apply butrejectthe'debtoverhang hypothesis an i favor late high-fliers, dominance tests to the distributions after (the benefits to growth of a reduced tax * Poll funding with universal coverage adjusting to purchasing-power parity. burden) as the dominant factor ad full lifetime careers would lead to a They find that the incidence of aggre- Their main conclusion: Debt reduction massive accumulation of capital, espe- gate poverty changed little. The number can have amuch greaterimpact than the =-Aly if the demographic structure re- ofpoorincreasedattherate of population magnitudeofreliefcoupledwith standard sembles apillarrather than the more tra- growth. The region with the greatest ag- growth models, would suggest The sec- dtional pyramid. This would have major gregate poverty is either South Asia or ondary effects on private investment of plications for the productivity of capi- Sub-Saharan Africa, depending on the reduced uncertainty about government and the functioning of financial sys- poverty line used. policyis likely to be more important than is. The experience was diverse across re- the direct amountof debtreduction itself * Fullfunding may not provide a solu- gions and countries. The onlyregions with But private investment is unlikely to a ta the financial pressures caused by falling poverty measures are South and increase if uncertainty remains about fu- nographic changes. An increase in the East Asia. ture domestic macroeconomic stability irement age may be required under This paper - a product of the Poverty and reform. The debt package would not _h funded and unfunded pension sys- and Human Resources Division, Policy havesucceededifthegovernmentbadnot as to accommodate population aging. ResearchDepartment-ispartofalarger put through asuccessfil domesticreform i nis will resultin ahigher active worklife effort in the department to monitor program befbre the debt relief package. io and a lower dependency ratio. progressinreducingpovertyinthedevel- This paper-ajointproductofthe Debt * Amixedsystem-cmnbiningaredis- opingwarild. Copies ofthe paper are avail- and International FinanceDivision, Inter- 'mtive first pillar and a fully funded able free from the World Bank, 1818 H national Economics Department, and the 'ined- contribution secondpillar-rep- Street NW, Washington, DC 20433. Country Operations Division 1, Country ents a more prudent, perhaps more Please contact Patricia Cook, room 813- Department II, Latin America and the Litable, approach toreformingpension 064, extension 33902 (41 pages). Caribbean - is part of a larger effort in tems the Bank to study the impact of debt re- * Variable contribution and pension ductionondevelopingcountries.Copiesof es, within specified limits, might be the paper are available free from the -frable and more consistent with WorldBank,1818HStreetNWWashing- ater reliance on personal choice. ton, DC 20433. Please contact Rose Vo, This paper-a produc. ofthe Financial room 88-042, extension 33722 (27 pages). tor Development Deptutment - is tof a larger effort in the department 172 Policy Research Workng Paper Sedes 1148. Economic Instability 1149. How Labor Markets This paper - a product of the Trade and Aggregate investment and Imperfect Competition Affect Policy Division, Policy Research Depart- Tariff Policy ment-is partofalarger effortin the de- Robert S. Pindyck and Andres Solimano partmentto understand howlabormarket (June 1993) Martin Rama policies and institutions affect economic (June 1993) performance. Copies ofthe paperare avail- Using the irreversibility approach to in- able free from the World Bank, 1818 H vestment, a robust, negative relationship Labor market institutions providea ratio- Street NW,Washingbon, DC 20433.Please between inflation and capital formation is nale for the difference between the 'corpo- contact Dawn Ballantyne, room N10-023, found for high-inflation count ries in Latin raist' consensus on free trade and the extension 37947 (22 pages). Ameriea and for low-inflation economies 'populist resistance to trade liberaiza- in the OECD. tion. 1150. WealthIer Is Healthier Recent literature suggests that because Protection -ray be a second-best policy investment expenditures are irreversible when the domestic sector is imperfectly lantPritchett and LawrenceR Summers and can be delayed, they may be highly competitive. But the optimal tariff de- (June 1993) sensitive to uncertainty. Pindyck and pends on labor market institutions too. Solimano briefly summarize the theory, Roma considers two theoretical set- In 1990 alone, more than halfa million stressingits empirical implications. tings. The first is fully centralized wage child deaths in the developing worldcould Then,usingross-sectionandtime-series barganin where all workers are union- be attributed to poor economic perfor- data for a set of developing and industrial ized and wage differentials are redistrib- mancein the 1980s Wealthiernations are countries, they explore the empirical rel- uted among workers (the "Scandinavia" healthier nations evanceofirreversibilityanduncertaintyto case).The secondis negotiation attheflrm aggregate investment. They find that: level, where workers are unionized in With cross-country, time series data on * The volatility of the marginal profit- imperfectly competitive sectors only, and health (infantandch?d ortality,andlife ability of capital - a summary measure wagesmay differfrom sector to sector (the expectancy) and per 4 Ata income, ofuncertainty-affects investmentas the "Latin America" case). He uses the case Pritchett and Summers estimate the ef- theory suggests, but the effect is moder- of the competitive labor market as a fee, of income on health- ate,andgreatestfor developingcountries. benchmark. They use instrumental variables esti- * This volatility has little correlation In Scandinavia, free trade maximizes mation to identify the effect ofincome on with indexes of political instability used welfae.Thecentral trade unioninternal- health that is structural and causal, iso- in recent studies of growth. izestheconsequencesofimperfectcompe- lated from reverse causation (healthier * Inflation is highly correlated with tition in the domestic sector- Since prices workers are more productive and hence this volatility andisarobust determinant in this sector are a mark-up over labor wealthier) orincidental association (some ofinvestmentandthemarginalpofitabil- costs, there is a wedge between the sec- otherfactormaycausebothbetterhealth ity of capital. The volatility of the real toral productivities oflaborand, therefore, and greater wealth). exchange rate also has an independent an inefficient allocation ofmanpower. By The long-runincome elasticity ofinfant contribution in explaining investment. choosing a "moderate" wage, the central and child mortality in developing coun- * The relationship between inflation tradeunionreplicates the effects ofasub- tries lies between 0.2 and o.4. and investment is nonlinear, and differ- sidy to the imperfectly competitive sector Using those estimates, they calculate ent thresholds of inflation, where the re- so that no government intervention is re- that in 1990 alone, more than halfa mil- lationship with investment becomes quiredL lion child deaths in the developing world stronger, were detectedfora group ofhigh- In Latin America, decentralized wage could be attributed to poor economic per- inflation countries in Latin America and bargaining increases the wedge between formance in the 1980s. low-inflation economies in the OECD. the sectoral productivities oflabor. While This paper- a product of the Office of This paper - a product of the Transi- wages in the export sector are constrained the Vice President, DevelopmentEconom- tion and Macro-Adustment Division, by harsh competition in world markets, ics .- is one in a series of background Policy Research Department - was pre- trade unionsinthe domestic sector can get papers prepared for the World Develop- pared for the NBERMacroeconomics Con- higher wages without completely squeez- mentReport1993 anhealth.Copies ofthis ference, March 12, 1993. It will be pub- ing labor demand. Ar import tariff im- paper are available free from the World lished in the NBER Macro-Economic An- proves manpower allocation by Bank, 1818HStreetNW,Washington,DC nual in 1993.Research was supported by reorienting demand toward the domestic 20433. Please contact the WorldDevelop- MITs CenterforEnergyandEnvironmen- sector. Since the second-best tariff is mentReportffice,roomT7-101,extension tal Policy Research, the National Science strictly positive, opening the economy 31393 (41 pages). Foundation, and the World Bank. Copies leads to a drop in welfare of this paper are available free from the Rama'sanalysis sheds somelightonthe World Bank, 1818 H StreetNW, Washing- political economy of protection. Particu- ton, DC 20433. Please contact Sabah larly, it suggests that trade liberalization Moussa, room N11-017, extension 39019 ismorelikelytoraise welfarein the Latin (53 pages). America case when it is accompanied by changes in labor market institutions. Policy Research Working Paper Series 173 1151. Is Growth Bad for the 1152. Population, Health, Health lendingis nowadecadeold, and Environment? Pollution, and Nutrition: Annual Operational many innovations in PHN1 lending have Abatement, and Endogenous Review for Fiscal 1992 emergedonlyinthepastfourorfiveyears. Growth This review demonstrates that good prac- Denise Vilancourt, Stacye Brown, ticesandnewandpromisingideas-well CharlesvanMarrewikFederickvanderPloeg, and Others worth emulating - are scattered across and Jos Verbeek (July 1993) PHN work. (r!y 1993) Overall,PHNwarkismovingintheright Growth in the population, hEalth, and direction and the quality of work is gener- T-whatciicumstances,ifany,doeconomic nutritionsector has been significant in the allyseentobeimproving.Welcome trends -wth and environmental quality go past flue years, stimulated by the World (which should be encouraged and rein- -d in hand? Bank's renewed commitment to reduce fmed) include seriousattentionto the poor- pouerty and its rapidly growing emphasis esk most vulnerable populations, growing Van MarrEwilk, van der Ploeg, and on human resource development. consideration of the demand of target yerbeek investigate the implications of groups,andincreasedattentiontomrnitor- ilution as abyproduct ofproduction and Population, health, and nutrition (PHN) ing and evaluation of sector perfarmance. Ayze how environmental concern af lending decreased in fiscal 1992 from the This paper is a product of the Popula- .ets the optimal rate of economic growth record levels of fiscal 1991, in both the ton, Health and Nutrition Department. ES-i optimal government policy. amount and the number of operations. Copies are available free from the World The government must levy taxes on Lending amounted to $96L6 million for Bank, 1818 HStreetNW,Wasbington,DC --)me to finance both productive govern- 16 projects, compared with $1,567.6 mil- 20433.Please contact OtiliaNadara, room .-sit spending and abatement activities. lion for 28 projects in fiscal 1991. S6-065, extension 31091 (77 pages). ustlevyanoptimal tax. Too high atax This temporary dip in PEN lending is ! harms prospects for growth and too attributable largely to pipeline factors. a tax rate is bad for the environment. Fiscal 1993 lending is projected to recap- 1153. North American Free Trade Van Marrewijk, van der Ploeg, and ture ifnot exceed the fiscal 1991level, and Agreement : Issues on Trade =Lbeek distinguish between two ap- projectionsforfiscal 1994andfiscal1995 In Financial Services for Mexico aches to incorporate the environment areforacontinuedincreaseinlendingvol- o themodelstockapproachandtheflow ume. Alberto Musalema, Dimitri Vittas, -roach The flow approach assumes PHN projects approved in fiscal 1992 audAsliDemirgag-Kunt t the level of environmental quality have been responsive to the WoridBanks (July 1993) nges instantly if production or abate- objective of poverty alleviation. Collec- --at levels change (this is relevant for tively, fiscal L992 projects cover the essen- implementation of the North American lyzing externalities associated, for tial features of good poverty work but the Free lradeAgreement (AFTA) willgen- mple, with noise). The stockapproach depth and quality of poverty work varies erate substantial efficiency gains for ames that pollution and abatement across projects. Drawing from the good Mexico's financial syster and economy. -'irectly influence the environment by practices observed andlessonsrecordedin The key to NAFTA's success in the finan- cting the rate ofchange inthe environ- this year's portfolio, the review offers the eilsector will be effctieprudaralgr- it over time (this is more relevant for following suggestions, among others, for lation and supervision. But Mexican fl- lyzing problems of add rain). strengtheningPHN interventions to alle- nancialinstitutions will needa reasonable They conclude that viate poverty- transition period to modernize operations * "Win-win" situations (in which im- * Poverty informationandmonitoring andriseto thechallengeoftheirCanadian vements in economic growth and en- must be accompanied by dissemination and U.S. counterparts. -nmental quality gohandin hand) can- and sensitization activities to strengthen arise underthe flow approach, but can nationalunderstandingofpoverty-related To maximize the efficiency gains from e under the stock approach - if and issues and national commitment toresolv- NAFTA, the regulatory environment for j if the intertemporal elasticity ofsub- ing them through the proper policy. Mexican banking, insurance, and securi- ution exceeds unity. * Community involvement in project ties markets should be further harmo- * Maximizing the economy's grcwth design and development requires clearly nizedwiththoseafthemoreadvancedand - is never optimal unless consumers defined and carefully designed institu- efficient Canadian and US. markets. tnothing about the environment. tional and procedural mechanisms, anda Musalem, Vittas, and Demirg-Kunt This paper is a product of the Systems concerted effort to make them work. argue that a prerequisite for NAFTAs ision, International Economics De- * It is essential that PHN sector work successis toremove regulatory distortions tment. Copies of the paper are avail- identify poor and vulnerable groups and as- and toeliminate opportunitiesfor regula- t free from the World Bank, 1818 H sesstheirneedsanddemandsforbasichealth, tory arbitrage. Moreover, eliminating or et NW, W&sbington, DC 20433. familyplanning, and nutrition services. reducing disparitiesbetweentheNAFTA Lse contactJos Verbeek, room S9-116, * Eventhemostdemand-drivenproject countries' tax rates and ways of levying msion 33935 (44 pages). designs targeted to clearlyidentifiedpov- taxes would help prevent distortions, tax erty groupsirequire promotional activities evasion, and tax avoidance. to ensure that these groups participate in Complete harmonization may not be and benefit from project initiatives. feasible or even desirable, given the way 174 Policy Researbh Working Paper Serles the three countries' financial systems 1154. Options for Pension Reform retirement age, and expanding the use of have evolvedandthe differences between in Tunisia proportional pensions for workers with their industrial structures and stages of short careers. economic developmenL Dimitri Vittas * In the longer term, a more radical In banking, insurance, and securities (July 1993) programto create afullycapitalizedpillar markets, the main free trade issues are that complements a redistributive pillar the convergence of authorization criteria Tunisia's financially pressedpension ae- payingbasicbenefits.Thiswouldgenerate and the removal of most of the obstacles tem needs to rationalize benefits and im- long-term savings, stimulate the develop- to freedom of establishment- It is also prove investment performance in the near mentof capital markets, and facilitate the important to harmonize guarantee futur. To anticipate deteriorating demo- privatization program. A third pillar, vol- schemes and to create well-definedMexi- graphics, steps should also be taken to untary savings encouragedby tax savings, can schemes to protect small, unsophisti- prepare for more radical reform: one pit- would cover self-employed people not cov- cated investors rather than mismanaged lar for redistribution, and one fully capi- eredby occupational schemes. institutions. The key to NAFTA's success talized Thispaper-aproductoftheFinancial in the financial sector will be effective Sector Development Department - is prudential regulation and supervision - Tunisials pension system provides oldage, part of a larger effort in the department particularly because of the heavy finan- survivorship, and disability benefits to to study pension systems. Copies of the cial pressures on the newly privatized retired and disabled workers and their paper are available free from the World banks and the financial groups that own dependents. It is a partially funded sys- Bank,1818HStreetNW,Washington,DC them. Without effective supervision, the tembased on solidarity betweet genera- 20433. Please contact (Priscilla Infante, new owners ofthe banks may take exces- tions. It is designed to provide insurance roomN9-003,extension 37664 (32pages). sive risks to recoup the substantial ele- againstlossofincomeinoldage,especially mentofgoodwillin theprivatization price, for people who live longer than average, before the protectionfrom foreign compe- andtoredistributeincomemorefavorably 1155. The Regulation tition and new entrants is phased out. towardlow-income retired workers. Only and Structure of Nonllfe Insurance An integrated market will presuppose to a limited extent does it achieve a third in the United States greater cooperation and information -x- objective: compulsory long-term saving. change among the national regulatory VittasanalyzesthestrucbreofTnisia's Martin P. Grace and Wicliael M.Barth authorities to ensure, for instance, that pension system, assesses its financial con- (July 1993) weakbanks donotundermine creditstan- dition, and sets out options for pension dards and that weak insurers do not offer reform. He finds that the current system: Restrictiveregulations on the U.S. nonlife deceptively low-priced policies. In these * Is fragmented, comprising several insrance industry have affected its ef]i- areas, Mexico needs intensive training schemes with different rules and condi- ciency andprofitability, especialyforsauch and cooperation with the Canadian and tions. mandatory lines as automobile insurance. US. regulatory authorities. * Promises generous benefits, with Prudential regulation that emphasizes To increase the contestability afthe fi- high targetedreplacementratesthatmay solvency monitoring ispreferable toprm nancial markets and benefit from the be unsustainable. product, and entry controls. transfer offinancial technology, the Mexi- * Despite high benefits, operates with can financial system shouldbe opened to low contribution rates, because both the Theinsuranceindustryisunderdeveloped foreign entry. But Mexico needs to mod- system and the labor force are young. in most