Policy, Research, and External Affairs WORINGPAPRSMAy IqH Catalog The World Bank May 1990 WPS 135 (Update) PRE Working Papers Catalog of Numbers 1 to 400 FIL COPY PRE working papers disseminate the findings of works in progress in the Bank's Policy, Planning, and External Affairs complex. The Policy, Research, and External Affairs Complex distributes PRE Working Papers to disseminate the findings of work in progress and to encourage the exchange of ideas among Bank staff and all others interested in development issues. These papers carry the names of the authors, reflect only their views, and should be used and cited accordingly. The findings, interpretations, and conclusions are the authors' own. They should not be attributed to the World Bank, its Board of Directors, its management, or any of its member countries. Policy, Research, and External Affairs Catalog WPS 135 (Update) Copies of this catalog only are available free from the World Bank Bookstore, 1818 H Street NW, Washington, DC 20433. 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. The PRE Working Paper Series disseminates the findings of work under way in the Bank's Policy, Research, and External Affairs Complex. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced at the PRE Dissemination Center Index WPS # Author Working Paper Title Page Agricultural Policies 6 Steven Haggblade, Peter B. Hazell, Farm-Nonfarm Linkages in Rural Sub-Saharan Africa 5 and James Brown 7 Avishay Braverman and J. Luis Guasch Institutional Aspects of Credit Cooperatives 5 8 Steven Haggblade and Peter B. Hazell Prospects for Equitable Growth in Rural Sub-Saharan Africa 6 156 Yoav Kislev, Zvi Lerman, and Pinhas Zusman Credit Cooperatives in Israeli Agriculture 60 167 Martin Ravallion Do Price Increases for Staple Foods Help or Hurt the Rural Poor? 65 176 Avishay Braverman and Joseph E. Stiglitz Credit Rationing, Tenancy, Productivity, and the Dynamics of Inequality 68 219 Avishay Braverman and J. Luis Guasch Rural Credit in Developing Countries 90 263 Peter Hazell, Mauricio Jaramillo, How Has Instability in World Markets Affected and Amy Williamson Agricultural Export Producers in Developing Countries? 110 284 Monika Huppi and Gershon Feder The Role of Groups and Credit Cooperatives in Rural Lending 118 285 John Richard Heath Enhancing the Contribution of Land Reform to Mexican Agricultural Development 118 286 Martin Ravallion and Monika Huppi Poverty and Undernutrition in Indonesia during the 1980s 119 290 Avinash Dixit and Amy Williamson Risk-Adjusted Rates of Return for Project Appraisal 120 303 Martin Ravallion Is Undernutrition Responsive to Changes in Incomes? 129 341 Martin Ravallion Cost-of-Living Differences between Urban and Rural Areas and Dominique van de Walle in Indonesia 144 375 Gaurav Datt and Martin Ravallion Regional Disparities, Targeting, and Poverty in India 157 395 Parker Shipton How Gambians Save - and What Their Strategies Imply for International Aid 166 Agriculture Production and Services 264 Herve Plusquellec Two Irrigation Systems in Colombia: Their Performance and Transfer of Management to Users' Associations 110 Agriculture and Rural Development 15 Vijay S. Vyas and Dennis Casley Stimulating Agricultural Growth and Rural Development in Sub-Saharan Africa 8 98 Agriculture and Rural Development Staff Diversification in Rural Asia 38 ii Index WPS # Author Working Paper Title Page 163 Hans P. Binswanger, Shahidur R. Khandker, How Infrastructure and Financial Institutions Affect 118 and Mark R. Rosenzweig Agricultural Output and Investment in India Country Operations 308 Yalcin M. Baran Harmonizing Tax Policies in Central America 131 309 Yalcin M. Baran How to Improve Public Sector Finances in Honduras 131 317 Zdenek Drabek and Andrzej Olechowski Price and Quality Competitiveness of Socialist Countries' Exports 135 349 Sadiq Ahmed and Basant K. Kapur How Indonesia's Monetary Policy Affects Key Variables 147 370 Ismail Arslan and Sweder van Wijnbergen Turkey: Export Miracle or Accounting Trick? 155 Debt and International Finance 121 Graham Bird Commercial Bank Provisioning Against Claims on Developing Countries 48 127 Ishac Diwan Linking Development, Trade, and Debt Strategies in Highly Indebted Countries 51 132 Daniel Cohen Is the Discount on the Secondary Market a Case for LDC Debt Relief? 53 150 Ken Kroner and Stijn Claessens Improving the Currency Composition of External Debt: Applications in Indonesia and Turkey 58 153 Ishac Diwan and Stijn Claessens An Analysis of Debt-Reduction Schemes Initiated by Debtor Countries 59 193 Peter Nunnenkamp Voluntary and Involuntary Lending: A Test of Major Hypotheses 75 194 Jeffrey Sachs Efficient Debt Reduction 76 195 Harry Huizinga How Has the Debt Crisis Affected Commercial Banks? 76 196 Eugene L. Versluysen A Review of Alternative Debt Strategies 77 213 Stijn Claessens and Ishac Diwan Conditionality and Debt Relief 87 250 William R. Cline The Baker Plan: Progress, Shortcomings, and Future 103 251 Ishac Diwan and Dani Rodrik Patents, Appropriate Technology, and North-South Trade 104 252 V. A. Hajivassiliou Do the Secondary Markets Believe in Life After Debt? 105 253 Helmut Reisen Public Debt, North and South 105 254 Ishrat Husain and Saumya Mitra Future Financing Needs of the Highly Indebted Countries 106 255 Charles Humphreys and John Underwood The External Debt Difficulties of Low-Income Africa 106 Index WPS # Author Working Paper Title Page 256 Sweder van Wijnbergen Cash Debt Buybacks and the Insurance Value of Reserves 106 259 Barry Eichengreen and Richard Portes Dealing with Debt: The 1930s and the 1980s 108 268 John Wakeman-Linn Shortcomings in the Market for Developing Country Debt 111 318 Sankarshan Acharya and Ishac Diwan Sovereign Debt Buybacks as a Signal of Creditworthiness 135 333 Stijn Claessens and Sweder van Wijnbergen An Option-Pricing Approach to Secondary Market Debt (Applied to Mexico) 140 342 Patricio Arrau Human Capital and Endogenous Growth in a Large-Scale Life-Cycle Model 144 355 Sule Ozler The Evolution of Credit Terms: An Empirical Study of Commercial Bank Lending to Developing Countries 149 378 Patricio Arrau How Does the Debt Crisis Affect Investment and Growth? A Neoclassical Growth Model Applied to Mexico 159 391 Daniel Oks Wealth Effects of Voluntary Debt Reduction in Latin America 164 393 Michael Occhiolini Debt-for-Nature Swaps 165 