developing countries because of ernize its financial institutions and * Only weakly links contributions and low levels of income and wealth and be- Musalem, Vittas, and Demirg(kV-Kunt benefits. It suffers from evasion ofcontri- cause restrictive regulations inhibit the conclude that the proposed NAPTAshould butions and inflated benefit claims and supply ofinsurance services. But several - allow for a gradual approach to foreign redistribution (from capricionsfavoringof countries have begun to reform their in- entry. A reasonable transition period, workers with lowincomes and shortered- surance industries. extending up to the year 2000, will give ited service). To help those countries, Grace and. Mexican institutions ample time to * Faces increasingfinancial pressures Barth offeranoverviewofinsurancerego- achieve the efficiency gains that moti- because it is maturing and expanding lation in the United States-and discuss vated the quest for the agreement in the benefits, butitsreservesshowpoorinvest- the economics and market structure of first place. ment performance and it has failed to nonlifeinsurancein entry andexit barri- This paper-a product oftheFinancial adjust contribution rates. era, economies of scale, and conduct and Sector Development Department - is Vittas proposes the following main re- performance studies. bas,d on a report produced for the Mexi- forms: They conclude that the U.S. nonlife in- can authoritiesin March1991. Itupdates * In the short run, reallocating social surance industry exhibits low concentra- the earlier report in relevant areas. Cop- security contributions from family allow- tion at both national and st be market iesofthispaperare availablefreefrom the ances to pensions and improving the fi- levels.Concentrationislowevenanaline- WorldBank, 1818HStreetNW,Washing- nancial performance of reserves. by-line basis. ton, DC 20483. Please contact Priscilla * In the medium term, rationalizing The primary concern ofregulators has Infante,room 19-003, extension 37664(58 benefit formulas through gradual use of been to protect policyholders from insol- pages). lifetime actualized earnings, indexing vency, but regulation has also aftenbeen pensions, graduallyincreasingthe normal used to protect the market position of lo- Policy Research Working Paper Series 175 cal insurance companies against the entry but as a lcarrot"to encourage proper enui- countries, there could still be trade diver- of ont-of-state competitors. Regulation has ronmental practices. sion in tropical timber products because workedbest when based on solvencymoni- some consumers may not prefer certified toring, with limited restrictions an entry. About 20 percent of the total production timber, given its higher price. Ithasbeenmoreharmfulwhenitinvolved of tropical timber is traded internation- Eco-labeling programs should be de- controls on premiums and products and on ally. But for Indonesia, Malaysia, Papua signed so that producers see them not as the industry's level of profitability. NewGuinea, andsome countriesin West- a nontariff barrier but as an instrument Over the years the industry has shown Central Africa, tropical timber trade ac- for capturing the rents associated with a remarkable degree of innovation, al- counts for more than 50 percent ofproduc- prevailing environmental concerns in the though ithas also facedmany serious and tion. developed world. Consumer education is persistent problems. The problems in- Although the tropical timber trade has important to the success of such programs, clude the widespread crisis inliability (in- often been blamed for deforestation, and eco-labeling programs should be de- cluding product liability and medical Varangis, PrimoBraga, andTakeuchi find signed accordingly. malpractice), the crisis in automobile in- that it contributes much less to defores- This paper-a product of the Interna- urance, the volatility of investment in- tation than do poor policies for the produc- tional Trade Division, International Eco- come, the effects ofmarket-driven pricing tion of tropical timber. Lack of tenure nomics Department - is part ofa larger andunderwritingcycles, and the difficulty rights,shortanduncertainloggingconces- effort in the department to evaluate the of measuring insurance solvency. sions, low stumpage values, and inad- impact on world markets ofenvironment- The 'long-tailed" lines of insurance - equate monitoringofloggingactivities are related trade policy instruments. Copies thosethatentaillongdelaysinfinal settle- among the major policy failures thathelp of the paper are available free from the ments - are exposed to the vagaries of deplete the tropical forests. WorldBank, 1818 HStreetNW,Washing- inflation and rising costs. Trade policies, often identified as an ton, DC 20433. Please contact Dawn Two mandatory lines - third party instrument for enforcing environmental Gustafson room S7-044, extension 33714 automobile insurance and workers' com- objectives internationally, are inefficient (31 pages). pensation(for workaccidents)-account instruments for correcting domestic dis- for nearly 55 percent ofpremiums. These toitions, and in the case of tropical tim- two lines - plus medical malpractice, ber trade, may affet the environment 1157. Intertemporal and Interspatlal other liability, and aircraft insurance - perversely. Comparisons of Income: hadcombinedratioswellover 125 percent Export and import restrictions ulti- The Meaning of Relative Prices in 1989. mately depress the value of an already Theindustryhassomeabilitytocnllude underpriced resource - the forest. Re- Sultan Ahmad andto set prices, but seems tobe competi- strictions on log exports, for example, (July 1993) ive and to earn profits 'elow similarly encourage wasteful processing of logs. =unted financial firms. Insurance prof- Unless soundforestmanagementpolicies Harmonizing methods for comparing ;Lfilityis not consistentlyabove orbelow are enforced domestically, the net effect prices is essential for improving compari- nurmal returns, although earnings for could even be an increase in the rate of sons of outputs over time and space. And mandatory and strictly regulated lines of deforestation. a synthesis of methods would reduce the automobile insurance and workers' com- Import restrictions may have a mar- cost of collecting and disseminating rel- pensation appear to bebelow-adequate for ginalimpact, since trade accounts for less evant informatiria. long-term viability. than 20 percent ofproduction and most of This paper-a productofthe Financial the tropical timber is imported in Asia, The conceptual issues confronting compil- 9 ctar Development Department - is where such restrictions currently do not ers of priceindiceshave notchangedmuch A of a larger effort in the department exist Even if import restrictions had a over the years. Theyinclude the intracta- study the development of the insurance significant impact, it would be in areduc- bility of basic index-number problems, the lustry. Copiesofthepaperare available tion in value of tropical logs that would practical difficulties of sampling and m the World Bank, 1818 H Street NW, make alternative uses of the forest lands matching prices, and the uncertainties .ashington, DC 20433. Please contact more profitable - so the rate of defores- about the appropriate weighting scheme iscilla Infante, room N9-003, extension tation might not be reduced. for comparing events in specific locales -664 (64 pages). Eco-labeling's main strength is its ca- over time and across locales. pacity to discriminate (through market Ahmad considers inconsistencies in signals) in favor of timber produced un- some measures oftime-to-time and place- i i56. Tropical Timber Trade der sound environmental practices. By to-place comparisons ofincome. He argues licles: What Impact Will contrast, bans andboycottshaveanindis- for a method that harmonizes price work -Labeling Have? eFlinate, perverse impact across generallyrecognizednational price But ifeco-labelingis imposed unilater- compilations, such as consumer price in- sayotisN.Varangis.CarlosA.Primo Bragi% ally byasubset ofcountries, its effective- dices (CPIs), the International Compari- IKenji Takechi Aes wv be doubtful. It will lead to trade son Programme (ICP, and national ac- ly 1993) &rzion and potentially perverse envi- counting. ronmental results, not to mention an in- Modern economiestendtobemore open, >labelingcouldbebeneficialifpursesd crease in GATT trade disputes. Even if so relative prices shouldbe more similar, dfilaterally and if ased olt sa ltic4 eco-labeling is adopted by all importing but it is increasingly apparent that price 176 Policy Research Working Paper Serles levels and trends can differ considerably ferent arguments are virtually identical. and cope with financial crises that threat- even within a nation-particularly those Both imply that the only reasonable way ened economic prosperity. Bank programs encompassing economically heteroge- to view policies to reduce fertility is as focused on core financial themes neous areas. activities in which one segment of society (loosening up interestrates, red acinggov- The global ICP exercise has provided (therich)isofferinganothersegment(the ernmentinvolvementin credit allocation, usefulinsightsinta theissuesinvolved.At poor) compensation to elicit a change in rationalizing taxes on financial inter- the same time, international comparisons behavior. mediaries) and on managing bank of the type ICP aims to facilitate are now Where there are true externalities, the failures, rehabilitating insolvent banks, seen as being more sensitive than ex- rich may also end up as well or better off and training bank managers and super- pected to changes in relative prices. lCP in terms of income than they were, be- visors. has given little attention to this issue, but cause everyone can benefit from the over- Recently, Bank programs have stressed there is a rich literature on the subject all efficiency gain, the developmentofcapital markets, espe-. with respect to CPIs. The common ground Where there are not true externalities, cially stock markets, but little research for the two logics is essentially national the poor are made better ofr in the sense has been done in measuring the level of accounts, broadly defined, ofreal income while the rich gain interms stockmarket developmentorunderstand-, Through conceptual and practical work ofutility byfinancing the necessary social ing the relationship between the develop- done by the World Bank en the topic, programs. ment of stock markets and the function- Ahmad suggests that harmonizing the Birdsall and Griffin outline briefly the ing of financial intermediaries. various methods is essential to a proper program implications of this 'welfare" Demirglo-Knt and Levine did some interpretation of the market signals that approach: more emphasis on apackage of preliminary research on these issues and prices send to economic agents. He also targeted social programs, and more em- suggest further topics for research. explains how a better synthesis reduces phasis in family planning services on cli- They propose different empirical indi- the overall cost of collecting relevant in- ent welfare and contraceptive choice. caUs of -stock market development? formation and disseminating it to users. This paper - ajoint product of the Of- They also suggest how to use these indi- This paper - a product of the Socio- fice of the Director, Policy Research De- cators to help evaluate stock market de- Economic Data Division, International partmentandthePpulationandHuman velopment policies. Economics Department-was presented Resources Operations Division, Eastern Theyfindthattherelationshipbetween at the meetings of the Allied Social Sci- AfrieaDepartment-ispartofacantinu- the development ofstock markets andthe ences Associations in Anaheim, Califor- ing effort in the Bank to assess the impli- functioning of financial intermediaries nia, January 5-7, 1993. Copies of this pa- cations for poverty ofvarious sectoral and may be complementary. per are available free from the World economywide policy changes. Copies ofthe This paper - a pr.duct of the Finance Bank, 1818HStreetNW,Washington, DC paper are available free from the World and Private SectorDevelopmentDivision, 20433. Please contact Elfrida O'Reilly- Bank, 1818HStreetNW,Washington,DC Policy Researct Department-is part of Campbell, room 87-136, extension 33707 20433. Please contact EllaHornsby, room alargereffortin the departmenttoevaln- (20 pages). J10-206, extension 35742 (26 pages). ate the developmentandrole ofemerging stockmarkets.Theresearchoutlinedhere will be funded by the Bank's Research 1158. Population Growth, 1159. Stock Market Development Support Budget under research project Externalties, and Poverty and Financial Intermediary Growth: "Stock Market Development and Pinan- A Research Agenda cial Intermediary Growth (RPO 678-37). Nancy Birdsall and Charles Griffin Copies ofthis paperare available free from (July 1993) Ash Demirgap-Mint and Ross Levine the World Bank, 1818 H Street NW, (July 1993) Washington, DC 20433. Please contact. The two major arguments for fertility re- Paulina Sintim-Aboagye, room N9-059, duction inuolue externalities and income The relationship between the development extension 38526 (35 pages). redistribution. The implications ofthe two ofstock markets and the functioning offL- arguments for policy are the same-both nancial intermediaries may be comple- require behavioral change by the poor. mentary. 1160. Equity and Bond Flows Their behavior is most likely to change if to Asia and Latin America: thechangeinprovestheirwelie-which Empiricalevidencesuggeststhatflnancial The Role of Global and Country should therefore be the focus ofpopulation services - such as mobilizing savings, Factors programs. managing risk, allocating resources, and facilitating transactions - influence and Punam Chuhan, StWn Claessens, Birdsall and Griffin review the implica- are influenced by economic development. and Nlanda lamingi tions for social policy in developing coun- And financial crises - widespread bank (July 1993) tries of two major justifications for fertil- failures, the collapse of stock markets - ity reduction: the externality argument can impede and even reverse economic Equity andbondflows toasampleafAsiar and the income redistribution argument. advances, and Latin American countries am about First they set out the arguments. In With this in mind, the World Bank equally sensitive to global factors and to terms of how policy affects the poor, they made special efforts in the 1980s to help country-specife factors. show that the implications of the two dif- countries improve their financial systems Policy Research Working Paper Series 177 Chuhan, Cleossens, and Marningi inves- Teas tried to find out what factors af- Asia - is part of a larger effort in the tigate whathas motivated the large port- fect Nepali women's decision to join the Region to increase equity for women in folioflows to several developing countries primary school teaching force and to par- education. The study was funded by the in recent years. ticipate in in-service teacher training. Banles Research Support Budget under Using monthly data on U.S. capital Prior studies, usinglarge surveymethods, research project "Increasing Educational flows to nine Latin American and nine did net provide the information program Equity for Women in Nepal" (RPO 676- Asian countries (instead of monthly re- planners needed. The author chose a re- 98). Copies ofthispaperare availablefree serves data), they analyze the behavior of search strategy more appropriate to the from theWorldBank, 1818H StreetNW, bond and equity flows to those countries. Nepali culture by combining quantitative Washington, DC 20433. Please contact Using panel data, they find that global and qualitative methods. Lydia Maningas, room D9-015, extension factors -such as a drop in U.S. interest Teas focused on the participation of 80380(59 pages). ratesand the slowdownin U.S.industrial women in the primary teachingforce and production-are important in explaining on twein-service teachertraining projects: capital inflows. But country developments the PrimaryEducatin Project(PEP) and 1162. The Slovenlan Labor Market are at least as important in determining the Radio Education Teacher Training In Transition: Issues and Lessons those flows, especially for Asia. Project (RETT). Inthe PEP, teachers from Learned They also find that equity flows are 10tol5primaryschoolsreceivein-service more sensitive than bond flows to global training in short sessions at a resource Milan Vodopivec and Samo Hribar-Mlic factors, but that bond flows are generally center. They get roughly a dollar a day to (July 1993) moresensitivetoacountry'screditrating cover their food and lodging costs. The andto the secondarymarketprice of debt. RETT provides in-service training to pri- To stimulate the efficient reallocation of This paper-a product ofthe Debtand mary teachers through daily radio broad- labor, tnasitionaleconomies should direct International Finance Division, Interna- casts, plus written assignments and resources away from prcwrams to preserve tional Economics Department - is part monthly meetings in resource centers. jobs and intoprograms to create newjobs; of a larger effort in the department to Gender disaggregatedinformationan the aloroforw zlefMede7erminationofrelative study the determinantsofcapital flows to RETT and the PEP programs had never wages but racinincomespolicy;and build developing countries. Copies ofthe paper been collected. The author hypothesized support for reform by promoting copera- are available free from the World Bank, that female teachers' needs are different tion among parties involved in collective 1818 H Street NW, Washington, DC from those oftheirmale counterparts and bargaining. 20433. Please contact Rose Vo, room SB- this would reflect in differential partici- 042, extension 31047. (36 pages)- pation rates. Among Teads conclusions: Yugoslavia(includingSlovenia)hasbeen * Women are more likely to be re- more market-oriented than the rest of cruited as teachers or into training pro- EasternEurope,withlittleornoplanning 1161. Increasing Women's grams ifinformation about positions and and healthier development of product Participation in the Primary School programs is made available to them in a markets. Until recently, however, the la- Teaching Force and Teacher timely, accessible way. To do this, exten- bormarketin Slovenia was subject tofor- Training in Nepal sion agents couldbe hired tobringinfor- midable constraints. mation from the ministry or program to But sweepinglegislative changes anda MollyMaguire Teas intended beneficiaries.Teachingpositions dramatic change in the climate of the (July 1993) andtrainingprogramscouldbeadvertised Slovenian economy have produced major in short radio messages and in letters to shifts in the allocation of Slovenia's labor Recruiting and training more women in primary school principals. force. Most important, the Rubicon ofjob primary education requires more effectve * Women areless likely toget training security has been crossed: Slovenian communication and moreeffort to provide if the resource center is inaccessible. To workers-wholikeotherYugoslavwork- culturallyacceptable travelto and accom- counter disincentives for women to travel ers were moreprotectedfEom jobloss than modations near training centers away from their homes and villages, cl- workers inmost socialist countries-can turally acceptable travel companions, now be laid ofE Partly as a result oflay- Although research shows that Nepalese lodging, andchildcare shouldbe provided. offs and bankruptcies, there has been a parents prefer sending girls to schools * The currentbroadcasttimeforradio dramatic increase in unemployment - with female teachers, only 12.8 percent of training conflicted with women's house- from 1.5 percent in the mid-1980s to 12.5 Nepalese primary school teachers are hold responsibilities. Changing the time percentinJanuary1993.Moreover,social women. Nepal has among the lowest en- to later in the evening would increase fe- sectoremployment decreased17.6 percent rollment and retention rates for girls in male participation in the program. from December 1989 to December 1991, the world.One strategytocarrectthe situ- * Women often lacked family support and the. labor force participation rate ationis to increase the number of women to become teachers or to become trained, dropped by nearly 8 percentage points. who become and remain teachers. But To increase such support, existing incen- Among lessons learned about the labor teacher training is also important; 60 per- tives (including allowances and salary market in Slovenia's transition to a mar- cent of Nepalese teachers are untrained, increases) should be publicized. ket economy. so the quality ofeducationis poor-often This paper - a product of the Popula- * Governments in transitional econo- rote memorization, with the teacher sim- tion and Human Resources Operations miestandtopreservecurrentiobstbrough ply reading textbooks aloud. Division, Country Department I, South employment subsidies andbysubsidizing 178 Policy ResearCh Working Paper Series early retirement To stimulate the offi- 1163. Domestic Distortions Budget under research project "The Cost cient reallocation of labor, they should and International Trade of Protection Index (RPO 676-49). Cop- redirect resources away from programs to iesofthispaperare availablefreefromthe preserve jobs into programs to create new James E. Anderson and J. Peter Neary WorldBank, 1818 H StreetNW, Washing- jobs. And to increase the flexibility of ad- (July 1993) ton, DC 20433. Please contact Dawn justing firms! workforces, transitional Gustafson, room S7-044, extension 33714 economies should legislate simple layoff The Trade Restrictiveness Index provides (30 pages). procedures and should not assign firms a theoretically consistent and empirically the responsibilityforfinancingredundant feasible framework for investigating the workers. trdeimplicationsofsuchdomesticdistar- 1164. Power, Distortions, Revolt, * It may be easy to demolish the old tions as production taxes and subsidiet and Reform in Agricultural Land system of determining wages, but it is Relations difficult to develop a new, well-function- Trade is affected not only by taxes and ing system. One country cannot simply subsidies that affect producers and con- Hans P. Binswanger, Klaus Deininger, copyanother's methods. Itisimportantto sumers of goods, but also, indirectly, by and Gershon Feder provide for a minimum wage, but it is in- taxes and subsidies that affect nontraded (July 1993) efficent to establish a complete wage goods or factors of production. structure, orto provideforautomatic cost- Anderson and Neary show how the If the efficiency of the large commercial of-livinga4justmentswhichbinder wage TradeRestrictivenessIndex(TRI)Dmaybe farn is a myth, why do markets for the moderation and make the wage structure extended to incorporate these types of rentalandsale ofagricufturallandrarely inflexible. Moreover, while state and so- distortions. Again, the value of the TRI reallocate land to the most efficient uses cial ownership prevail, an incomes policy gives the equiproportionate change in the and users (Tamilyfhrmers)? is a must prices of traded goods, which would com- * The trial and error approach to find- pensate for a given change in all distor- Most work on the relationship between ing the right mix of active labor market tions, both in tradedand nontraded goods farm size and productivity strongly sug- policies is unavoidable. But governments and in factor markets. gests that farms that rely mostly on fan- should evaluate the effectiveness of such Anderson andNeary, whodevelopedthe fly labor are more productive than large programs and weigh them against alter- theory of the TRI, showhow to apply itin farms operated primarily by hired labor. native policies aimed at reducing unem- practice, drawing on a larger study by Thisstudybeganasaninquiryintohow ployment - notably increased public Anderson and Bannister of changes in rental and sales markets for agricultural spending and investment tax credits. Mexicanagriculturalpolicybetween 1985 land in the developing world affect effi- * Unilateral government action is and 1989. Adapting the TRI to a partial ciencyandequity. Whatemerged was the counterproductive. To overcome mutual equilibrium context allows existing esti- clear sense that great variations in land hostilityand achieve cooperation, govern- mates afkey demand and supply elastici- relations around the world and over time ments should, aniongother things, consult ties to be incorporatedinto the Index; and cannotbeunderstoodinthecommonpara- with trade unions on the legislation and the basic formula is adapted to take ac- digm of property rights and competitive programs to be introduced, and wage a countofsome special features ofMexican markets. Under that paradigm, land scar- public relations campaign to demonstrate agricultural markets. city leads to better definition of rights, the unavoidability of reform and to em- The TRI shows a great increase in re- which are then traded in sales andrental phasize program successes- strictivenessin 1986 and especially 1987, markets accessible equally to all players. This paper - a product of the Transi- followed by major reductions in restric- The outcome should be the allocation of tion and Macro-A4justment Division, tiveness in 1988 and 1989. The cumula- land to the most efficient uses and users, Policy Research Department-is part of ere effect a 49.9 percent fall in trade re- yet this rarely happens. alargereffortin the departmenttoinves- strictiveness over the four years. Instead,landrightsandownershiptend tigate howlabor markets work during the The major, although not the only, source to grow out of power relationships. transition ofsocialist economies. Itis one of changes in trade restrictiveness were Landowning groups have used coercion ofthe outputs of the research project "'La- changes in producer subsidies, especially and distortions in land, labor, credit, and bar Market Dynamics during the Transi- for maize. These trends are not captured commodity markets to extract economic tion ofaSocialistEconomy" (PO 677-20) by changes in indices for consumer and rents from the land, from peasants and funded by the Banks Research Support producer subsidy equivalents, which the workers, and most recently from urban Budget This paper was prepared for the authors also present. Indeed, in anumber consumer groups or taxpayers. Suchrent- 24th National Convention of the Ameri- ofyears at least one of the ad hoc indices seelking activities reduce the efficiency of can Association for the Advancement of changed in the opposite direction to the resourceuse,retardgrowth,andincrease Slavic Studies, held in November 1992 in change in the corresponding welfare- the poverty of the rural population. Phoenix, Arizona. Copies ofthis paper are based index. Binswanger, Deininger, and Feder ex- available free from the World Bank, 1818 This paper - a product of the Interna- amine how these powerrelations emerged H Street NW, Washington, DC 20433, tional Trade Division, international Eco- and what legal means enabled relatively Please contact Sabah Moussa, room N11- nomics Department - is part ofa larger fewlandownerstoaccumulateandholdan 017, extension 39019 (37 pages). effort in the department to measure the to large landholdings. They discuss the effects ofprotection policy. The studywas successes and failures of reform in mar- funded by the Banks Research Support ket and socialist economies, and the per- Policy Researh Working Paper Series 179 versions ofreforms in both systems, mani- output than it would have been in a mar- Rapid adjustments to price changes, accel.- fasted in large commercial farms and col- ket economy. The idea was thatrecession erted wage claims, and accommodating lectives. stemming from an overall decline in de- monetary policy may lead to high, sus- Theysurveytheistoryoflandrelations mand couldbe moderatedbyremoving the tained inflation. and the legacies that historyleaves. They administrative barriers thatin aplanned discuss the three analytical controversies economyhinderedthebest deployment of The authors surveyed 41 firms in and surrounding economies of scale, and the resources. around Moscow in the last two weeks of efficiency of the land sales andland rental The results were the reverse of expecta- November1992 to getan empirical handle market. tions. Unemployment reached 12 percent on how firms are responding to the chang- They discuss the main policy issues and of the labor force by the end of 1991, and ing economic environment. They found implications ofvarious distortions andsuc real incomes plummeted (by about 40 per- that: cessful and unsuccessful reforms in the cent).Anestimatedl7percentofthepopu- * There were large negative (supply developing world,includinglandregistra- lation lived in poverty in 1989. By 1991, and demand) shocks to output for a sig- tion and titling, land taxation, regulations thatfigurereached34percent.Thepoverty nificant number offirms and branches. restrictinglandslesandrentals,fragmen- ratemore than doubledforall social groups * Profitability was remarkably buoy- tationandconsolidation ofland, redistribu- except pensioners, for which it remained antinreal terms; there wasclearevidence tive land reform, and decollectivization. stable. Large households, and children in that firms with market power rapidly In an epilogue on methodology, they particular, were especially affected. The adjustedproducerprices, tryingtomain- examine how various strands ofeconomic poverty gap rose from an estimated 1.4 tain or increase their markup. theory have contributed, or failed to con- percent of GDP to 4.8 percent * There was no evidence ofa strategic tribute, to the explanation of variationsin Existing evidence onincome distribution change in pricing rules. policies, distortions, and land relations shows thatit did not change. There was a * Most firms experienced relative sta- over space and time. slight compression ofincome among farm- bility in earnings and in the distribution This paper-aproductoftheAdvisory ers, which has also occurred in the past of revenues. There was no substantial Group, Latin America and the Caribbean when real incomes declined, and possibly evidence of decapitalization - at least Technical Department and the Agricul- some wage-stretching among workers. through greater borrowing or predatory tural Policies Division, Agriculture and Whathappened to the general welfare? wage settlements. Rural Development Department - was Conclusive results are elusive. Personal * The upward aimcininterfirmarrears prepared for the Handbook of Develop- consumption, overall, decreased. Queuing was smaller than aggrPgate numbers mentEconomics, Volume ]I,editedbyJere also decreased, but utility gains from might have lad one to expect. Behrman andT. N. Srinivasan. Copies of shorterlines were offsetas real wages, and * Inertiai: the wagesystemshouldnot this paper are available free from the thus the opportunity cost of waiting, de- be ignored. R.d wages wera cut back WorldBank, 1818HStreetNW, Washing- clined. Real appreciation ofthe exchange sharply by the great rie shock of Jan- ton, DC 20433. Please contact Hans rateraiseddollar wages substantiallyand ary 1992, but real statistical wages then Binswanger, room 14-021, extension led to an upsurge in consumer imports, climbed back toward early 1991 levels. 31871(121 pages). thus increasing the utility derived from * Benefits firms provided account for the ownership of consumer durables. large shares oflabor income and 40 to 45 Thispaper-aproductoftheTransition percent of firms' costs. Firms may nave 1165. Social Costs of the and Macro-Acjustrnent Division, Policy tried to squeeze benefits, particularly in Transition to Capitalism: ResearchDepartment-is partofalarger housing, butallocationstothe Social Fund Poland, 1990-91 effortin the departmenttoanalyzeincome have generally stayed constant distribution and poverty in transition * Employment adjustments werelim- Branko Milanovic economies. Copies of the paper are avail- ited, despite the downward pressure on *(August 1993) able free from the World Bank, 1818 H output and the lack of growth in firms StreetNWWashington,DC20433.Please surveyed. Net employment separations Contrwy to expectations, Poland's stabi- contact Rebecca Martin, room N11-043, were relatively restricted. Firms contin- .lization program entailed unexpectedly extension 39026 (29 pages). ued tobire at significant rates in 1992, in high social costs. Unemployment reached part because of fixed factors technology, 12 percent by the end of 1991, and real in part because of the reluctance offirms incomes fell 40 pement The poverty gap 1166. The Behavior of Russian to discard workers. Consequently, firms rosefror anestimated1.4percentofGDP Firms In 1992: Evidence have shedfewworkers-mostlyancillary to4.8 percent from a Survey and clerical staff; usually women. * Some firms chose to place workers on The Polish stabilization program imple- Simon Commander, Leonid Iberman, Cecilia minimum wages, reducinglabar costs sig- mented in 1990 as part of the transition Ugaz, and Ruslan Yemtsov nificantly. The result is that unemploy- to capitalism entailed unexpectedly high (Augus:1993) ment benefits are provided defactowithin social costs. thefirmsratherthanthroughlaboroffices. The often unstated assumption had The shocks 41 Moscow firms suffered in * In short, the status of the so-called been that since central planning was in- 1992 did not necessarily reduce theirprof- productionworker, the core oftheRussian trinsically inefficient, stabilizationin Po- itabiliti But what's good fir these few industrial firm, remains untouched. land might be less costly in terms of lost Ruasianfirms maybe badfortheeconomy. Clearly, there was a large "employment 180 Policy Research Waking Paper Series overhang" at the end of 1992. The next the underlying pass-through into open macrecononie variables to assess the stage ofthe transition will be difficult unemployment will be great. By the third quality and relevance of projections in This paper - a product of the National quarter of 1992, this "augmented7 unem- policy framework papers for the Africa Economic Management Division, Eco- ploymentrate approached 4 percent ofthe region. nomic Development Institute - was labor force. Even so, the authors observe funded by the Banks Research Support nontrivial outflows from unemployment to Policy framework papers (PFPs) have be- Budget under the research prcject'Labor jobs, and in some regions to jobs in the come important documents because they Markets in Transitional Socialist Econo- private or collective sector. provideaframework for the economiepoli- mies" (RPO 677-30). Copies of this paper In Russia, outflows to state sector jobs cies thata country will pursue andfor do- are available free from the World Bank, dominate. Survey evidence shows consid- nor assistance. The projections included 1818 H Street NW, Washington, DC erable turnover in the state sector andre- in these documents reflect the policy tar- 20433. Please contact Olga del Cid, room silient hiring. Much ofthe churningin la- gets and the expected outcomes of polic3 M3-047, extension 35195 (46 pages). bor markets seems to be through volun- reforms. tary separations and job transitions. Net Paruqee focuses on the qualityandrel- changestoemploymenthavebeenlimited, evance of these projections, comparing 1167. Unemployment and Labor and have involved mostly ancillary or actual outcomes with the projected or Market Dynamics In Russia clerical staft targeted outcomes for selected variables. Commander, Liberman, and Yemtsov The idea is that a retrospective survey Simon C5mmander, LeonidI Liberman, discern a core or membership rule domi- such as this will eventually improve pro- and Ruslan Yemtsov nating Russian firms' decisions, which it jections. (August 193) would be dangerous to assume will be Faruqee recommends further country- maintained. They interpret it as a hold- by-country analysis of PEP projections Lack of a credible reform program has ing strategy in a complex game the firms and actual outcomes toidentifyhowmuch weakened any impulse toward large-scale have been playing with government. Lack of the divergence between the two is due restructuring of firms in Russia. Net of a credible reform program has weak- to external factors (such as weather and changes to employment have been imite4 ened any impulse toward large-scale re- terms of trade) and how much to lack of and have involved mostly ancillary or structuring of firms. progress in policy reform. Delayed clerical staff Wages have been more volatile and progress could be due to unforeseen cir- have greater-regional dispersion, but the cumstances (such as political changes or The past 15 months have seen the begin- authors predict no large consistent shift internal strife) or to unrealistic targets. ning of structural change in Russia but a in relative wages. Rather, the wage path The quality and realism ofPPP prqjec- failure of the economy to stabilize. The has probably been governed by current tions are likely to improve, says Farmqee, balance sheet, conclude Commander, revenue streamsandadditional transfers, if certain steps are taken in making pro- Liberman, and Yemtsov, suggests that a and then set consistent with the stable jections: return to centralized control remains al- employment rule. The path of wages over * All PFPs after the first one should mostimpossible, but the decentralization 1992is clearly associated with changes in contain a review of outcomes in relation thathas occurred containsmanyundesir- Russia's monetary and fiscal stance and to projections in previous PFPs. able features. allied institutional features. * Whenever the chances offallingshort In framing their analysis, the authors This paper-aproduct ofthe National ofprojectedartargetedoutcomesarehigh, draw on aggregate data and firm-level Economic ManagemeLt Division, Eco- the PPP should say so. datafrom the first-roundresultsofa 1992 nomic Development Institute - was * Usingreferencessuchasthisreview, survey covering 41 firms in the Moscow funded by the Banles Research Support the projections couldconsiderbenchmark region. The