394 Mark M. Spiegel Threshold Effects in International Lending 165 Development Economics 14 Stijn Claessens The Optimal Currency Composition of External Debt 8 17 Stanley Fischer Economic Development and the Debt Crisis 9 28 Bela Balassa Temporary Windfalls and Compensation Arrangements 13 77 Bela Balassa Incentive Policies and Agricultural Performance in Sub-Saharan Africa 31 79 Bela Balassa Quantitative Appraisal of Adjustment Lending 32 97 Richard H. Snape Export-Promoting Subsidies and What to Do About Them 38 105 Richard H. Snape Securing Access to International Markets 44 - 135 PRE Dissemination Center PRE Working Papers Catalog of Numbers 1 to 400 54 139 Bela Balassa A Conceptual Framework for Adjustment Policies 55 149 Bela Balassa Reflections on Perestroyka and the Foreign Economic Ties of the USSR 58 151 Bela Balassa U.S. Trade Policy Towards Developing Countries 59 152 Bela Balassa Subsidies and Countervailing Measures: Economic Considerations 59 181 Johannes F. Linn and Deborah L. Wetzel Public Finance, Trade, and Development: What Have We Learned? 70 iv Index WPS # Author Working Paper Title Page 224 Stanley Fischer The Economics of the Government Budget Constraint 92 267 Cheryl W. Gray Issues in Income Tax Reform in Developing Countries 111 280 Bela Balassa Adjustment Policies in East Asia 117 281 Bela Balassa Tariff Policy and Taxation in Developing Countries 118 282 Bela Balassa EMENA Manufactured Exports and EEC Trade Policy 117 291 Sadiq Ahmed and Ajay Chhibber How Can Indonesia Maintain Creditworthiness and Noninflationary Growth? 121 296 Lawrence Haddad and Ravi Kanbur How Serious is the Neglect of Intrahousehold Inequality? 123 350 Cheryl W. Gray Legal Process and Economic Development: A Case Study of Indonesia 147 373 Lawrence Haddad and Ravi Kanbur Are Better-off Households More Unequal or Less Unequal? 156 385 Timothy Besley and Ravi Kanbur The Principles of Targeting 162 Education and Employment 12 Andre Komenan and Christiaan Grootaert Teacher-Nonteacher Pay Differences in C6te dIvoire 7 18 Harold Noah and John Middleton China's Vocational and Technical Training 9 19 Christiaan Grootaert Cbte d'Ivoire's Vocational and Technical Education 9 24 John Middleton and Terri Demsky World Bank Investment in Vocational Education and Training 11 25 Adrian Ziderman Israel's Vocational Training 12 26 John Middleton Changing Patterns in Vocational Education 12 27 Marlaine E. Lockheed, Bruce Fuller, Family Background and Student Achievement 12 and Ronald Nyirongo 29 Emmanuel Jimenez The Relative Effectiveness of Single-Sex and Coeducational and Marlaine E. Lockheed Schools in Thailand 13 - 61 Emmanuel Jimenez, Vicente Paqueo, Student Performance and School Costs in the Philippines' and Ma. Lourdes de Vera High Schools 25 - 62 George I. Za'rour Universities in Arab Countries 26 69 Emmanuel Jimenez, Vicente Paqueo, Does Local Financing Make Primary Schools More and Ma. Lourdes de Vera Efficient? The Philippine Case 28 70 Arvil V. Adams and Antoine Schwartz Vocational Education and Economic Environments: Conflict or Convergence? 28 71 Marlaine E. Lockheed and Andre Komenan School Effects of Student Achievement in Nigeria 29 and Swaziland Index v WPS # Author Working Paper Title Page 72 Emmanuel Jimenez, Marlaine E. Lockheed, The Relative Efficiency of Public Schools in Developing and Vicente Paqueo Countries 29 87 Peter Moock and Rosemary Bellew Vocational and Technical Education in Peru 34 140 John Middleton, James Terry, Building Educational Evaluation Capacity in Developing and Deborah Bloch Countries 55 141 John Whalley and Adrian Ziderman Payroll Taxes for Financing Training in Developing Countries 55 142 Adrian Ziderman Vocational Secondary Schooling in Israel: A Study of Labor Market Outcomes 56 '143 Donald R. Winkler Decentralization in Education: An Economic Perspective 56 166 Nat J. Colletta and Margaret Sutton Achieving and Sustaining Universal Primary Education: International Experience Relevant to India 64 170 Eliakim Katz and Adrian Ziderman General Training Under Asymmetric Information 66 171 Christopher Dougherty The Cost-Effectiveness of National Training Systems in Developing Countries 66 172 Elizabeth M. King and Rosemary T. Bellew The Effects of Peru's Push to Improve Education 67 206 Valerie E. Lee and Marlaine E. Lockheed The Effects of Single-Sex Schooling on Student Achievement and Attitudes in Nigeria 84 207 Ana-Maria Arriagada Occupational Training Among Peruvian Men: Does It Make a Difference? 85 208 Marlaine E. Lockheed, Josefina Fonacier, Effective Primary Level Science Teaching in the Philippines 85 and Leonard J. Bianchi 236 Peter Moock, Philip Musgrove, Education and Earnings in Peru's Informal Nonfarm and Morton Stelener Family Enterprises 97 237 Aaron Benavot and David Kamens The Curricular Content of Primary Education in Developing Countries 97 241 Ana-Maria Arriagada The Effect of Job Training on Peruvian Women's Employment and Wages 99 242 Marlaine E. Lockheed A Multi-Level Model of School Effectiveness and Nicholas T. Longford in a Developing Country 100 288 Emmanuel Jimenez, Marlaine E. Lockheed, School Effects and Costs for Private and Public Schools Eduardo Luna, and Vicente Paqueo in the Dominican Republic 120 Energy Development 106 Edited by Mohan Munasinghe Energy Issues in the Developing World 44 and Robert J. Saunders 107 Mohan Munasinghe, Joseph Gilling, A Review of World Bank Lending for Electric Power 45 and Melody Mason vi Index WPS # Author Working Paper Title Page 109 Philip Yates Improving Power System Efficiency in Developing Countries Through Performance Contracting 45 111 Industry and Energy Department Recent World Bank Activities in Energy 46 112 Kay McKeough, Jose Escay, A Visual Overview of World Oil Markets 46 and Sompheap Sem 159 Kay McKeough Current International Gas Trades and Prices 62 Energy Strategy, Management and Assessment 68 Robert van der Plas Domestic Lighting 28 108 Josef Leitmann How to Collect Data on Household Energy Consumption 45 110 Ernesto Terrado, Matthew Mendis, Impact of Lower Oil Prices on Renewable Energy 45 and Kevin Fitzgerald Technologies 270 Keith Openshaw and Charles Feinstein Fuelwood Stumpage: Financing Renewable Energy for the World's Other Half 113 Environment 245 Peter Poole Developing a Partnership of Indigenous Peoples, Conservationists, and Land Use Planners in Latin America 