survey results suggest that Budget underthe research project"Labor figures based on experience with success- the greater autonomy of firms has facili- Markets in Transitional Socialist Econo- ful cases of adjustment. tated the exploitation ot market power mies (RPO 677-30). Copies of this paper * From time to time, each country de- while failing to dampen the demand for are available free from the World Bank, partment could carry out a review to as- easy credit from the budget or banking 1818 H Street NW, Washington, DC sess the realism of departmental PFP system. For the most part, that demand 20433. Please contact Olga del Cid, room projections, and the Chief Economists has been satisfied, enablingfirms to meet M3-047, extension 35195 (46 pages). Office could review projections to assess current wage claims and, to a lesser de- their quality. gree, sustain output levels. This paper- a product ofthe Office of Buoyant nominal profits can be traced 1168. How Macroeconomic the Chief Economist, AfricaBRegionalfOf- either to pricing behavior derived frm Projections In Policy Framework fice - is part of a larger effort to assess market power or to transfers or subsidies Papers for the Africa Region the progress ofadjusting countries in the channeled through the fiscal or monetary Compare with Outcomes Africa region with macroeconomic and system.Thisinturnhasartificiallysustained structural reforms. Copiesofthepaperare therevenuesideafthegovernmentaccomts. RashidParaqee available free from the World Bank, 1818 Official unemployment was no more (August 1993) H Street NW, Washington, DC 20433. than 1 percent ofthelaborfarcebytheend PleasecantactNandita Tannan,roomJ5- of 1992, but evidence on the importance Actual outcomes are compared with pro- 101, extension 34581(109 pages). ofmarginalunemploymentindicatesthat jected or targeted outcomes for selected Policy Research Working Paper Series 181 1169. Costs and Benefits Fernandez-Arias concludes that for a impose no restrictions on searches for of Debt and Debt Service country to benefit from DDSR, it needs better jobs. Reduction significant indirect benefits (such as in- Bar-Ilan and Levy study the effects on creased domestic and foreign savings). employment of exogenous restrictions on Eduardo FernAndez-Arias Direct benefits are likely to be negative mobility-in the form of a transfer from (August 1993) because of the commercial banks' finan- the quitting worker, made either to the cial gains and because DDSR operations employeror to a third party. These trans- Contrary to popular views, commercial are frontloaded. DDSR operationscannot fers, the separation bonds, are typically banks have probably benefited from debt be justified solely by direct benefits and the benefits lost by the quitting worker, anddebtservicereductionoperations. Debt savings in cash flow. suchasvestedpension.Restrictionsofthis and debt service reduction make sense to This paper - a product ofthe Debt and type, bycrowding out thefirms that allow the borrowing country only if they will International Finance Division, Interna- on-the-job searches for employment, di- engenderenoughindirectbenefts (suchas tional Economics Department - is part rectly increase unemployment- increased domestic andforeign savings) to of a larger effort in the department to Whenrestrictionsonwarkers'mobility compensate for their heavy direct costs. understand the costsandbeneflitsto con- take the fnrm ofa zero-sum transfer, there tries of debt and debt service reduction is no real effect so long as the transfer is Pernandez-Arias evaluates the costs and arrangements. Copies of the paper are below some bound - the worker loses benefitsofdebtanddebtservicereduction available free from the World Bank, 1818 nothing. When the separation bond is (DDSR)fromt pointofviewofflvecon- H Street NW, Washington, DC 20433. prohlbitivelylarge,crwhenitisforfeited tries that have concluded Brady deals: Please contact Rose Vo, room S8-042, ex- to a third party, employment among all CostaRica, Mexico, the Philippines, Urn- tension 33722 (38 pages). types of warkers falls- guay, and Venezuela. This paper - a product of the Trade He concludes that, contrary to widely Policy Division, Policy Research Depart- heldviews, commercial banks have prob- 1170. Job Search by Employed ment - is part of a larger effort in the ablybenefited from the operations. Com- Workers: The Effects of department to study the impact of labor mercial bank participation in DDSR is Restrictions market institutions and policies on eco- voluntary, so direct financial savings to nomic performance. Copies of the paper the country are probably negative at Avner Bar-Ilan and Anat Levy are available free from the World Bank, presentvalues.ThebenefitfromDDBRis Augast 1993) 1818 H Street NW, Washington, DC notthatdebtisbought at"bargain prices" 20433- Please contact Dawn Ballantyne, at the expense of commercial banks. It Some firms offer high wages in turn for room N10-023, extension 37947 (29 appears difficulttojustifyaDDSR opera- their workers'implicit commitment not to pages). tion on purely financial grounds.A more search for better jobs. Some firms that realistic waytolookataDDSRoperaton cannot afird to pay wages that guaran- is to view it as a 'project" that involves a tee lifetime attachment pay lower wages. 1171. Finance and Its Reform: certain financial cost. The return on such but impose no restrictions on searches for Beyond LaIssez-Fale a prject is how the DDSR operation im- better jobs. When theseparation bondtakes proves the macroeconomy, or contributes theformofatrnsferbetweentheemployer Gerard aprio, Jr. and LawrenceH.Sunnets to development. and the empoyem employment is unaf- (August L993) The main purpose of DDSRis to estab- fected in most cases. But when it is Jurfeited lishamoreefficientarrangementbetween to a third party, employment among all Many economies would benefit from less drbtor countries and commercial banks, types of workers falls, government intervention infinancial mar- leading toimproved conditions for devel- kets, but the prescription should not be ,opment ADDSR operation that does not Within the framework of a general equi- abrupt or total government withdrawal help developmentiscostly and shouldnot librium search model, Bar-lan and Levy from the financial sector. Rather than in- be undertaken. study the effect of institutional restric- tervening heavily in credit allocation de- . The impactof DDSR on developmentis tions on workersjob mobility. cisions, governments should focus on do- usually measured by the increase in the The model generates endogenous job ing what only they can do: providing an growth rate of GDP, but it is too soon to searches onthejobandoffthejob with two enabling environment for the private ft- measure that for these five countries. A forms of labor contracts emerging and ancial and nonfinancial sectors, and suitable alternative is to look at the coexisting in equilibrium. ensuringthatfinancialopermtionsesafes change in investment patterns. One form ofcontractinvolves the work- and sound A strong policy framework is needed if ers' long-term commitment to the firm debtand debtservice reduction are to sig- ("reversed tenure): Some firms offer high That the financial sector should be liber- nificantly improve development In wages inreturnfortheir workers commit- alized was the orthodox view in the mid- Mexico and, to alesser extent, Venezuela ment not to search for better jobs. 1970s, during a pendulum swing toward improved and sustained strong adjust- The other is a short-term contract re- reliance on the free market. In the early me nt policies have generated the greatest quiringno such commitment* Somefirms 1980s, the pendulum swung back to the development benefits. Gains have been that cannot afford to pay wages thatguar- left,basedpartlyonevidence-especially less in smaller countries where policies antee lifetime attachment pay lower from Latin America- that overly rapid were not as supportive. wages, have lower turnover costs, but reform had real costs, and partly on an 182 Polcy Reseamh Working Paper Series increased appreciation of financial mar- viding an enabling environment for the * Initially, allowing the export only of ket failure. Blind adherence to free mar- private financial and nonfinancial sectors, high-quality,bigh-pricedvarietiesofsuch ket principles was no longer appropriate. and ensuringthatfinancial operations are commodities as cotton and rice, to limit Now a counter-counterrevolution is in safe and sound. upward pressures on domestic prices of sight, with some swing back toward the This paper-aproductofthe Financial lower-qualityvarieties, which are impor- view that the market makes a mess of it, Sector Development Department - is tant toconsumptioninlow-income Indian but the government makes it even worse. part of a larger effort in the department households. Caprio and Summers agree that mar- to study the role of finance in develop- * Liberalizing fertilizer imports and ket-oriented financial systems appear to ment. Copies of the paper are available deregulatingdomesticmanufacturingand do a better job than systems with exten- free from the World Bank, 1818 H Street the distribution of fertilizers. sivegovernmentinvolvement,butcantend NW, Washington, DC 20433. Please con- * Removing subsidies on irrigation, that the assumption that perfect compe- tact Paulina Sintim-Aboagye, room N9- electricity, and credit (and creating con- titionwill solve all problemsinfinance- 059, extension 38526 (24 pages). ditions to facilitate the trading of canal- especiallyinbanking-canbe dangerous. irrigation water Tights). Information problems,implicit or explicit * Deregulating the wheat, rice, sugar, government guarantees associated with 1172. Uberalizing Indian cotton, and edible oil and ollseed indus-. deposits, and externalitiesassociated with Agriculture: An Agenda for Reform tries, and abolishing compulsory govern- the payments system makebanks unique. ment acquisition at below-market prices Governments implicitly recognize Garry Parse and Ashok Gulati of sugar, molasses, and milled rice. banking's uniqueness - few allow just (September 1993) * Reforming the food security system anyone to enter banking - but public to protect low-income groups from the pronouncements and observers' recom- India's incentive system heavily favors increaseinthegenerallevelaffoodprices mendations often favor a move to more manufacturingand discriminate against required by the liberalization of agricul- competition. Perfect competition, how- agriculture This proposed reform agenda ture. This would involve better targeting ever, is optimal under the assumption, would remove major policies that distort of food subsidies and associated reforms among others, of no government guaran- agricultural imports, exports, inputs, and of the public distribution system, or even tee. Inflct, most governments differ only domestic markets. It would protect low- its eventual replacement by afood stamp inhow explicittheyare about theirdeposit incomegro ups against necessaryincreases system. insurance schemes. in food prices. Research forthis paper -ajoint prod- The financialreformsmostlikelyto sue- act of the Trade Policy Division, Policy ceedarethosetbatgivebanksanincentive In July 1991, India embarked on a pro- Research DepartmnentoftheWorldBank, toengagein safe andsoundbanking.When gram of economic decontrol that greatly and the National Council ofApplied Eco- excessive competitionisallowed,thechar- speededthopreviouslyslowprocessoflib- nomic liesearchinNewDelhi-was car- ter value" of banking diminishes to the eralizing trade and domestic regulatory ried out mainly by consultants in India. pointthatitisnolongerprafitableforbank- controls begun in 1978. But the focus of Itispartofalong-termresearchprogram ers to behave prudently. reform has been on manufacturing. Re- to quantify the impact on agriculture of A consideration of finance's role, and a form has barely touched agriculture, Indiastradeandotherincentiveandregu- look at how reforming economies have which accounts for two-thirds of employ- latory policies. The paper was funded by fared, suggest also that gradual reform is ment in India and about 30 percent of the Banks Research Support Budget un- often to be preferred in this domain. De- India's GDP. der a dissemination grant (RPO 678-04). regulation of credit markets and interest Although soine crops (notably oilseeds) Copies ofthe paperareavaflablefreefrom rates canbe counterproductive in unstable receive heavy protection, the neteffect of the World Bank, 1818 H Street NW, macroeconomicconditionsandwhenbanks interventions to date is to heavily favor Washington, DC 20433. Please contact are unsophisticated or have weak balance manufacturing over agriculture. In this Dawn Ballantyne, room N10-023, exten- sheets. And changes in the charter value agendaforreform, Pursell andGulati rec- sion 37947 (44 pages). may evolve only slowly after reform. ommend: Faster progress and greater efforts * Removingalquentitativeexportand should be made, however, in bank super- import controls on agriculture, except for 1173. Morocco's Free Trade vision andregulation andin institutional special treatment (such as export taxes) Agreement with the European development, includingaccounting, audit- when Indian exports wouldbe substantial Community: A Quantitative ing, legal and judicial reform, and train- enough to depress world prices (most Assessment ing (of bankers and other finance profes- likely with rice). sionals). * Further reducing protection on Thomas F. Rutherford, E. E. Rutstrm, In sum, many economies would benefit manufacturing, rather thanbringingpro- and David Tarr from less government intervention in fi- tectionforagricultureupto thesamelevel. (September1993) nancial minarkets, but the prescription * As a transitional measure, consider- should not be abrupt or total government ing the use of variable tariffs based on Welfare benefits to Morocco from. a free withdrawal from the financial sector. weighted averages of past international trade agreement with the European Com- Rather than interveninglheavily in credit prices as a way to partly insulate domes- munitywouldbeaboutL5percentofGDP. allocation decisions, governments should tic prices from oxtreme fluctuations in But welfre benefits would be2.5 percent focus on doing what only they can do: pro- world prices. of GDP if Moroco Lberalized trade with Policy Research Working Paper Series 183 the whole world -and with only slightly lower import prices from the European tries'tarifisincorporatedmore escalation higher adjustment costs. Community. The nontraded goods sector than do tariffi in industrial countries. would also contract slightly. Apparently tariff escalation is also often Morocco is interested in developing are- * Thevalue-addedtaxwouldhavetobe reinforced by nontariff barriers on pro- ciprocal free trade agreement with the increased to compensate for the loss in cessedgoodsalthoughsupportingdatafor European Community (EC), although it tariff revenues, on which Morocco de- this finding are less firm. already enjoys free access to EC markets pends. This issue should not be viewed as a inindustrial products andis notobligated Estimates are providedas ranges, with North-South issue, contend Safadi and to giveEC exportersreciprocal access. But probability assessments, because of the Yeats.Abiasagainstimpartsofprocessed Moroccan agricultural exports are im- element ofuncertainty. goods is builtinto trade barrier escalation peded by agricultural protection in the This paper - a product of the Trade among Asian countries and should be European Community. Policy Divisica, Policy Research Depart- addressed in regional initiatives to liber- A free trade agreement would require ment - is part of a larger effort in the alize intra-Asian trade barriers. that Morocco lower its moderately high department to investigate the conse- Safadi and Yeats make three recom- tariffs againstitsmostimportant trading quencesoffegionalintegration.The study mendations for dealing with escalation 'partner. Tariff reductions against the was funded by the Banks Research Sup- issues in multilateral negotiations: European Communitybutnotagainstthe part Budget under the research project * Japan and, to a lesser extent, the rest of the world may provide benefits "Impact of EC '92 and Trade Integration Republic of Korea are the key to success- provided the trade diversion costs of on Selected Mediterranean Countries ful negotiations on these issues, as they preferential tariff reduction do not domi- (RPO 675-64). Copies of this paper are have a far greater import bias against nate. available free from the World Bank, 1818 processed commodities than do all other Rutherford, Rutstrom, and Tarr apply H Street NW, Washington, DC 20433. countries with which Safadi and Yeats a 39 sector general equilibrium model of Please contactNellieArtis,oomN10-013, compare them. That is, Japanese and the Moroccan economy which includes the extension 38010 (27 pages, plus 18 pages Korean trade barriers incorporate far sectors most likely to be affected by such of appendices). more escalation than do trade barriers in an agreement. They investigate the eco- other countries studied. nomic effects ofthe prospective free trade * Disproportionatelylighcutsintrade agreement as well as five other trade lib- 1174. Asian Trade Barriers barriers for unprocessed commodities are eralization scenarios for Morocco. Among Against Primary and Processed not the solution, as they would increase their most important findings: Commodities effective protection for processed goods. * The welfare benefits to Morocco from * Any approach to trade liberalization afree trade agreement with theEuropean Rned Safadi and AlexanderYeats shoulddeal-withbothtarifsandnontariff Community wouldbe about L.5percent of (September 993) barriers, to ensurethatareductionin one GDP. Such substantial welfare gains type ofrestrictionisnotoffsetbyafurther partlyreflectthebenefitsofreducingdis- Tariffescalation toprotect domestic indus- tightening in the other. Several Asian persion in the tariff regime. tries against more efficientpro hcers is not countries apply both types ofrestrictions * Welfare benefits ofabout 2.5 percent limitedto industrial countries.Protection to commodity imports. of GDP would accrue from liberalizing ofdomestic industries is also common in This paper - a product of the Interna- trade with the rest of the world - with Asian developing countries and in intra- tional Trade Division, International Eco- only slightlyhighera6lustmentcosts. Lib- Asian trade. nomics Department-is part ofa larger eralizing trade with the world would pro- effort in the department to analyze and vide greater benefits because it would Many developing countries are being en- predict structural changesintrade and to eliminate the trade diversion costs asso- couraged to shift toward increased pro- identifyfactorsaffectingdevelopingcoun- 'ciated with discriminatory trade liberal- cessing and exports of domestically pro- tries' exports. Copies of the paper are ization.(Although the fact that significant duced natural-resource-based products available free from the World Bank, 1818 benefitswouldaccruefrom discriminatory now exported in primary form. But in H Street NW, Washington, DC 20433. 'liberalization againstimportsfromeither manymajorimportmarkets,thestructure Please contact Jean Jacobson, room 87- the European Community or the rest of of tariffs and nontariff barriers militate 037, extension 33710 (29 pages). the world indicates that trade diversion against such efforts. is not dominant.) Zero orlowtariffsare generallyapplied * As a result ofimproved access to the to industrial countries' imports ofprimary 1175. OECD Trade Barriers European Community, employment and (unprocessed) commodities; duties in- Faced by the Successor States output in the vegetable and citrus fruit crease, or "escalate," as the level of pro- of the Soviet Union sectors would expand. But the phosphate cessing or fabrication increases. Tariff sector stands to gain most from the free escalation produces a trade bias against Bartlomici KamniusI and Alexander Yeate trade agreement because liberalization processedgoods. (September1993) would induce a depreciation in the real In the past, such trade barrier escala- exchange rate. tion has been attributed chiefly to indus- Opportunities to expand investments and * Morocco's cereal, meat, dairy, and trial countries. Safadi and Yeats exam- exports in the former Soviet Union are sugar sectors would lose most in terms of ined the structure ofrestrictions in Asian unlikely until the OECD govwnments, employment, because of significantly countriesandfoundthatmostAsiancoun- especially in the European Community, 184 Pallty Research Working Paper Series reduce tariffand nonstariffrariersenouwgh lowerproductivityand the losses in value spending could not permanently exceed to put the newly independent states ofthe added (triggered by higher tariffs) that public revenues from taxation. former Souiet Union on an equal footing exporters have to absorb to compete in In socialistcountries, social supportwas with other countries. protected markets. built into the system through full employ- Exceptfor exports ofenergy and indus- ment guarantees, state-run pension Using a comprehensive World Bank- trial raw materials, trade opportunities schemes, and free public education and UNCTAD database ontariffandnontariff for many prducts in which the newly health care. The onlyexplicit policytoward barriers (NTBs), Kaminski and.Yeats ex- independent states of the former Soviet poverty involved alcoholics, handicapped amine the incidence of OECD trade bar- Union might have a comparative advan- people, and other special categories. riers to exports oftheformer Soviet Union tage are greatly restricted by OECD tar- Thissystemisbeingreplacedbyamar- (FSU). OECD markets have grown iffs and nontariffbarriers. ket system in which the labor market is steadily in importance in the past decade This paper- a product of the Interna- key and those who cannot earn enough and now receive more than half of FSU tional Trade Division, International Eco- must be supportedby the state. To coun- exports. And additional trade could help nomics Department - is part of a larger teractincreasingincome disparities, social the FSU republics make the ransition to effort in the department to analyze and transfers must be focused more on the market economies. predict structural changesintradeandto poor- EasternEuropeanstatesare l-pre- Overall, OECD tariffs that the FSU identify factors operating to restrain pared for this role. They have no experi- republicsface are 70 to 90 percenthigher trade. Copies of this paper are available ence in identifying the needy and target- than the average paid on all goods im- free from the World Bank, 1818 H Street ing support to them. The question is, to- ported,but their worst effectis the result NW, Washington, DC 20433. Please con- ward which world of welfare capitalism of the margins ofprfernce they give other tact Jean Jacobson, room 87-035, exten- are the formerly socialist countries likely (non-FSU) exporters. For example, be- sion 33710 (35 pages). to evolve? cause of a special EFTA-EC protocol, Milanovic contends that the Central manufactures are traded duty-free be- European countries will probable evolve tween countries in these two blocs, while 1176. Cash Social Transfers, Direct toward the corporatistmodel of continen- similar (competing) FSU goods may face Taxes, and Income Distribution talEurope. Capitalistcountries in Europe duties of 20 percent or more. In Late Socialism tend tohave large social transfers thatare No significant trade expansion will oc- oftenrelated to previous earnings, so they curuntil nontariffbarriersareliberalized BrankoMilanovic have relatively limited roles in income in NTB-"ridden" product groups of inter- (September 1993) redistribution. Transfers are closer to so- est to FSU exporters. Sectors in which cial insurance than to social assistance. NTBs are particularly important include The formerlysocialistcoatries ofCentral The evolution of more agricultural fish, fruit, sugar, vegetables, beverages, and Eastern Europe are ill-prepared to Balkan countries andthe Slavic republics textiles, clothing, and ferrous metals. identify the needy and deliver social ser- of the former Soviet Union is more diffi- OECD trade barriers on some FSU com- vices to them The question is, toward cult to predict Poorer and more agricul- modity exports provide high levels of "ef- which world of welfare capitalism are ture-based countries are generally less fective protection" that constrain the ef- Eastern European countries likely to abletoadminister welfare schemes, gauge forts of the newly independent states of evolve? individual incomes, and deliver social the FSU(NISs)toincrease domestic cam- support-and their finances maybe even modity processing. Milanovic analyzes the impact of direct more strained than those oftheir Central AlthoughtheUnitedStatesbasgranted taxes and cash social transfers on income European counterparts. most-favored-nation status to the NISs distributionin Bulgaria, Czechoslovakia, This paper - a product of the Transi- (excludingAzerbaijan), andthe European Hungary, Poland, and Yugoslavia in the tion and Macro-Adjustment Division, Community recently signed the Agree- years before the collapse of communism. Policy Research Department-is part of ments on Trade, Commercial, and Eco- He contrasts the results for socialist and a larger effort in the department to study nomic Cooperation with the Baltic states, market economies. income distribution in transition econo- these developments have not substan- Cash social transfers accounted for mies.Copiesofthepaperareavailablefree tially improved their market access. Be- about afifth ofgrossincome, a proportion from the World Bank, 1818 H Street NW, cause of geographic proximity and the comparable wit'athatindevelopedwelfare Washington, DC 20433. Please contact existing transportation network, the Eu- economies. Generally, cash iransfers were RebeccaMartin,roomNll-043, extension ropean market is the most important unrelatedtoincomeinsocialisteountries, 39065(33 pages). OECD market for most NISs. But under in marked contrast with market econo- present EC arrangements, NIS products mies, where such transfers go mainly to are subject tohigher tariffs and more re- low-income households. 1177. Environmental Taxes and strictive nontariff barriers than exports Direct taxes played almost no role in Policies for Developing Countries from EFTA members, Lom6 Convention incomeredistrbution.Theyweresmall- signatories, or former European CMEA 1 to 2 percent of gross income, except in Nel Bruce and GregoryM.Ellis members (the Czech Republic, Hungary, Hungary - and proportional to income. (September 1993) Poland, Romania, and Slovakia). Lower Most taxes were paid by enterp=:Tes, as wage rates in many NISs may not be suf- payroll taxes, and most workers were Command-and-control environmental ficient to compensate for their generally unaware of the taxation and that public policies and market-based incentive poi- "IIcy Research Working Paper Series 185 's differ in administrative cost, level of where increased fuel taxes, perhaps military upendingwouldpositivelystimu- -t--trol over polluters, monitoring and coupled with improved regulations for late world economic renewal. npliance requirements, incentives for vehicle maintenance, may be desirable. . This paper - a product of the Public !Luters to invest inpollution abatement, Higher taxes on high-sulphur coal would Economics Division, Policy Research De- ifiscal consequences to thegovernment curb both industrial and household emis- partment- was presented at the 1993 sions of sulphur dioxide. Charges can be Amual Meetings of the Ainerican Eco- *reasing urbanization and industrial- implemented for fixed-site easy-to-moni- nomicAssociationin Anaheim, California, tion can exacerbate pollution problems tar industrial emissions. Subsidies to in in January 1993. Copies of the paper are developing countries. Tax revenues in dustries that cause pollution should be available free from the World Bank, 1818 weloping countries are too low to sup- phasedoutand those industries shouldbe H Street NW, Washington, DC 20433. rt adequate infrastructure for treating subjected to higher-than-average tax Please contact Carlina Jones, room N10- d disposing of wastes, but the problem rates. 063, extension 37699 (15 pages). ilso attributable to the classic problem This paper - a product of the Public externalities in production and con- Economics Division, Policy Research De- -ption.tternalitiedmeansthat the partment-ispartofalargeieffortinthe. 1179. How the Market Transition ts of environmental degradation are departmenttoevaluatefliscalinstruments Affected Export Performance t considered by the private for environmental protection: Copies o( In the Central European *isionmakersundertakingthe activities the paper are available free from the . Economies 't cause the problems. WorldBank, 1818HStreetNW,Washing- Two typesofpolicies are commonlycon- ton, DC 20433. Please contact CArlina Bardomiej Kaminski ered to correct this marketfailure and Jones,roomN10-063, exilm uon 37699(74 (September 1993) prove the allocation ofresources: com- pages). tnd-and-control policies (such as emis- There appears to be a close link between -- -n and abatement standards) and mar- export performance and the decision to -basedincentivepolicies (suchasemis- 1178. Prductivity of PublIC - move quickly to a market-based economy. ns charges, taxes on production and Spending, Sectoral Allocation Countries that removed administratve aumption, and marketable pollution Choices, and Economic Growth controls on prices, de=ued currency, in- tas), which raise the price of such ac- troduced uifed exchange rates, and lib- ities for the perpetrators. John Baffes and Anwar Shah eralizedtradealso eapndedexports. The Market-based incentives theoretically (September 1993) drvingforce ofesprtgrowth in five Cen- lucepollutionatleastcostandincrease tralandEasterEuropean countries was rernment revenues, but may require The model results suggest that reshaping manufactures, some of them redirected tly monitoring to be effective, and are public spending priorities in favor of hu- from CMEA markets, primarily to Ger- ially implemented in an environment man resource development andau;ayfrom many. inperfect information about the costs militaryspendingwouldpositielystimu- ibatement. Sometimes command-and- late world economic reneraL Empirical studies have paid little atten- trol policies makemore economicsense tion to the supply-side forces behind the this environment. Baffesand Shah examine the composition export performance of the Central and Efficiency gains from cubing pollution ofpublic spending and its implications for Eastern European countries of Bulgaria, developing countries may be large. economic growth- Czechoslovakia, Hungary, Poland, and me polluting activities are subsidized, Theyuseatranslogproductionfunction Romania(CEL-5)inOECDmarketsafter ur tailing them brings both fiscal and by treating gross domestic produetas the the collapse of central planning. ionmentalbenefits. Taxing polluting outputandlabor,privatecapital,andsev- Kanminski examines export develop- * rtsandoutputsisaparticularlyattra:- eral types of public sector capital stocks mentainthesecountriesinL980-91,focus- a policyin developing countries, which as the inputs, using time-series data for ing on how transformation programs af- m lack enperience in administering 25 countries for 1965-84. fected trade. OECD markets now receive I enforcing other types of environmen- The production functions of all butfour three-fourths of CEE-5 exports. Sustain- regulation. Corrective taxes make use countries exhibitedincreasingreturns to ingtbis market penetration is crucial for r:isting administrative structures and scale. The highest outputelasticitywas for countries making the transition to mar- rease taxrevenues, which can be spent human resource development capital, fol- ket-based economies. Kaminski provides public goods to improve environmen- lowed by private capital and labor. Out- insightinto the impact of transformation- quality (includingtreatmentfacilities put elasticityof infrastructure capitalwas cum-stabilization programs on export waterandsewage, waste disposal, and found to be relatively small, with the ex- performance. These insights are relevant kitation) or can be used to reduce other ceptionafLatinAmericancountrieswhere to former centrally planned economies es(whichareoFenbighlydistortionary it exhibited relatively high values. Mili- that have yet to restorea *ountries with a narrow tax base). tary capital had negative output elastic- equilibrium and to liberalize prices. Whichgoodsandinputstosinglecutfor ityin slightly more thanhalfof the cases Kamiski examines the export perfar- rective taxation depends on the main considered. mance of the CEE-5 before and after the res of pollution, which varies from Theresultseuggestthatreshapingpub- collapse of central planning. He finds a ntry to country. Air pollution from lic spending priorities in favor of human close link between export performance deles is growing in many couitries, resource development and away from and the decision to move quickly to a 186 Policy ReseaCh WorkIng Paper Series market-based economy. Countries that Huizinga examines the financing of U.S. available free from the World Bank, 1818 removed administrative controls on direct investment abroad. Using a theo- H Street NW, Washington, DC 20433. prices, devalued currency, introduced retical model, he first examineshowhome Please contact Rose Vo, room 88-042, ex- unified exchange rates, and liberalized country investors can use debt finance to tension 31047 (29 pages). trade also expanded exports. Bulgaria and reduce their host country taliability and Romania, crippled by macroeconomic toreducethecapitalinvestmentdistortion chaos and vacillating macroeconomic re- attributable to foreign taxes. 1181. Reforming Health Carm: form,registereddropsinbothexportsand Empirically,U.S.affiliatesareshownto A Case for Stay-Well Health imports. useleveragein high tax environments and Insurance Kaminski suggests that differences in situations where the af=liates face high among Czechoslovakia, Hungary, and foreign wage bills relative to assets. This ZeUko Bogetic and Denni Hefiley Poland (CEE-3) had little to do with pre- confirms the notion that leverage can be (September 1993) vious trends in export performance, exter- used to ward offhost country tax and wage nal economicfactors, and earlier attempts pressures on the firm. Many hea lth core rform pnposals expand at trade reform. The expansion of exports Huizingaexamines whatcharacteristics insurance coverage without fundamen- in 1990-92 represented a dramaticrever- offoreign directinvestment determine the tally changing the structure of health in sal of trends prevalent in the prior two average hostcountrytaxrate paid. Gener- surace The stay-well plan used in decades. The surge in exports is explained ally, the taxation of foreign direct invest- Mendocino County, Calfornia, since 1979, neither by the length of time experiment- ment is positively related to the ratio of a offers an alternatie insurance structure ing with foreign trade under central plan- Eirm's plantand equipment spendingtoits that provides direct incentives for cona um- ning nor by earlier trendsin competitive- assets, and negatively related to the size ers to control utilization and adopt ness in OECD markets. of the wage bill. Host countries appear to healthier ifestyle. The driving force of export growth was charge lower taxes in cases where U.S. di- manufactures, some of them redirected rect investors abroad pay high wage bills All countries-whether industrial, devel- from CMEA markets, primarily toGer- to labor within the host country. oping, or in transition to a market many. The severing of links that used to Certain trends emerge from the data: economy - are interested in health care bindthe economies ofthe CMEAhadaless * Thereis arelative shiftofU.S. direct reform. A central focus of reform every- destructive impact on the foreign trade investment abroad toward the industrial where is to make patients more respon- performance ofthe CEE-3 than one might countries. sive to health care costs without dilating have expected. * Debt finance of direct investment is the protection offered by public or private The fact that exports to the CMEAfell becoming more important in industrial insurance. at the same time that exports elsewhere countries and less important in develop- Conventional insurance offers custom- (often of the same products) increased ing countries. ers little incentive to monitor their own suggests a causal relationship. * The tax benefits that industrial and use othealth care services orto adopt and This paper- a pruAnet ofthe Interna- developing countries get from U.S. afEli- maintain better health habits. tional Trade Division, International Eco- ates, as measured by average income and Bogetic and Heffley describe an alter- nomics Department-is part ofalarger payroll tax rates, are waning. The down- native health insurance structure first effort in the department to analyze the ward trend in tax rates suggests an in- adoptedinMendocino County, Califarnia, transition from central planning to mar- creased international competition to at- inl979,andcempareitwithconventional ket-based economies. Copies of the paper tract foreign direct investment forms of insurance. The Mendocino or are available free from the World Bank, The reduction in average tax rates on 'stay-well" plan offers consumers direct 1818 H Street NW, Washington, DC U.S. investment abroad and the relative incentives to control their use of health 20433. Please contact Pauline Kokila, shift toward investment in industrial care services and to adopt healthier room 87-040, extension 33716 (38 pages). countries suggests a tougher climate lifestyles. How well this insurance can ahead for developing countries that wish contain health care costs depends on the to attract foreign direct investment. size of the incentives and consumer re- 1180. The Financing and Taxation One strategy for attracting foreign in- sponsiveness to them. of U.S. Direct Investment Abroad vestment would be to deepen the domes- Conditions in some developing coun- ticfinancialmarketsoamultinational can tries and in many countries moving to Harry Huizinga attract additional lending capital in the market-based economies - overuse of (September1993) host country itselt Another approach is services, poor health habits, and decin- local equity participation in foreign direct ing real incomes - improves the likeli- A reduction in avemge tax rates on U.S. investment to lessen the incentives for hoodofafavorableresponsetosuchireen- investment abroad and a relative shift of host countries to tax foreign investments tives. U.