101 Financial Policy and Systems 133 Alan Gelb, John B. Knight, Lewis Through A Looking Glass: Public Sector and Richard H. Sabot Employment, Rent-Seeking, and Economic Growth 53 134 Silvia B. Sagari International Trade in Financial Services 53 147 Izak Atiyas The Private Sector's Response to Financial Liberalization in Turkey: 1980-82 57 169 Alan Gelb and Patrick Honohan Financial Sector Reforms in Adjustment Programs 66 202 Alan H. Gelb Financial Policies, Growth, and Efficiency 83 243 Fawzi H. Al-Sultan Averting Financial Crisis - Kuwait 100 248 Mansoor Dailami and Michael Walton Private Investment, Government Policy, and Foreign Capital in Zimbabwe 103 266 Mansoor Dailami Policy Changes that Encourage Private Business Investment in Colombia 110 381 Alan Gelb and Silvia Sagari Trade in Banking Services: Issues for Multilateral Negotiations 160 389 Patrick Honohan Monetary Cooperation in the CFA Zone 163 Index i WPS # Author Working Paper Title Page 390 Patrick Honohan Price and Monetary Convergence in Currency Unions: The Franc and Rand Zones 164 Industry Development 168 Ashoka Mody Technological Change from Inside: A Review of Breakthroughs! 65 International Commodity Markets 10 Mudassar Imran and Ron Duncan Optimal Export Taxes for Exporters of Perennial Crops 6 64 Takamasa Akiyama Cocoa and Coffee Pricing Policies in Cte d'Ivoire 26 67 Robert D. Weaver and Saad Ali Shire Price and Tax Policy for Semi-Subsistence Agriculture in Ethiopia 27 92 Pravin K. Trivedi A Model of Cocoa Replanting and New Planting in Bahia, Brazil, 1966-85 36 119 Walter C. Labys Recent Developments in Commodity Modeling: A World Bank Focus 48 136 Raghuram Rajan Pricing Commodity Bonds Using Binomial Option Pricing 54 148 Takamasa Akiyama Impact of the International Coffee Agreements Export and Panayotis N. Varangis Quota Systemon the World's Coffee Market 58 154 Jock R. Anderson Forecasting, Uncertainty, and Public Project Appraisal 60 161 Timothy Besley and Andrew Powell Commodity-Indexed Debt in International Lending 62 175 Robert D. Weaver An Integrated Model of Perennial and Annual Crop Production for Sub-Saharan Countries 68 180 Boum-Jong Choe Structural Changes in Metals Consumption 70 211 Panos Varangis Coffee Pricing Policies in the Dominican Republic 86 314 Theodosios Palaskas and Panos Varangis Primary Commodity Prices and Macroeconomic Variables: A Long-run Relationship 133 348 Takamasa Akiyama and Donald F. Larson Recent Trends and Prospects for Agricultural Commodity Exports in Sub-Saharan Africa 146 354 Dhaneshwar Ghura How Commodity Prices Respond to Macroeconomic News 148 357 Ying Qian Application of Flexible Functional Forms to Substitutability among Metals in U.S. Industries 150 358 Pier Giorgio Ardeni and Brian Wright The Long-Term Behavior of Commodity Prices 150 367 Panos Varangis and Ronald C. Duncan The Response of Japanese and U.S. Steel Prices to Changes in the Yen-Dollar Exchange Rate 154 viii Index WPS # Author Working Paper Title Page 382 Donald F. Larson The Indonesia Vegetable Oils Sector: Modeling the Impact of Policy Changes 161 383 Yair Mundlak and Donald F. Larson On the Relevance of World Agricultural Prices 161 384 Christopher L. Gilbert The Rational Expectations Hypothesis in Models of Primary Commodity Prices 161 International Economic Analysis and Prospects 9 Andrea Boltho Can We Return to Rapid Growth? 6 124 Robert E. King and Helena Tang International Macroeconomic Adjustment, 1987-1992: A World Model Approach 50 187 Menahem Prywes Linking Wages to Changing Output Prices: An Empirical Study of 13 Industrial Countries 73 209 A seminar sponsored by the International Can the Industrial Countries Return to Rapid Growth? 86 Economics Department 228 Robert Lynn and F. Desmond McCarthy Recent Economic Performance of Developing Countries 94 262 Dermot McAleese and F. Desmond McCarthy Adjustment and External Shocks in Ireland 109 298 Ahmad Jamshidi Evaluating Global Macroeconomic Models: A Case Study of MULTIMOD 123 372 Shahrokh Fardoust and Ashok Dhareshwar Long-Term Outlook for the World Economy: Issues and Projections for the 1990s 156 International Trade 16 Patrick Messerlin Antidumping Laws and Developing Countries 8 63 Kenji Takeuchi Does Japan Import Less Than It Should? 26 78 J. Michael Finger Economists, Institutions, and Trade Restrictions: A Review Article 31 95 Junichi Goto International Trade and Imperfect Competition: Theory and Application to the Automobile Trade 37 99 Sam Laird and Julio Nogues Trade Policies and the Debt Crisis 38 102 Junichi Goto Effects of the Multifibre Arrangement on Developing Countries: A Survey 43 137 Sam Laird and Alexander Yeats Trends in Nontariff Barriers of Developed Countries, 1966-1986 54 165 Alexander J. Yeats Shifting Patterns of Comparative Advantage: Manufactured Exports of Developing Countries 64 182 Julio Nogu6s Latin America's Experience with Export Subsidies 70 Index ix WPS # Author Working Paper Title Page 186 Patrick A. Messerlin The Uruguay Negotiations on Subsidies and Countervailing Measures: Past and Future Constraints 72 239 Julio Nogu4s The Choice Between Unilateral and Multilateral Trade Liberalization Strategies 98 244 Alexander J. Yeats Do Caribbean Exporters Pay Higher Freight Costs? 101 265 Alexander J. Yeats Do African Countries Pay More for Imports? Yes 110 297 Refik Erzan, Junichi Goto, Effects of the Multi-Fibre Arrangement on Developing and Paula Holmes Countries' Trade: An Empirical Investigation 123 307 Alexander J. Yeats On the Accuracy of Economic Observations: Do Sub-Saharan Trade Statistics Mean Anything? 131 315 Julio Nogu6s Notes on Patents, Distortions, and Development 134 319 Refik Erzan Would General Trade Liberalization in Developing Countries Expand South-South Trade? 136 320 Refik Erzan and Peter Svedberg Protection Facing Exports from Sub-Saharan Africa in the EC, Japan, and the United States 136 371 Refik Erzan and Alexander Yeats Tariff Valuation Bases and Trade Among Developing Countries: Do Developing Countries Discriminate Against Their Own Trade? 