& investment toward industrial coun- highly. How to structure the stay-wall system tries, rather than developing countries, Thispaper-aproductefthe Debtand depends onthe country, but the stay-well suggests a tougher climate ahead for de- International Finance Division, Interna- plan is a general, flexible form of insur- veloping countries that wish toattractfor- tional Economics Department - is part ance that subsumes most conventional eign direct investment. of a larger effort in the department to plansas special cases.Therewards farlow study the effect of taxation of foreign di- use might take many forms. As in the rect investment Copies of the paper are Mendocino plan, the rewards might be a Policy ResearCh WorkIng Paper Series 187 credit to a retirement account, but they Central and Eastern European countries in favor of diversification an the grounds couldjust aseasilybe annual cashrebates should consider. of safety and soundness. On the other or credits against out -f-pocket expenses First, there is probably some tradeoff hand, product, capital, and labor markets that exceed an individual's or family's between the distribution ofwealth and the are often underdeveloped, so there maybe spending goal in a future period. efficacy of corporate governance in an few other constraints to discipline com- Administration of the stay-well plan economy. Theory and to some extent prac- pany managers in the absence of active appears not tobe unduly complex.If any- tice support the view that tighter owner- shareholder monitoring. thing, incorporating stay-well incentives ship patternsleadtobetter corporate per- This paper - a product of the Transi- in a single-payer or national health care formance. But more widely dispersed tion and Macro-Adjustment Division, system wouldbe simpler than incorporat- ownership patterns clearly have other Policy Research Department-is part of ing them in a self-insuredfund The suc- economic and social benefits that are im- a larger effort in the department to ana- cess of the plan hinges on whether incen- portantin the Central and EasternEuro- lyze the economic impact of legal reform tives shift the frequency distribution of pean context and to some extent (along inCentralandEasternEurope.Thestu y health care spending by reducing unnec- with speed) motivate the"mass privatiza- was funded by the Bank's Research Sup- essary utilization in the short-run and tion"plans.Theuseofinstitutionalinter- port Budget under the research project through better health care habits, reduc- mediaries and creative legal frameworks "Corporate Governance in Central Eu. ing long-run costs. to concentrate voicemorethan ownership rope' (RPO 678-42). Copies of this paper Despite additional payments to low maybe a partial solution to the dilemma. are available free from the World Bank, users, the stay-well plan could be less Strongerandmorecommittedvoicemight 1818 H Street NW, Washington, DC expensive than conventional plans with also be gained by encouraging ownership 20433. Please contactMaine Berg, room similar coverage. As in any insurance by parties with other long-term contrac- N11-057, extension 31450 (30 pages). plan, solvency is enhanced by larger tual interests, whether as suppliers, em- groups, better risk-pooling, ecnomies of ployees, or creditors. scale in administration and claims pro- Second, there is likely to be some 1183. Who Would Vote for Inflation cessing, and greater bargaining power tradeoffbetweenindustrialstructureand In Brazil? An Integrated with health care providers. the efficacy of corporate governance. Framework Approach to inflatlon This paper- a product of the Country Given a certain dispersion of ownership and Income Distribution Operations Division, Europe and Central in an economy, smaller firms mean fewer Asia, Country Departmentl-is part of owners, greater stakes per owner, and Cheikh Kane and Jacques Mariset an effort in the region to strengthen the greater incentives and lower costs for (September 993) emphasis on the analysis of social sector shareholder monitoring. Yet Central and issues. Copies of the paper are available Eastern European industrial structures Are Brazil's delays in adapting a stal- free from the World Bank, 1818 H Street tend to be quite highly concentrated. zatiomprogramrelated to thendingthat NW, Washington, DC 20433. Please con- Theremaybootherbenefitstopreserving Brazils high inflationhurtsthelowered tactFaithSmith,roomH5-245, extension suchconcentrationinsomeindustries,but middleclasses frmorethantherich aho 36072 (17 pages). antimonopoly and privatization policies insulate themselves frm its effects by Jak- shouldnotleave the governanceissue out ing advantage of high real interst rate of the equation. an demand deposits? 1182. Corporate Governance Finally, there is clearly an important In Central and Eastern Europe: and difficulttradeoffbetween the efficacy Most studies of how inflation affects in- Lessons from Advanced Market of corporate governance and concerns of come distribution focus only on wages or Economies safetyandsoundnessinfinancalinterme- the inflation tax. Kane and Marisset ar- diaries.The UnitedStatesrepresentsome gue that this approach could be mislead- OherylW. Gray andRebeccaJ. Hanson extreme, where concerns of safety and ing as it ignores important channals (September 1993) soundness dominate, limiting active par- through which inflation affects income ticipation in corporate governance by distribution. %he countries ofCentral and Eastern Eu- banks, insurance companies, pension The authors present an integrated rope need to erronthe side ofstronger and funds, and mutual funds. Germany and framework that combines interest-bear- moreactiecorporategovernance German Japan are on the other side, allowing fi- ing assets with labor income and cash andJapanesemodels may offersomedm. nancialintermediaries(andotherrelated holdings. This allows them to describe firms) a major voice in corporate gover- clearly the conditions under which infla- Patternsofcorporate ownership and gu- nance. Unfortunately, this tradeoffis even tion will create gainers and losers. ernance in advanced market economies more difficult in Central and Eastern They apply the model to Brazil, which vary immensely, the result not only of Europe because of the lack of alternative is a prime candidate for this exercise be- policy choice but of cultural and political tools to achieve either goal. On the one cause its economy combines skewed in- differences and historical accident. None hand, legal and information systems are comedistributionandhighinflation.They ofthase patterns can be copied wholesale relatively weak,makingit difficulttoiden- show that in Brazil inflation helped onto the Central and Eastern European tify and eliminate irresponsible self-deal- worsen income distribution in the 1980s. scenet But the experiences of Germany, ing byfiduciariesin the intermediary in- Their major findings are as followt- Japan, and the United States do point to stitutions. Furthermore, the high degree * In 1980-89 the inflation-inducedin- certain lessons and tradeoffs that the ofriskin these economies arguesstrongly comeloes for the lowest quintile in Brazil 188 Polly Research Working Paper Series was an estimated 19 percent a year, of governmentor other agencies-is notso 1185. Refonning Hungarian which 16 percent is attributable to the simple.Atthesame time, theyoutline the Agricultural Trade Policy: erosion of real wages and the rest to the inefficiencies associated with firms pro- A Quantitative Evaluation inflation tax. viding such services and benefits. They * During the same period, Brazil's explore the issues involved in calculating Morris E. Morkre and David G. Tarr middle class, which lostclose to30 percent how social benefits should be divided be- (September 1993) of its annual income, was devastated be- tweenfirmsandthegovernmentandiden- cause ofitslimited access toindexed assets. tify problems and options associated with Import protection, asport subsidies, and a e But the richest quintile managed to the transition to a new division of rights potential common agricultural policy insulate itself from inflation by taking and responsibilities. (CAP) system are all shown to be costly to advantage ofhighreal interest an demand The main problem is housing. After a Hungary in terms oflost welfare The pro- deposits - without losing from reduced government decree in February 1993, posed CAPsystein woulalsosignificantly labor income. Had real assets and subsi- steps have been taken to accelerate pri- increaethegouernment'fiscalprobem;. dized credit been considered in the analy- vatization, but they have been piecemeal. as, the regressive effects of inflation The main stumbling block is the financ- Morkre andTarr quantitatively assess the woud probablyhave been even worse, say ingandmanagementofcommon property. consequences for Hungary of three types Kane and Morisset The problem of free riders and the lack of of policies* Thisraiessaquestion:Dothesefindings an appropriate institutional setting is * Removing quantitative import re- aboutthe distributional effectsofinflation likely to exacerbate problems of who strainta in agriculture, both for all of ag- help explain Brazil's delays in adopting a handles and pays for common mainte- riculture and for each of five separate stabilization program? nance. agriculturalproducts. This paper - a product of the Latin Commander and Jackson argue that a * Removing the export subsidy pro- America and the Caribbean, Country maesystematiegeneralprogramofdives- gram in agriculture. Department I - is part of a larger effort titure in housing is essential. Part ofthis * Adopting a European Community- in the department to understand the so- must be an explicit new institutional ar- type common agricultural policy (CAP) cial dimensions of inflation. Copies of the rangement far addressing the manage- system in Hungary. paper are available free from the World ment problem. The quality of the housing The authors estimate the consequences a Bank, 1818HStreetNW,Washington, DC stock varies greatly, so they suggest a all policies by using a small open-economy 20433. Please contact Tania Hollestelle, scheme and possible financing for damp- computable general equilibrium model for room 17-041, extension 30968 (29 pages). ening the large-scale effects of privatiza- Hungary, calibrated to the year 1990. tion and for ensuring a minimum level of They estimate the tariff equivalent of quality for divested housing stock. the import licenses through a detailed 1184. Providing Social Benefits Theydiscuss the divestiture andrelated study of price comparisons, the first ofits In Russia: Redefining the Roles fnancingproblemsinanumberofsettings. kind for Hungary. of Finns and Government Whatbappens,forexample,inacompany Imposing a CAP system, they find, town when the companyceases operation? would be a costly step backward for Hun- Simn Commander and Richard Jackman Who covers benefits for the workers left gary, especially as the long-run trend in (September 1993) withoutajob? What compensatoryfiran- Hungarian agricultural policy has been cial supports are providedin such a town, toward less intervention and more reli- Prouiding or workers'social benefits is a given existing budget arrangements? ance on the market. A CAP system would brake on the competiti"eaess of Russian This paper - aproduct ofthe National significantly increase the governments firm Butpayingtaxes thatallow thegoo- Economic Management Division, Eco- fiscal problems. ernment to provide benefits is not a solw nomic Development Institute-is partof Importprotection and export subsidies don either. The main problem is housing alarger effort in the Bank to understand are costly, inefficient policies. The modt and a systematic program of divestitur the functioning of labor marketsin tran- importantpolicyconclusion,theycantend, may be the critical first step This will in- sitional economies. The study wasfunded has to do with the piecemeal sequencing volve tackling issues offinancing, owner- by the Bank's Research Support Budget of reforms in the presence of both expot ship, and common property. underresearch project Labor Marketsin subsidies and import licenses. Removing Transitional Socialist Economiest (RPO impart licenses while export subsidies Russian firms commonly provide many 677-30). Copies afthis paper are available remain would generate byproduct distr- nonmonetary benefits touorkers6includ- free from the World Bank, 1818 H Street tionsin the export market and little gain ing such social benefits as housing and NW, Washington, DC 20433. Please con- in welfare. The piecemeal removal of ex- someaspectsafeducationandhealthcare. tact Olga del Cid, room M3-047, extension portsubsidies, however, would notgener- Nonmonetary benefits may amount to 35 35195 (41 pages). ate byproduct distortion, so substantial percent oflabor costs, which is high cam- gains could be expected - but at the ex- pared with OECD countries. In a market pense of greater adjustment costs. economy, most of these benefits would be Tofacilitate understanding of this com- provided by local governments. monly used type of general equilibrium Commander and Jackson explain why model, they explain the results by using the obvious solution-transferring social supply-and-demand graphs ofthe agricul- benefits and services from firms to local tural sector. Pollcy Research Working Paper Series 189 This paper - a product of the Trade tries and regions by the level of capital in response to shocks. The terms of trade Policy Division, Policy Research Depart- flight relative to GDP. Theyfind that capi- of developing countries are linked to this ment - is part of a larger effort in the tal flight is more widespread than com- model by the assumption that the level of department to assess the impact of trade monly assumed and, relative to GDP, is demand in industrial countries positively liberalization in transition economies. Cop- rather evenly distributed. The capital affects the terms of trade of developing ies of the paper are available free from the flight-GDP Lorenz curve is above the 45- countries. World Bank 1818 H Street NW, Washing- degree line, indicating that countries with The worst-case scenario for developing ton, DC 20433. Please contact Nellie Artis, a smaller GDP have more capital flight countries is flexible interest rate borrow- room N10-013, extension 37947 (28 pages, than one would expect if it were distrib- ingcombinedwithmnetarycontractionin plus 11 pages of appendix). uted proportionate to GDP. the industrial world, which raises nominal This paper-- a product of the Debt and interestrates, reducesinflation, and wors- International Finance Division, Interna- ens the terms of trade of developing coun- 1186. Recent Estimates of Capital tional Economics Department - is part tries. To the extent that developing coun- Flight of a larger effort in the department to tries want to avoid this scenario, borrow- study the integration of developing coun- ing at either fixed interest rates or infla- StUCla essen and David Naud triesin world financial markets. Copies of tion-indexed rates would be preferable to (September1993) the paper are available free from the borrowingatfleible nominal interestrates. World Bank, 1818 HStreetNW, Washing- To reduce risk, countries should seek Estimates ofcapitalfight cac ulted using ton, DC 20433. Please contact Rose Vo, debt contracts in which debt service pay- several methodoloVi-s do not differ widely. room S8-042, extension 31047.(27 pages). ments vary positively with their terms of Capital flight is more widespread than cam- For individual country data, available on trade. Results indicate that inflation-in- monlyassumedand,relativetoGDPeuenly a floppy disk, contact Shelley Fu, exten- dexeddebtismost desirable on this score. distributed. The capitalflight-GDPLorenz sion 33885 (fax 477-0661). Warner examines only extreme options, curse is close to the 45-degree line with all debt of one type. The optimal strategy would probably entail all three Researchers and policymakers have in 1187. How Should Sovereign kinds of borrowing. And the paper does recent years paid considerable attention Debtors Restructure Their Debts? not examine options for efficientinterna- to the phenomenon of capital flight. Re- Fixed Interest Rates, Flexible tional risk-sharing. searchershavefocusedonfourquestians: Interest Rates, or Inflation-Indexed This paper-aproductofthe Interna- What concept should be used to measure tional Economic Analysis and Prospects capital flight? What figure for capital Andrew M. Warner Division, International Economics De- flight will emerge, using this measure? (September 1993) partment-isprtofalargereffortinthe Can the occurrence and magnitude ofcapi- department to understand the links be- ta] flight be explained by certain (eco- Thepresumptionthatfixed-ratedebtis, in tweentheinternationaleconomicenviron- nomic) variables? Whatpolicy changes can general, less risky than flauible-rate debt is ment and the growth process in develop- be useful to reverse capital flight? historically inaccurate. In some common ing countries. Copies of the paper are Claessens and Naud6 focus strictly on circumstances, flexible-rate borowing ac- available free from the World Bank, 1818 presenting estimates of capital flight us- tually reduces net risk-whether debt ser- H Street NW, Washington, DC 20433. ing a number of alternative methodolo- wice payments are indexed to nominal in- PleasecantaetJacquelynQueenroomS8- gies. In their discussion of these method- terest rtes or to inflation in industrial 216, extension 33740 (35 pages). ologies, they show that although the ap- countries. proaches to measuring capital flight dif- fer, the identities used in balance of pay- Can developing countries affect the vari- 1188. Developmentalsm, nent data make them close in final mea- ance of real imports solely by altering the Socialism, and Free Market surement. In particular, the so-called way debt service is paid? The answer, says Reform: Three Decades of Income World Bank residual and Dooley methods Warner, is a qualified yea. Distribution In Chile -i- presented in the past as very different The presumption thatfixed-rate debtis approaches to measuring capital flight- less risky than flexible-rate debtishistori- Merio Marcel and Andrds Solimano actually produce similar measurements. cally inaccurate as a general proposition. (September 1993) Claessens and Naud6 discuss the data Using annual data for 1970-90, Warner used for calculating capital flight and the showsthatformanydeveloping countries, How do the poorest 40 percent are under adjustment that must be made. They flexible-rate borrowing actually reduced market-oriented refowm? Lower income present aggregate capital flight figures netrisk-whetherdebtservicepayments gups szfr when real wages fall and using the various measures for 84 devel- were indexed to nominal interest rates or unemployment increases. Then their sitU- oping countriep- to inflation in industrial countries. The ation improves as medium-term growth The figures showa pattern ofincreasing covariance terms are larger and more of- takes offand conditions improve in thzla- capital flight until 1988, followed by a e- ten positive with inflation than withnomi- bar market A sort ofKznets relation can turn of flight capital between 1989 and nal interest rates. be traced betweenrebrranddistribtion. 1991. Warner presents a macro-model of the Claessens and Nand6 present regional industrial countries to organize thoughts Afterrelatively stable income distributian aggregates ofcapitalflightandrankcoun- about the comovements of these variables in the 1960s, and aredistribution toward 190 Policy Research Working Paper Series low-income groups under Allende, income organized by the Brookings Institution to diversify ownership and encourage the shares declined for the 40 percent of the and heldin Washington,DC in April 1993. entry of new firms. population (low- and lower-middle income Copies of this paper are available free from * Small-scale privatization and thelib- groups) under Pinochet. The top 20 per- the World Bank, 1818 H Street NW, eralization ofdistribution and service aec- centbenefitedmostfrom the income shift Washington. DC 20433. Please contact tors are likely to have the fastest payoff away from low-income groups. Under Susana Florez, room N11-017, extension in the reform of property rights. Aylwin,theincomeshareofthebottom40 39075(48 pages). * China'erapidgrowthmomentumand percent returned to previous levels, but macroeconomic stability cannot be sus- the share of the top 20 percent remained tained withoutfortherreforms, including above its pre-1973 historical average. 1189. Can Communist Economies the reform ofbanking, taxation, and prop- Marcel and Solimano show that in the Transform Incrementally? China's erty rights. first years of mdrket-oriented reform in- Experience This paper - a product of the Transi- come for the poor deteriorated, chiefly tion and Macro-Adjustment Divisioh, because ofpersistent high unemployment Alan Gelb, Gary Jefferson, and Indojit Singh Policy Research Department -is part of and a squeeze on the real minimum wage (September 1993) two Bank research projects: "Enterprise and oLher wage categories. Behavior and Economic Reforms: ACoit- The share of the middle class (the third How does China's approach to reform - parative Study in Central and Eastern and fourth quintiles) in national income incrementally removing constraints on Europe,"andIndustrialReformandPro- declined by an average 3 percentage market behavior-square with theoppos- ductivity in Chinese Enterprises (RPO points during 1974-89 - because of cut- ing 'big bang' thesis that partial reform is 675-38). Copies ofthis paper are available backs in public sector employment and probably worse than no reform because it free from the World Bank, 1818 H Street steadily declining public sector wages. leaves economic agents constrained neither NW, Washington, DC 20433. Please con- Recession with high unemployment by plan nor by markets? Are there rational tact PRDTM, room N11-065, extension especiallyhurts the poor, andgrowth does bases forthese widy different approaches 37471 (49 pages). not equalize conditions until it strength- to fundamental economic change? If so, ens labor markets. Only when Chile's what is transfemable fiom China? economy approached full capacity, when 1190. The Government's Role wagesrose and unemployment dropped to Gelb, Jefferson, and Singh try to answer In Japanese and Korean Credit a historic low in the early 1990s, did in- important questions: How important is Markets: A New Institutional come distribution for the poor improve. If the phasing of political and economic lib- Economics Perspective growth continues and investmEnt grows eralization and the active (versus passive) even faster, as in the past two years, the role of the state in reform? What lessons Yaon Je Cho and ThomasKHellmann labor market will remain tighter than in can be learned about comprehensive top- (September 1993) any period in the past 30 years and distri- down reform as opposed to experimental bution may improve more significantly. bottom-up reforms? About fast versus Gouernment-l credit allocation in the Is a liberalized economy compatible slow liberalization and opening up of the early stages of Korea's and Japan's te- with social equity? Marcel and Solimano economy? About the need to establishfull nomic developmen helped overcome per- show that initially income distribution private property rights at the boginning vasivemarket imperfections but increased deteriorated under reform, chiefly because of reform? About reform's implications for the risk of entrenched intrests and inst- of macroeconomic crises and subsequent welfare and distribution? Can China's tutionalinertim.Inbothcountries,govern- high unemployment and depressed real excellent performance be linked to par- mentinualementdiminishedascompeti- wages. However, itis not clear that trade ticular reform measures, or does itreflect fie capital markets and Lage conglomer- liberalization and deregulation are so- distinctive initial conditions or social and ates expanded with economic grwth. cially regressive, though the market out- demographic factors? Is China's perfor- comes that dominate in a liberalized mance sustainable without more compre- Cho and Hellmann discuss the effective- economy may generate a failure in the hensive transformation, or does it reflect ness of credit policies in the early stages labor market that social policy should cor- transient gains that are substantially of economic development in Japan and rect. exhausted? Among lessons China offers Korea. They examine the importance oi There is more potential for improving are the following institutional arrangementsformanaging the quality of social services today than * Partial reform can succeedin raising credit policies in the two countries. in the past, but targetingofsocial services productivity in agriculture and industry; They emphasize participatory govern- shouldbedesignedtopreventthe"poverty industrial productivity has grown very mentintervention,whereincreditpolicies trap." Targeting and social policies should rapidly in the nonstate sector but also in could be viewed as part of an internal al- be designed to encourage personal efforts state enterprises. locationmechanism* Government, banks, to escape poverty and to avoid alienating * A"big bang is not economically nec- and large industrial firms may be said to middle-income groups. essary unless justified by the need to ad- have formed what the authors call a'gov- This paper - a product of the Transi- dress macroeconomic imbalances. ernment-led internal organization' tion and Macro-Adjustment Division, * There may be virtue in a decentral- (GUO). They examine the theoretical Policy Research Department- was pre- ized, 'bottom-up" approach to reform. foundations for this view and discuss the pared for the conference "The Chilean * Rapid privatization is not necessary implications for the efficiency of credit Economy. PolicyLessons and Challenges,' for successful reform, but it is important allocations. Policy Research Working Paper Series 191 They argue that in early economic de- few of the quotas imposed are binding. ton, DC 20433. Please contact Aban velopment such a participatory approach And other institutional arrangements - Daruwala, roor7 87-042, extension 33713 may have helped overcome pervasive such as production-sharing under HTS (35 pages). narketimperfections. But there were also 9802 and a liberal quota regime for goods significant dangers: problems of en- made with U.S.inputs-furthermitigate trenchedinterestsandinstitutional iner- the MFA's restrictiveness. 1192. Effects of Tax Reform tia. Mexican exporters probably receive on Argentina's Revenues In both countries, the relative impor- only a fraction of available rents, says tance of GLIO gradually diminished as Bannister. The welfare implications of Jacques Mrisset andAlejandro zquierdo competitive capital markets and large MFArestrictions,andofmarketimperfec- (September L993) conglomerates ("privately led internal tions that might lead torent-sharing, are enanizations") expanded with economic thus not as significant in Mexico as they In Argentina, changes in tax legislation, growth. mightbein countries for which conditions tax administration, and individual tax- This paper-aproduct of theFinancial are more restrictive. But even for the few payers' attitudes toward tax evasion La- Sector Development Department - is rents generated in Mexico's case, some proved tax revenues. Here is a method to part of a larger World Bank research rent-sharing is taking place. measure how much. project on the effectiveness of credit poli- Bannister tests the existence ofperfect cies in East Asia. Copies ofthe paper are markets and Tent-sharing for six groups Too often, a good tax policy proposal is availablefree from the World Bank, 1818 of Mexican apparel exports to the United considered sufficient to improve the tax H Street NW, Washington, DC 20433. States between 1981 and 1990: sweaters, system - too little consideration is given Plase contact Tomoko Ishibe, room N9- trousers, men's coats, women's coats, wo- to weaknessesin taxadministration, per- 037, extension 37665 (30 pages). ven shirts, and underwear. haps because of measurement problems. There are consistent differences be- Analyzinglegal and administrative mea- tween the unit value of U.S. production sures and quantitatively evaluatingtheir i iil. Rent-Sharing In the Multi- and the Mexico export fob. price of ap- impactontaxrevenuesisgenerallyardn- _ re Arrangement: The Case parelin the U.S.market adjustedfor tar- ous. lexico iffs and transportcosts. The adjustedprice Marissetand lzquierdo develop asimple of Mexican exports is consistently below approach to assessing how tax effort af- -ey J. Bannister the price for U.S. production, which sug- fectstaxrevenues (performance). By "tax tember 1993) gests that rent-sharing may be taking effort" they mean changes in tax legisla- place tion (exceptchangesinnominal taxes), tax -et power affects the distribution of Using modifications of the methods of administration,andindividualtaxpayers' ta rents in the market for Mexico's ex- Erzan, Krishna, and Tan (1991), Bannis- attitudes toward tax evasion. Changes in . ofapparel and textiles to the United ter tests alternative explanations for the taxadministationincludeincreasingtax -es under the Multi-Fibre Arrange- price difference - differences in the com- penalties, new technologies, and admin- . Although rents from quotas on ap- position of Mexican exparts and U.S. pro- istrative reform. d are probably small in the case of duction, and differences in the quality of They measure tax effort as aresiduah ico, a significant share goes to U.S. Mexican exports and US. oducts. the variations in tax revenues that can- oriters for such product groups as un- The existence of differences in compo- not be explained by changes in economic sear and woven shirts. sition between Mexican exports and U.S. variables and tax structures. Using this production is rejected for three of the six approach, one can easily identify factors nisterinvestigatesmarketpowerand groups- Bannister also controls for the thatinfluence tarrevenuesovertime,and fistribution ofrentain the marketfar existence ofsignificant quality differences- understand the behavior of tax revenues ice's exports ofapparel to the United The results indicate that rent-sharing in developing countries, particularly ,es under the Multi-Fibre Arrange- mayexistforwoven shirts andunderwear wheremacroeconomicconditionsarevola- it (MPA). (two of the three groupsin the sample that tile. Conventional wisdom holds that volun- are consistently quota-bound). U.S. im- The authors apply this approach to _exportrestraints, such as those under porters may receive up to 49 percent of Argentina; it can as easily be applied to MFA, are superior to other kinds of available rents- othercountries.Theirmainconclusionsin ebarriersbecause they allow develop- This paper- a product of the Interna- this application: ountries to receive the scarcity rents tional Trade Division, International Eco- * The administrative dimension oftax i quantity restrictions. Recently a num- nomics Department -is part of a larger reform is at the heart of Argentina's re- fstudieshavequestionedthisdhodaxy. effort in the department to analyze the cent fiscal adjustment. Since 1991, tax Erzan, Krishna, and Tan (1991), in par- effects ofthe Multi-Fibre Arrangement on effortis an average 80 percent higherthan lar, have pointed out that if market developing countries. The study was duringthepreceding(temparmy)success- erexistsonlyon the side oftheimport- funded by the Bank's Research Support fal adjustmentperiod (under the Austral - they can acquire some of the fixed Budget under research project "Licence Plan). s resulting from quotas, in a form of Prices and Rent Sharing in the Multi-F- * An eficient tax administration and t-sharing." bre Arrangement" (RPO 676-69). Copies an improvement in taxpayer compliance In Mexico's case, rents resulting from of the paper are available free from the levels appear to precede rather than fol- restrictions are probablysmall, since WorldBank,1l818HStreetNW,Washing- low increases in tax revenues. 192 Policy Research Working Paper Series * Tax effort is influenced significantly particularly unfavorable circumstances- the rateand pattern ofChinese industrial by such macrovariables as GDP growth including a severe energy crisis because growth. The extent ofsuch bias should be and inflation, as well as by political ofan economic blockadeimposedby neigh- investigated and analyzed for possible (in)stability. It is influenced less by such boring Azerbaijan. Links with other economic patterns that fiscal variables as alternative sources of In Armenia, current labor policies rep- may be more readily measurable. financing. resenta step in the right direction because * In Argentina, the sequence of the tax theyleave primary responsibility forlind- Datafor recentyearsindicate an accelera- effort was, first, to broaden the potential ingajobto the individual. The state'srole tionof Chineseindustrialgrowth,from the value-added tax base, and then to reduce is simply to provide a social safetynetand annual rates ofabout 10 percent recorded tax evasion through higher tax penalties to create an environment that generates in the quarter century before economic and improvements in the basic functions jobs. Tangible progress hasbeen madebut reform to figures approaching 15 percent of tax administration (inspection, audits, theacliustmentprocesshasjustbegunand in the mid- and late 1980s. 0 tax management, and personnel policy). is hindered by inconsistent labor policies Evaluating the statistics underlying This paper -a product of the Country -in some areas too radical andin others these reportsrequires an appraisal ofhow Operations Division, Latin America and smacking of the old interventionism. economic reform has affected the ablitv the Caribbean, CountryDepartment lV- Vodopivec and Vroman offer several of China's statistical system to measure ispartofalargereffortinthedepartment general policy guidelines. economic performance. Erroneous infor- tounderstandfiscalreformsinArgentina. * Undertake several initiatives, not mation about the rate and pattern of in- Copies ofthe paper are available free from just one - possibly worker training as dustrial growthcould distortmeasuresof the World Bank, 1818 H Street NW, wellasjobsearchassistance,self-employ- productivity change consideredto be cen- Washington, DC 20433. Please contact ment grants, and temporary public em- tral indicators ofthe effectiveness ofChi- Gerald Carter, room 16-020, extension ployment. neee industrial reform. 