155 374 Samuel Laird and Alexander J. Yeats Two Sources of Bias in Standard Partial Equilibrium Trade Models 157 397 Patrick A. Messerlin Antidumping Regulations or Procartel Law? The EC Chemical Cases 166 Macroeconomic Adjustment and Growth 4 Miguel A. Kiguel and Nissan Liviatan Inflationary Rigidities and Stabilization Policies 4 85 Ramon E. Lopez and Luis A. Riveros Wage Responsiveness and Labor Market Disequilibrium 34 91 Nissan Liviatan Israel's Stabilization Program 36 101 Luis A. Riveros and Ricardo Paredes Measuring the Impact of Minimum Wage Policies on the Economy 43 138 William R. Easterly Fiscal Adjustment and Deficit Financing during the Debt Crisis 54 162 Miguel A. Kiguel Inflation in Argentina: Stop and Go Since the Austral Plan 63 185 Stephen A. O'Connell Uniform Trade Taxes, Devaluation, and the Real Exchange Rate: A Theoretical Analysis 72 188 Luis A. Riveros International Differences in Wage and Nonwage Labor Costs 73 201 William R. Easterly How Much Fiscal Adjustment is Enough? The Case of Colombia 83 x Index WPS # Author Working Paper Title Page 204 Luis A. Riveros The Impact of Labor Costs on Manufactured Exports in Developing Countries: An Econometric Analysis 84 205 Sang-Woo Nam What Determines National Saving? A Case Study of Korea and the Philippines 84 212 Andr6s Solimano How Private Investment Reacts to Changing Macroeconomic Conditions: The Case of Chile in the 1980s 87 214 Peter R. Fallon and Luis A. Riveros Adjustment and the Labor Market 88 218 Vittorio Corbo Public Finance, Trade, and Development: The Chilean Experience 89 221 Ricardo J. Caballero and Vittorio Corbo How Does Uncertainty About the Real Exchange Rate Affect Exports? 91 222 Christopher Colclough The Labor Market and Economic Stabilization in Zambia 91 223 Jose Saul Lizondo Overvalued and Undervalued Exchange Rates in an Equilibrium Optimizing Model 91 226 Andr6s Solimano Inflation and the Costs of Stabilization: Country Experiences, Conceptual Issues, and Policy Lessons 93 229 Steven B. Webb and Heidi S. Zia The Effect of Demographic Changes on Saving for Life-Cycle Motives in Developing Countries 94 234 William Easterly A Consistency Framework for Macroeconomic Analysis 96 235 Steven B. Webb and Heidi S. Zia Borrowing, Resource Transfers, and External Shocks to Developing Countries: Historical and Counterfactual 97 247 Carlos Alfredo Rodriguez Macroeconomic Policies for Structural Adjustment 102 257 Sweder van Wijnbergen Growth, External Debt, and the Real Exchange Rate in Mexico 107 260 Jagdeep S. Bhandari, Nadeem Ul Haque, Growth, Debt, and Sovereign Risk in a Small, Open Economy 108 and Stephen J. Turnovsky 261 Sweder van Wijnbergen, Robert Rocha, Inflation, External Debt, and Financial Sector Reform: and Ritu Anand A Quantitative Approach to Consistent Fiscal Policy 109 271 Katherine Terrell and Jan Svejnar How Industry-Labor Relations and Government Policies Affect Senegal's Economic Performance 113 279 Paul M. Romer What Determines the Rate of Growth and Technological Change? 116 289 Miguel A. Kiguel and Pablo Andr6s Neumeyer Inflation and Seigniorage in Argentina 120 292 Ronald Findlay Is the New Political Economy Relevant to Developing Countries? 121 293 Mario 0. Teijeiro Central Bank Losses: Origins, Conceptual Issues, and Measurement Problems 122 Index x WPS # Author Working Paper Title Page 294 Robert Pindyck Irreversibility, Uncertainty, and Investment 122 299 Carlos Alfredo Rodriguez The External Effects of Public Sector Deficits 124 304 Merilee S. Grindle The New Political Economy: Positive Economics and Negative Politics 130 306 Ali Khadr and Klaus Schmidt-Hebbel A Method for Macroeconomic Consistency in Current and Constant Prices 131 310 Ali Khadr and Klaus Schmidt-Hebbel A Framework for Macroeconomic Consistency for Zimbabwe 132 311 Leonardo Leiderman and Nissan Liviatan Macroeconomic Performance Before and After Disinflation in Israel 132 316 Rudiger Dornbusch and Sebastian Edwards The Macroeconomics of Populism in Latin America 134 321 Jorge Marshall and Klaus Schmidt-Hebbel Economic and Policy Determinants of Public Sector Deficits 136 323 Miguel A. Kiguel and Nissan Liviatan The Old and the New in Heterodox Stabilization Programs: Lessons from the 1960s and the 1980s 137 335 Ramon E. Lopez and Luis A. Riveros Macroeconomic Adjustment and the Labor Market in Four Latin American Countries 141 339 Luis Serven and Andr6s Solimano Private Investment and Macroeconomic Adjustment: An Overview 143 343 William R. Easterly and Deborah L. Wetzel Policy Determinants of Growth: Survey of Theory and Evidence 144 344 William R. Easterly Policy Distortions, Size of Government, and Growth 145 379 Miguel A. Kiguel and Nissan Liviatan Some Implications of Policy Games for High Inflation Economies 159 386 Luis A. Riveros and Carlos E. Sanchez Argentina's Labor Markets in an Era of Adjustment 162 396 W. Max Corden Strategic Trade Policy-How New? How Sensible? 166 399 Andr6s Solimano Macroeconomic Adjustment, Stabilization, and Growth in Reforming Socialist Economies: Analytical and Policy Issues 167 400 Andr6s Solimano Macroeconomic Constraints for Medium-Term Growth and Distribution: A Model for Chile 167 Population, Health, and Nutrition 11 Bernhard Liese and Norman Gratz The Selection and Use of Pesticides in Bank Financed Public Health Projects 7 13 Trudy Harpham and Ian Timaeus Objectives and Methods of a World Health Survey 7 23 Mead Over Cost-Effective Integration of Immunization and Basic Health Services in Developing Countries: The Problem of Joint Costs 11 xii Index WPS # Author Working Paper Title Page 65 Howard Barnum Interaction of Infant Mortality and Fertility and the Effectiveness of Health and Family Planning Programs 27 66 Anthony R. Measham and Roger W. Rochat Slowing the Stork: Better Health for Women Through Family Planning 27 81 Richard Heaver Reaching People at the Periphery: Can the World Bank's Population, Health, and Nutrition Operations Do Better? 