30603 (23 pages). * Use some resources to monitor and Rawski describes the statistical mate- evaluate interventions, so you find out rials and procedures used to provide in- 'what works? formation onthe growth ofindustrial out- 1193.TheAnnenianLabor * Coordinate active policy interven- put. He investigates sources ofbiasin the Market In Transition: Issues tions and the interface between active and oflicial statistics toindicate wheneverpos- and Options passive instruments. sible, how these biases affected reported * Be prepared to change as the macro- output totals, and to appraise the impact Milan Vodopivec and Wayne Vroman economic environment changes, and take of adjustments to reported output growth (Sepeaiber 1993) advantage of the current climate. Under on measures of industrial productivity. high inflation, for example, consider wid- The specific consequences of decentral- Armenia, like all of the economies of the ening the wedge between wages andvari- ized decisionmaking, growing price flex- former Soviet Union, faces a host ofprob- ous cash and in-kind transfers. When ibility,inflation, dual pricingsystems, the fems in reforming the labor market choos- inflation abates, consider paying cash emergence of enterprises with few or no ing the right pace for reallocating labor, benefits on the basis of prior earnings. ties to the system of state planning, and setting up a well-firctioning wage deter- * Above all, be flexible and sensitive to other emerging features of the industrial mination system, fostering geographic signals and changes in signals. Among system may be unique to China but the mobility, providing adequate incomesup- policy options, one size does not fit all. broaderissuesraisedarerelevantinmany port to theibblessandthepooranddesign- This paper - a product of the Transi- countries. ing appropriate active policies for the la- tion and Macro-Agustment Division, Rawski finds considerable evidence of bor market. Policy Research Department-is part of an upward bias in measures of China's alargereffortin the department to inves- real industrial outputin the past decadq Reform of the labor market in the former tigate howlabormarkets work during the The issue is not whether such bias exists SovietUnion (FSU)is essential to increase transition of socialist economies. Copies of but whether its presence substantially productivity. The transition of the FSU the paper are available free from the alters our perception of the rate and pat- economies to a market economy must in- World Bank,1818HStreetNW Washing- tern of Chinese industrial growth. volve amassive displacementofworkers, ton, DC 20433. Please contact Susana Teclarifythisissuerequiresinvestigat- andwill entaillabor shortages for certain Florez, room N11-017, extension 39075 ing the extent of possible upward bias. skills.Akeychallengewillbe toreallocate (34 pages). This in turn calls for an analysis of pos- labor at the lowest social costs. sible links between upwardbias -which Vodopivec and Vroman identify key la- is itself difficult to observe - and other bor market issues in Armenia, reflecting 1194. How Fast Has Chinese economic patterns that may be more on the dilemmas and options Industry Grown? readily measurable. policymakers face both in Armenia and This paper - a product of the Transi- elsewhere in the PSU. Tomltawski tion and Macro-Aiustment Division, Armenians are ardentadvocates afradi- (September 1993) Policy Research Department -is part of cal reform and have already made the division's research initiative, Indus- progress in several areas (including suc- An upward bias in measures of Chinals trial Reforms and Productivityin Chinese cessful privatization oflandin 1990). But real industrial output in the past decade Enterprises. The study was fundedby the the Armenian transitionistakingplace in may substantially alter our perception of Banks Research Support Budget under Policy Research Working Paper SerIes 193 research project'Reforms and Productiv- lowing: (1) increasing the turnover tax and vestment than more general tax incen- ity in Chinese Enterprises"(RPO 675-38). introducing the value-added tax that will tives such as corporate tax rate reduc- Copies ofthispaperare availablefree from replace it at rates that maintain the in- tions. The long-run cost-effectiveness of the World Bank, 1818 H Street NW, creased level ofrevenue;(2)increasingthe these incentives - except corporate tax Washington, DC 20433. Please contact social security tax rate; and (3) maintain- rate reductions, which proved cost-ineffec- Emily Khine, room N11-065, extension ing, but not raising, the historical cost- tive in all cases - varies by country. In 37471 (44 pages). based profit tax, an automatic stabilizer. Turkey, investment allowances and capi- An obvious alternative to the profit tax tal consumption allowances were cost-ef- based on historical cost accounting is to fective. In Mexico, neitherinvestment tax 1195. The Enterprise Sector redress a 1991 mistake, the indexing of credits nor accelerated capital consump- and Emergence of the Polish amortization deductions. Schafferrecom- tion allowances were cost-effective. In Fjscal Crisis, 1990-91 mends drastically reducing or even abol- contrst,inPakistanbothinvestmenttax ishingamortization deductions for state- credits and accelerated capital consump- Mark Schafter owned enterprises for fixed capital ac- tionallowances were cost-effective. In the (§eptember 1993) quired before 1990 (before the start of the intermediate run, defined as tax policy transition from socialism). It is odd that impactafter one year, only the investment Increasing taxrevenues from the enterprise these firms are given atax break on top of allowances and accelerated capital con- sector alone will not solve Poland's bud- the free use ofstate"wnedcapital. If any- sumption allowances available to Turkish ret crisis. As the state sector shrinks and thing, they should be payingfor the use of industries proved cost-effective. the private sector grows, the tax net will the capital. To make selective tax incentives more ret increasingly leaky. The budgetary This paper - a product of the Transi- effective, investment tax credits must be problem could be ameliorated by control- tion and Macro-Adjustment Division, refundable and carrying forward invest- ling social security expenses and possibly Policy Research Department -is part of ment anddepreciationallowancesmustbe byabolishingamortizationdeductionsfor alargerdepartmentalstudyonEnterprise permitted. If stimulating investment ex- state-owned enterprises Behavior and Economic Reform in Central penditure is the sole objective oftaxpolicy, and Eastern Europe. Copies of this paper reducing the corporate tax rate is not a Schaffer analyzes the causes of the col- are available free from the World Bank, cost-effective instrument to achieve this lapse of profitability in 1991 of the Polish 1818 H Street NW, Washington, DC objective. enterprise sector. He explores how it af- 20433. Please contact Emily Rhine, room This paper - a product of the Public fected the government budget and as- N11-065, extension 37471 (32 pages). Economics Division, Policy Research De- - -ses the forecasts of enterprise sector partment-is partofalargereffortinthe formance used to prepare the departmentto evaluatepublic policiesfor ernment!s 1990 and 1991 budgets. 1196. Corporate Tax Structure private sector developmentin developing Schaffer attributes about half of the and Production countries. The study was fixded by the -:p in profitability to the decrease in the Bank's Research Support Budget under "ationrate and the consequentdecrease Jeffrey Bernstein and Anwar Shah research project "An Evaluation of Tax he inflation bias in profits that results (September 1993) Incentives for Industrial and Technologi- n historical cost accounting. cal Development (RPO 675-10). Copies of He attributes most of the rest of the Investment tax credits, investment allow- thepaperareavailablefreeframtheWorld --apseinprofitabilitytohigherlaborunit ances, and accelerated capital consump- Bank, 1818HStreetNWWashington,DC ts sandhigheramortization allowances. tion allowances are more cost-effective in 20433.PleasecontactCarlinaJones,room -nen wages are endogenizedin a simple promoting investment than more general N10-063, extension 37699 (61 pages). del, nearly the entire collapse of profit- tax incentives such as corporate tax rate lity is explained by the changes in in- reductions. ion bias and amortization allowances. 1197. Determinants of Inflation The decrease in the inflation bias and Bernstein and Shah provide an empincal among Franc Zone Countries increase in amortization allowances framework for assessing the effects of tax In Africa sed profits, ird thus profit taxes, to policy on an array of producer decisions I, freeing up cash that could be spent aboutoutputsuppliesandinputdemands Ermo Boccaraand Shantayanan Devarvjan -rages, causing profits and profit taxes in Mexico, Pakistan, and Turkey. They (September 1993) aill even further. This loss in govern- specify and estimate a dynamic produc- rtrevenue was offsetbyincreasedrev- tion structure model with imperfect com- Despite belonging to a ,onetary union as from wage taxes, which were in turn petition for selected industries in these with a common =*rency and pooled far- etbyanincrease in wage-indexedgov- countries. eigrserves,thecounrieofAfrisfmw ment spending, notably on pensions. The model results suggest that tax mone(CFA) experience substantially differ- As a result of all these changes, the policy affected production and investment ent inflation rates, especially in the short ernmentdeficitincreasedabout4 to5 and further that selective tax incentives run. This is partly e:plained by the fact cent ofGDP - about half of the fiscal such as investment tax credits, invest- thatforprimaryexporter ingener4 and 'ng between 1990 and 1991. ment tdlowances, and accelerated capital for CPA zone members in particular, the Policy options Schaffer recommends for consumption (depreciation) allowances volality of commodity prices implies a -easing tax revenues include the fol- are more cost-effective at promoting in- high variance in government revenues. 194 PolCy Research Working Paper Series Despite belonging to a monetary union 1198. Enterprise Reform forth to provide housing, pensions, and with a common currency and pooled for- In China: The Evolving Legal social securitythroughalternativemeans. eign reserves, the countries of Africa's Framework * Contract law, to protect the legal franezone (CFA) experience substantially rights of enterprises and allow economic different inflation rates, especially in the Natalie Lichtenstein transactions between parties to replace short run. (September 1993) administrative controls, and to ensure BaccaraandDevargian develop amodel that the court system and dispute resl- ofinflation differentials for the franc zone How far legal reform has gone, and where tion procemes function credibly and reli- countriesbased on behavioral differences it needs togo, to support enterprise reform ably, thereby making all other reforms in fiscal policy responses to fluctuations andproidethe legalenuironment needed enforceable. in the price of the main export commod- for China's transition to a 'socialist mar- To make these reforms meaningful, ity- The model isbased onthe fact thatfor ket economy." property rights must also be better des primaryexporters in general, and for CPA fined. China's civil code currently offers zone members in particular, the volatil- EnterprisereforminChinasincel979has only a limited definition of the rights of ity of commodity prices implies a high been supported by accelerated reform of ownership andofanenterprise'srights tAr variance in government revenues. China's legal framework In the transition sell, transfer, orotherwise dispose ofprop- Themodel identifies two effects: amon- to a "socialist market economy," state erty. etary effect (commodity booms imply a enterprises will operate independently of Lichtensteincatalogsthese pieces ofthe surge in foreign reserves which, if the government, may no longer be fully legal framework, suggesting where fur- unsterilized, is inflationary) and a fiscal owned or controlled by the state, and will ther reform is needed to support enter- effect (higher government revenues are, deal with the state and other legal enti- prisereform. She focuses on thereform of to varying degrees, accompanied by a ties through market-based transactions. state enterprises but also discusses the marked increase in the level of spending, The number of collective (township and reform of nonstate enterprises. She which is again inflationary). village) enterprises has grown rapidly, touches only lightly on the role of foreign Thefiscalrelationshipisthekeybebav- and in recent years so has the number of investment but does not eddress the de- ioral equation of the model, as the other private enterprises. velopingframeworkofpatent, trademark, relationships are essentially derivedfrom This level of economic change requires and copyright laws. accountingidentities. a commensurate level of legal change. This paper - a product of the Legal BoccaraandDevarajanempiricallytest Lichtenstein describes the legal frame- Department-istbefirstinaseriesofstaff the model for CMte d'vaire. Ittracks quite work needed for enterprise reform in the publications intended to provide infarma- well the inflationary cycle that Cate world's most populous country. tion and analysis of legal issues relevant d1voire experienced after the boom in First, it is essential to define the enter- to development- Copies of the paper ae coffee prices in 1975-76. prise and its rights and obligations. To available free from the World Bank, 1818 Since the countries are in a monetary define and broaden the autonomy of en- H Street NW, Washington, DC 2043. union, ifsome countries have expansion- terprises, enterprise law and company law Please contact Malini Rangaraan, room ary fiscal policy (and thus inflation) the and regulations must be reformed. For MC6-367, extension 81710 (39 pages). others must take a more contractionary state and collective enterprises, a goal of fiscal stance. Oneissue forfutureresearch legal reform is also to effect the separa- is what determines whether a member tion of ownership and management. To 1199. Public Pension Governance country has the freedom to follow an ex- create alegal environmentin whichall en- and Performance: Lessons pansionaryfiscal policy or whetheritmust terprises -including state enterprises- for Developing Countries contract because other members have al- participate as independent economic ac- readyexpanded.Adiscussion ofpotential tors, reform is also needed in the follow- OliviaMitchell "games" playedby countriesinamonetary ing areas: (October 1993) union may shed light on these issues. * Bankruptcy and competition law, to This paper - a product of the Public promote fair, effective competition among Lessons U.S. pension analysts learned. Economics Division, Policy; Research autonomousenterprises and to ensure the Department-is partofalarger effort in continued protection of the public inter- Mitchell examines the relationship be- the departmentto study structural adjust- est even without direct state management tween public sector pension plan perfor- mentinSub-SaharanAfrica. Copies ofthe of enterprises. mance and management practices to im- paper are available free from the World * Financial laws, including securities prove the design and governance of pub- Bank, 1818 HStreetNW,Washington, DC lawsandrgulations, soenterprisefinanc- lie pensions in developing countries. Un- 20433.PleasecontactCarlinaJones,room ingean take place in amarket-driven sys- derstandingthisrelationshipisimportant N10-063, extension 37699 (45 pages). tem rather than through a planning because better yields on public pension mechanism. plan investments reduce the need for ad- * Laws governing land us, mortgage ditional taxes to support retirees - and financing, and pension and social security well-fimded plans stand a better chance systems, to separate employee housing of paying promised benefits. and pension and social security systems Her model relates investment returns from enterprise obligations and hence- an public pension assets, as well as plan y Research Working Paper Series 195 ig status, to features characterizing Mitchell discusses some of the complex creases the number of women qualifying ansion systems' governance struc- issues that must be confronted when as- withoutsignificantlyreducingthepropor- ad authority, using a new data set tablishingfundingnormsfordefinedben- tion of qualifying men. "3.state andlocal public sector plans. efit pension plans in the public sector. * In funded pension systems, on aver- in findings stand out: This paper - a product of the Finance age men accumulate much more pension The higher the fraction of retirees andPrivate SectorDevelopmentDivision, capital than women do because of men's d to the pension board, the stronger Policy Research Department -is part of higherearningsandmarecontinuouspaid gative effect oninvestmentreturnin alarger effort in the department toinves- work. Different rates of real interest and , and the more variable the returns. tigatethe complexissuesrelatedto oldage earnings growth affect individuale fund Systems fared about the same security arrangements. The study was accumulation differently. Womenbenefit lier they had in-house or external funded by the Bank's Research Support more from high rates of return and low 'y managers, or independent perfor- Budget under research project 'Income earnings growth because they tend to re- e analysis (evenifthe external man- Security for Old Age (RPO 677-45). Cop- ceive a higher proportion oftheirlifetime were drawn from the "top 10"). But ies ofthe paper ae available free from the earnings when young. But some men and .: pensions performed better when World Bank, 1818HStreetNW, Washing- many women fail to achieve minimum and actuarial computations were ton, DC 20433. Please contact Daniele pension levels. If the pension shortfall is by professional actuarial andinvest- Evans, room N9-057, extension 37496 (73 compensated forbylump-sum capital top- couselors rather than relying on pages). ups, women receive 93 percent of top-ups r or current employees to choose (70percentifJointcontributions are used). tment strategies. * In hybrid pension systems that com- Social investment rules hurt public 1200. The Life-Cycle Distributional binebothPAYGandfundedelements, the 'nyields.Publipensionplanswhich Consequences of Pay-As-You-Go higher the proportion of PAYGpayments, - atedtbatacertainpartionofinvest- and Funded Pension Systems the greater the replacement rate for sbedirectortoin-stateprojects gen- peopleinthebottom40 percentofthelife- d much lower returns. Jane Falkingham and Paul Johnson time earnings distribution (the majority i ndata show that many public pen- (October1993) of whom are women). But replacement ystems funded their plans satisfac- rates for people in the middle of income , but others did not. The results show Flat-rate pay-as-you-go pen sion plans and distzibution are insensitive to any variant fimdedpensionsproduceverydifferentdis- of the PAYG-funded combination. Fiscal stress reduced stock funding tributional outcomes, the single most im- Inshort,ilat-ratepay-as-you-gopension i. portantdeterminantofwhichisthedjfer- plans and funded pensions produce very * Stock funding rates were lower, the ent lifetime employment and earnings diffierent distributional outcomes, the rthe fraction ofelected retirees and records of men and twmen. single most important determinant of dactive workers represented onthe Using a dynamic cohort microsimulation whichis the differentlifetime employment on system board. model (LIFEMOD), Falldngham and and earnings records of men and women. Stock funding ratios were higher Johnson examine the life-cycle distribu- This paper- a product of the Finance a system had in-house actuaries, tional consequences ofavariety ofpay-as- and Private Sector Developmen tlDivision, the board authorized benefitlevels, you-go (PAYG) and funded pension sys- Policy Research Department-is part of when board members had liability tems.'Thistechniqueallowsthemtoinves- alargereffortin the departmenttoinves- ance. tigate both the socioeconomic character- tigatethecomplexissuesrelatedtooldage Stock funding rates were unaltered istics and the number of people affected security arrangements. The study is Lte statutes guaranteeringthatben- by a change in contribution or eligibility funded by the Banks Research Support 'be guaranteed by law, or by legally rules in any pension system. Budget under research project 'Income ndingrequirements,orbythestate's LIFEMOD uses 1985 parameters for Securityfor OldAge. Copies ofthe paper y to carry budget deficits from one the UnitedKingdomso specificresultsare are available free from the World Bank, to the nexL Nor did they vary when notvalidfor other countries.But winners 1818 H Street NW, Washington, DC atedorspecial taxes were earmarked and losers are likely to be similar across 20433. Please contact Daniele Evans, usion revenue. countries. They find that: room N9-057, extension 37496 (75 pages). icymnakers in developing countries * Women benefitimuchmore thanmen *rofit from the mistakes made and in a flat-rate PAYG system. In simula- is learned by U.S. pension analysts. tions, 84 percent of surviving women but ugh no single package of pension only 33 percent of surviving men are net practices can optimize investment beneficiaries,because women havehigher rmanceforall systems acrossall time life expectancy and lower lifetime earn- &s, care mustbe taken when design- ings. ie regulatory and investment envi- * Imposing minimum contributions ent in which these plans operate. substantially reduces the number of loping countries should study the women who qualify for a pension. Impos- ofthe U.S. GovernmentAccounting ing ajoint contribution rule on the earn- lards Board. ings of married couples significantly in-