33 82 Dov Chernichovsky and Linda Zangwill Microeconomic Theory of the Household and Nutrition Programs 33 88 John A. Ross and Stephen L. Isaacs Costs, Payments, and Incentives in Family Planning Programs 35 93 Susan H. Cochrane The Effects of Education, Health, and Social Security on Fertility in Developing Countries 36 94 George Simmons and Rushikesh Maru The World Bank's Population Lending and Sector Review 36 96 Maureen Lewis and Genevieve Kenney The Private Sector and Family Planning in Developing Countries 37 114 My T. Vu, Eduard Bos, Africa Region Population Projections, 1988-89 Edition 47 and Rodolfo A. Bulatao 115 My T. Vu, Eduard Bos, Asia Region Population Projections, 1988-89 Edition 47 and Rodolfo A. Bulatao 116 My T. Vu, Eduard Bos, Latin America and the Caribbean Region Population and Rodolfo A. Bulatao Projections, 1988-89 Edition 47 117 My T. Vu, Eduard Bos, Europe, Middle East, and North Africa Region and Rodolfo A. Bulatao Population Projections, 1988-89 Edition 47 155 Ian Timaeus and Wendy Graham Measuring Adult Mortality in Developing Countries: A Review and Assessment of Methods 60 173 Julio Frenk, Enrique Ruelas, Hospital Management Staffing and Training Issues 67 and Avedis Donabedian 246 Richard Hayes, Thierry Mertens, Causes of Adult Deaths in Developing Countries: Geraldine Lockett, and Laura Rodrigues A Review of Data and Methods 102 249 Ricardo Bitran-Dicowsky The Determinants of Hospital Costs: An Analysis and David W. Dunlop of Ethiopia 103 273 Population and Human Resources Population, Health, and Nutrition: FY88 Annual Department Sector Review 114 274 Nancy Birdsall and Estelle James Efficiency and Equity in Social Spending: How and Why Governments Misbehave 114 275 Fred Arnold Revised Estimates and Projections of International Migration, 1980-2000 115 324 F. T. Sai and K. Newman Ethical Approaches to Family Planning in Africa 137 Index xiii WPS # Author Working Paper Title Page 328 Rodolfo A. Bulatao, Eduard Bos, Europe, Middle East, and North Africa (EMN) Patience W. Stephens, and My T. Vu Region Population Projections, 1989-90 Edition 139 329 Rodolfo A. Bulatao, Eduard Bos, Latin America and the Caribbean (LAC) Region Patience W. Stephens, and My T. Vu Population Projections, 1989-90 Edition 139 330 Rodolfo A. Bulatao, Eduard Bos, Africa Region Population Projections, 1989-90 Edition 139 Patience W. Stephens, and My T. Vu 331 Rodolfo A. Bulatao, Eduard Bos, Asia Region Population Projections, 1989-90 Edition 140 Patience W. Stephens, and My T. Vu 337 Rodolfo A. Bulatao and Eduard Bos, Projecting Mortality for All Countries 142 with Patience W. Stephens and My T. Vu Public Economics 73 Jonathan Skinner Taxation and Output Growth in Africa 30 74 Andrew Feltenstein and Stephen Morris Fiscal Stabilization and Exchange Rate Instability 30 75 Shlomo Yitzhaki and Wayne Thirsk Welfare Dominance and the Design of Excise Taxation in C6te d'Ivoire 30 76 Shlomo Yitzhaki and Yitzhak Vakneen The Shadow Price of a Tax Inspector 31 86 Ritu Anand, Ajay Chhibber, and External Balance, Fiscal Policy, and Growth in Turkey 34 Sweder van Wijnbergen 90 Robert F. Conrad and Zmarak M. Shalizi A Framework for the Analysis of Mineral Tax Policy in Sub-Saharan Africa 35 100 Anwar Shah Public Infrastructure and Private Sector Profitability and Productivity in Mexico 38 120 Ajay Chhibber and Sweder van Wijnbergen Public Policy and Private Investment in Turkey 48 125 Christophe Chamley and Qaizar Husain The Effects of Financial Liberalization on Thailand, Indonesia, and the Philippines: A Quantitative Evaluation 50 128 Ajay'Chhibber and Javad Khalilzadeh-Shirazi Public Finance in Adjustment Programs 51 131 George R. Zodrow and Charles E. McLure, Jr. Implementing Direct Consumption Taxes in Developing Countries 52 157 Martha de Melo, Marc Leduc, A Policy Model for Tunisia with Real and Financial Flows 61 and Setareh Razmara 177 Jack M. Mintz and Jesuis Seade Cash Flow or Income? The Choice of Base for Company Taxation 69 178 Jack M. Mintz Tax Holidays and Investment 69 179 Christopher Heady Public Sector Pricing in a Fiscal Context 69 Xiv Index WPS # Author Working Paper Title Page 189 Emil M. Sunley The Treatment of Companies Under Cash Flow Taxes: Some Administrative, Transitional, and International Issues 73 190 Riccardo Faini, Jaime de Melo, Macro Performance Under Adjustment Lending 74 Abdel Senhadji-Semlali, and Julie Stanton 192 Ajay Chhibber, Joaquin Cottani, Inflation, Price controls, and Fiscal Adjustment in Zimbabwe 75 Reza Firuzabadi, and Michael Walton 198 Chad Leechor and Robert Warner Equity in Unequal Deductions: Implications of Income Tax Rules in Ghana and Nigeria 78 210 Roger H. Gordon Notes on Cash-Flow Taxation 86 238 Ehtisham Ahmad and Stephen Ludlow The Distributional Consequences of a Tax Reform on a VAT for Pakistan 98 240 Ake Blomqvist and Emmanuel Jimenez The Public Role in Private Post-Secondary Education: A Review of Issues and Options 99 278 Anand Rajaram Inflation and the Company Tax Base: Methods to Minimize Inflation-induced Distortions 116 322 William McCleary Earmarking Government Revenues: Does It Work? 136 334 Jaber Ehdaie An Econometric Method for Estimating the Tax Elasticity and the Impact on Revenues of Discretionary Tax Measures (Applied to Malawi and Mauritius) 141 345 Donald Cox and Emmanuel Jimenez Private Transfers and Public Policy in Developing Countries: A Case Study for Peru 145 368 Guttorm Schjelderup Reforming State Enterprises in Socialist Economies: Guidelines for Leasing Them to Entrepreneurs 154 Public Sector Management and Private Sector Development 80 Samuel Paul Emerging Issues of Privatization and the Public Sector 32 113 Barbara Nunberg Public Sector Pay and Employment Reform 46 118 John Nellis Contract Plans and Public Enterprise Performance 47 126 Samuel Paul, John C. Ickis, Educating Managers for Business and Government: and Jacob Levitsky A Review of International Experience 50 160 Mary M. Shirley Evaluating the Performance of Public Enterprises in Pakistan 62 199 Samuel Paul Private Sector Assessment: A Pilot Exercise in Ghana 78 217 Barbara Nunberg Public Sector Management Issues in Structural Adjustment Lending 89 220 Samuel Paul, David Steedman, Building Capability for Policy Analysis 90 and Francis X. Sutton Index xv WPS # Author Working Paper Title Page 227 Samuel Paul Institutional Reforms in Sector Adjustment Operations 93 233 John Nellis Public Enterprise Reform in Adjustment Lending 96 258 L. David Brown and David C. Korten Understanding Voluntary Organizations: Guidelines for Donors 107 302 Sherry Keith Improving Support Services for Rural Schools: A Management Perspective 129 305 Lawrence F. Salmen and A. Paige Eaves World Bank Work with Nongovernmental Organizations 130 312 Mary M. Shirley Improving Public Enterprise Performance: Lessons from South Korea 133 338 Sunita Kikeri Bank Lending for Divestiture: A Review of Experience 142 392 Samuel Paul Institutional Development in World Bank Projects: A Cross-Sectoral Review 164 Socioeconomic Data 5 Angus Maddison and Bart van Ark Comparisons of Real Output in Manufacturing 4 22 Jean-Paul Azam, Patrick Guillaumont, Methodological Problems in Cross-Country Analyses and Sylviane Guillaumont of Economic Growth 10 Strategic Planning 313 Michael E. Colby The Evolution of Paradigms of Environmental Management in Development 133 376 Colin I. Bradford, Jr. The World Economy in the Mid-1990s: Alternative Patterns of Trade and Growth 158 377 John Stremlau After the Cold War: Security for Development 158 Trade, Finance, and Industry 104 Manuel Hinds Economic Effects of Financial Crises 44 183 Alberto Musalem Private Investment in Mexico: An Empirical Analysis 71 287 Thanos Catsambas and Miria Pigato The Consistency of Government Deficits with Macroeconomic Adjustment: An Application to Kenya and Ghana 119 Trade Policy 1 Cristian Moran Imports Under a Foreign Exchange Constraint 3 2 Vinod Thomas Issues in Adjustment Lending 3 xvi Index WPS # Author Working Paper Title Page 3 Jaime de Melo CGE Models for the Analysis of Trade Policy in Developing Countries 4 20 Ramon Lopez and Vinod Thomas Imports and Growth in Africa 10 21 Jaime de Melo and Patrick Messerlin Effects of European VERs on Japanese Autos 10 83 Jaime de Melo and David Tarr Welfare Costs of U.S. Quotas on Textiles, Steel, and Autos 33 84 Brian Pinto Black Markets for Foreign Exchange, Real Exchange Rates, and Inflation: Overnight versus Gradual Reform in Sub-Saharan Africa 33 89 Taeho Bark and Jaime de Melo Export Quota Allocations, Export Earnings, and Market Diversifications 35 103 James R. Tybout and Taeho Bark Industrial Portfolio Responses to Macroeconomic Shocks: An Econometric Model for Developing Countries 43 122 Riccardo Faini, Lant Pritchett, Import Demand in Developing Countries 49 and Fernando Clavijo 123 Riccardo Faini Export Supply, Capacity, and Relative Prices 49 144 Jaime de Melo and Sherman Robinson Product Differentiation and Foreign Trade in CGE Models of Small Economies 56 145 Jaime de Melo, Julie Stanton, Revenue-Raising Taxes: General Equilibrium Evaluation and David Tarr of Alternative Taxation-in U.S. Petroleum Industries 57 146 Timothy Condon, Vittorio Corbo, Exchange Rate-Based Disinflation: Wage Rigidity, and Jaime de Melo and Capital Inflows: Tradeoffs for Chile, 1977-81 57 174 Ramon Lopez and Dani Rodrik Trade Restrictions with Imported Intermediate Inputs: When Does the Trade Balance Improve? 68 191 Sebastian Edwards Openness, Outward Orientation, Trade Liberalization, and Economic Performance in Developing Countries 74 197 Fernando Clavijo and Riccardo Faini Differentiating Cyclical and Long-Term Income Elasticities of Import Demand 77 215 Francois Bourguignon, William H. Branson, Adjustment and Income Distribution: A Counterfactual and Jaime de Melo Analysis 88 216 Jaime de Melo and L. Alan Winters Price and Quality Effects of VERs - Revisited: A Case Study of Korean Footwear Exports 88 295 Vinod Thomas Developing Country Experience in Trade Reform 122 326 Jaime de Melo and L. Alan Winters Do Exporters Gain from Voluntary Export Restraints? 138 327 James R. Tybout Making Noisy Data Sing: A Micro Approach to Measuring Industrial Efficiency 138 332 Ashok Gulati with James Hanson Effective Incentives in India's Agriculture: Cotton, and Garry Pursell Groundnuts, Wheat, and Rice 140 Index Xvii WPS # Author Working Paper Title Page 336 Arvind Panagariya Input Tariffs and Duty Drawbacks in the Design of Tariff Reform 142 352 Jaime de Melo and L. Alan Winters Voluntary Export Restraints and Resource Allocation in Exporting Countries 148 353 Arvind Panagariya How Should Tariffs Be Structured? 148 387 Jaime de Melo and Sherman Robinson Productivity and Externalities: Models of Export-Led Growth 163 388 Faezeh Foroutan The Distortionary Effects of Tariff Exemptions in Argentina 163 Transport 158 Alice Galenson Labor Redundancy in the Transport Sector 61 346 Hans Jirgen Peters India's Growing Conflict between Trade and Transport: Issues and Options 146 356 Ian G. Heggie and Michael Quick A Framework for Analyzing Financial Performance of the Transport Sector 149 359 Tae H. Oum, W. G. Waters, II A Survey of Recent Estimates of Price Elasticities and Jong Say Yong of Demand for Transport 150 380 Lee W. Huff and Louis S. Thompson Techniques for Railway Restructuring 160 Urban Development 325 Kyu Sik Lee and Alex Anas Manufacturers' Responses to Infrastructure Deficiencies in Nigeria: Private Alternatives and Policy Options 138 360 Bertrand Renaud Compounding Financial Repression with Rigid Urban Regulations: Lessons of the Korean Housing Market 151 361 Stephen K. Mayo and James I. Stein Housing and Labor Market Distortions in Poland: Linkages and Policy Implications 151 362 William Dillinger Urban Property Taxation: Lessons from Brazil 152 363 Dale Whittington, Donald T. Lauria, Paying for Urban Services: A Study of Water Vending and Xinming Mu and Willingness to Pay for Water in Onitsha, Nigeria 152 364 Gian Carlo Guarda Financing Urban Services in Latin America: Spatial Distribution Issues 152 365 Stephen Malpezzi, A. Graham Tipple, Cost and Benefits of Rent Control in Kumasi, Ghana 153 and Kenneth G. Willis 366 Robert Buckley and Anupam Dokeniya Inflation, Monetary Balances, and the Aggregate Production Function: The Case of Colombia 153 xviii Index WPS # Author Working Paper Title Page 369 Dale Whittington, Apia Okorafor, Cost Recovery Strategy for Rural Water Delivery in Augustine Okore, and Alexander McPhail Nigeria 152 Welfare and Human Resources 203 Nanak Kakwani and Ranjan Ray Optimal Commodity Taxes Under Rationing 83 225 Paul Glewwe and Oussama Kanaan Targeting Assistance to the Poor Using Household Survey Data 92 Women in Development 129 Paul Collier Women in Development: Defining the Issues 51 130 Matthew Lockwood and Paul Collier Maternal Education and the Vicious Cycle of High Fertility and Malnutrition: An Analytic Survey 52 184 Augusta Molnar and Gotz Schreiber Women and Forestry: Operational Issues 71 200 T. Paul Schultz Women and Development: Objectives, Frameworks, and Policy Interventions 79 232 Nadine R. Horenstein Women and Food Security in Kenya 95 269 Women in Development Division Women in Development: Issues for Economic and Sector Analysis 112 272 T. Paul Schultz Women's Changing Participation in the Labor Force: A World Perspective 113 276 Shahidur R. Khandker Improving Rural Wages in India 115 277 Shahidur R. Khandker The Effect of Formal Credit on Output and Employment and Hans P. Binswanger in Rural India 115 398 Katrine A. Saito and C. Jean Weidemann Agricultural Extension for Women Farmers in Africa 167 1988 World Development Report Background Papers 30 Bela Balassa The Adding Up Problem 14 31 Bela Balassa Public Finance and Economic Development 14 32 Kenneth Davey Municipal Development Funds and Intermediaries 15 33 John Cuddington Fiscal Policy in Commodity-Exporting LDCs 15 34 Lance Taylor Fiscal Issues in Macroeconomic Stabilization 15 35 Stephen Lister Improving the Allocation and Management of Public Spending 16 36 Douglas J. Puffert Social Security Finance in Developing Countries 16 Index xix WPS # Author Working Paper Title Page 37 Brian Pinto Black Market Premia, Exchange Rate Unification, and Inflation in Sub-Saharan Africa 17 38 Larry Schroeder Intergovernmental Grants in Developing Countries 17 39 Stephen A. O'Connell Fiscal Policy in Low-Income Africa 17 40 Eugene L. Versluysen Financial Deregulation and the Globalization of Capital Markets 18 41 William Dillinger Urban Property Taxation in Developing Countries 18 42 David L. Lindauer Government Pay and Employment Policies and Government Performance in Developing Economies 18 43 Tax Administration Division, IMF Fiscal Tax Administration in Developing Countries: Affairs Department Strategies and Tools of Implementation 19 44 David L. Lindauer The Size and Growth of Government Spending 19 45 Govindan Nair and Anastasios Filippides How Much Do State-Owned Enterprises Contribute to Public Sector Deficits in Developing Countries - and Why? 19 46 Robert Lacey The Management of Public Expenditures: An Evolving Bank Approach 20 47 Robert F. Conrad Considerations for the Development of Tax Policy When Capital is Internationally Mobile 20 48 Johnathan Skinner Do Taxes Matter? A Review of the Effect of Taxation on Economic Behavior and Output 21 49 DeAnne Julius and Adelaida P. Alicbusan Public Sector Pricing Policies: A Review of Bank Policy and Practice 21 50 Celso Luiz Martone Fiscal Policy and Stabilization in Brazil 21 1989 World Development Report Background Papers 51 V. V. Bhatt On Participating in the International Capital Market 22 52 V. V. Bhatt Financial Innovation and Credit Market Development 22 53 Fernan Ibanez Venture Capital and Entrepreneurial Development 23 54 Andrew Sheng Bank Restructuring in Malaysia, 1985-88 23 55 Bela Balassa Financial Liberalization in Developing Countries 24 56 Bela Balassa The Effects of Interest Rates on Savings in Developing Countries 24 57 Dimitris Antoniades and Dimitris Kouzionis Financial Distress of Industrial Firms on the Greek Banking System 25 58 Craig R. Neal Macrofinancial Indicators for 117 Developing and Industrial Countries 25 nx Index WPS # Author Working Paper Title Page 164 Patrick Honohan and Izak Atiyas Intersectoral Financial Flows in Developing Countries 64 283 Tipsuda Sundaravej Experiences of Financial Distress in Thailand 118 and Prasarn Trairatvorakul 300 Mauricio Larrain How the 1981-83 Chilean Banking Crisis was Handled 124 301 Colin Mayer Myths of the West: Lessons from Developed Countries for Development Finance 129 340 Vincent P. Polizatto Prudential Regulation and Banking Supervision: Building an Institutional Framework for Banks 143 347 Robert M. Buckley Housing Finance in Developing Countries: A Transaction Cost Approach 146 351 Stanley C. Silverberg The Savings and Loan Problem in the United States 147 Uncategorized 230 Bent Hansen Unemployment. Migration, and Wages in Turkey, 1962-85 94 231 Doug Addison The World Bank Revised Minimum Standard Model: Concepts and Issues 95 Volume I Numbers 1 - 100 Policy, Research, and External Affairs Working Paper Series 3 1. Imports Under a Foreign In sum: policy makers must look at Linking policies to performance. Al- Exchange Constraint the policies that affect GDP and prices though the links among policy change, and the availability of foreign exchange funding, and economic returns might Cristian Moran when trying to estimate import behavior seem clear, identifying themin practice is in developing countries. complex. Efforts to clarify the expected To estimate how adjustment packages This paper is a product of the Trade effects of policy on performance should will affect the flow of imports, poli- Policy Division, Country Economics De- continue. There nevertheless are practi- cymakers need to look beyond the tradi- partment. Please contact Karla Cabana, cal difficulties, some of them unpredict- tional explanatory variables of GDP and room N10-037, extension 37946. able. A country's policies may improve, real import prices. They must focus in but the financing to carry them out may addition on the availability of foreign be inadequate. Also influencing the effec- exchange. 2. Issues in Adjustment Lending tiveness of reforms are their credibility and sustainability - as well as an array The traditional model of import behavior Vinod Thomas of complementary policies and nonprice - which looks only at GDP and real im- considerations. port prices as explanatory variables - Three major issues have emerged from Getting the most from the external failed to predict or explain the developing adjustment lending. One is translating strategy. Much of the Bank's intellectual countries' import slumps in the early adjustment policies into improved eco- and financial effort has supported an out- 1980s. It works well for industrial coun- nomic performance. The second is recon- ward orientation and market liberaliza- tries, unconstrained by foreign exchange. ciling policy reforms with changing exter- tion. But confusion remains over what But it does not work well for the typical nal conditions. The third is coordinating these changes really mean, about what is developing country, short of foreign ex- the adjustment process itself- coordinat- really being sought, and about how much change. ing the efforts of all the interested parties, is beingreformed. Needed now is a clearer Hence, the search for a better model inside and outside the country. In relation understanding of the respective roles of - a model more useful for developing to each of these issues, expanding the domestic policy and external factors in in- country policy analysis. Hemphill intro- menu ofpolicy options could make adjust- creasing trade and accelerating growth. duced the availability of foreign ex- ment packages more credible and effec- Improving the adjustment process. change, measured by international re- tive. Preparedness for the reforms has been serves and foreign capital inflows, as a important for their implementation and lone set of explanatory variables. This Reaping the full benefit of adjustment sustainability. Timely financing for the paper goes a step further and adds the packages depends on a government's adjustment package has also been a key traditional variables, prices and GDP, to commitment to reform as well as a variety to acceptability. Building a domestic con- internationalreserves andforeign capital of complementary factors, many of which sensus, essential to sustaining stabiliza- inflows. The four variables together do a have not been duly considered because of tion and adjustment efforts, requires better job of predicting import responses the lack of time, resources, and skills. commitment and the abiEty to experi- - better than each of the two individu- Mostpolicypackageshave focusedon ment. Providing adequate finance re- ally. adjustment in the following areas: (1) quires coordinated rather than frag- So, when putting an adjustment fiscal and investment policy, (2) exchange mented efforts by donors, commercial package in place, policymakers need to rateandtradereform,(3)industrialregu- lenders, and the respectvegovernments. estimate how the availability of foreign lation, (4) agricultural pricing, (5) finan- In sum: more attention needs to be exchange will affect the flow of imports. cial liberalization, and (6) institutional placed on the commitment to price re- The focus is important because the poli- development. No small task. Meanwhile, forms and on nonprice areas. Support cies that affect the availability of foreign concerns have been voiced that too much might also increase for the outward orien- exchange range more broadly than do is being attempted - or, where sociopo- tation of countries - if discussions are policies affecting aggregate demand (con- litical issues are ignored, too little. extended to consider external factors and tractionary fiscal and monetary policies It is becoming increasingly clear that if nondistortionary ways of promoting do- and exchangerate policies). In addition to if these packages are to be more effective mestic production are explored. In addi- actions influencing aggregate demand and credible, the menu of policy options tion, governments must do more to build and prices, the broader policies include might be expanded in three areas. One is a consensus for the reforms - and the those: translating adjustment policies into im- external financing community must in- * To increase the export supply re- proved economic performance - the ob- crease its flexibility in supporting those sponse. jective of domestic strategy. The second is same reforms. * To keep international markets reconciling policy reforms with changing This paper is a product of the Trade open to developing countries (that is, to external conditions to get the most from Policy Division, Country Economics De- reverse protection in industrial coun- the external strategy. The third is im- partment. Please contact Karla Cabana, tries). proving the process of adjustment itself. room N10-037, extension 37946. * To increase capital inflows, both So, an already onerous set of tasks has to official and private. become even broader - or, better, more focused. 4 Policy, Research, and External Affairs Working Paper Series 3. CGE Models for the Analysis of Applications to internal and external ity of the process makes a serious stabili- Trade Policy in Developing balances zation program credible. Countries Three others are modifications of dy- The orthodox approach has been less namic models that treat intertemporal successful in chronic inflation countries. Jaime de Melo linkages recursively: We distinguish three types of orthodox * Model 4. Decomposing the causes stabilization programs all of which in- Simulation models with strong micro- of a balance-of-payments crisis and com- clude a tight fiscal stance. The first one is economic underpinnings are being used paring the results with purchasing power based primarily on the fiscal adjustment, increasingly in quantifying the implica- parity calculations. as was the case in Brazil and Mexico in tions of alternative trade policy scenarios * Model 5. Determining what an ex- the early 1980s. We argue that this ap- in developing countries. Presented here change rate in temporary disequilibrium proach is ineffective in dealing with infla- are seven models whose modifications means for the current account. tion, especially when undertaken in the enable useful applications to trade policy * Model 6. Determining what alter- midst of abalance of payments crisis. The and external balances, and to growth. native foreign trade strategies might second type includes a money crunch (as mean for long-run growth. in Chile and Argentina in the mid-1970s), The use of computable general equilib- Applications to intertemporal issues and the third uses the exchange rate as rium (CGE) simulation models for policy The seventh model is a modification the main nominal anchor (as in the analysis has become widespread. In the that goes beyond intertemporally decom- "Tablitas"). industrial countries they have generally posable growth paths to show the deter- Disinflation during these experi- hadamicroeconomicfocusbecauseecono- minants of intertemporal substitution in ences has at best been slow, and in some mywide policy analysis can rely instead a two-period, two-sector dependent econ- cases inflation accelerated during the sta- on econometric techniques. But such omy. bilization programs. Price inertia, and techniques are not well suited to econo- * Model 7. Determining the optimal lack of credibility created insurmount- mywide analysis in developing countries, borrowing strategy for a country that able difficulties that led in many cases to for three reasons: (1) the lack of time faces external borrowing constraints the abandonment of the program. series data, (2) the need to remove incon- linked to its fiscal position. Persistence and discipline, however, sistencies from data that are available, These economywide simulation mod- can make the orthodox approach succeed. and (3) the short time that big changes in els are good tools for quantifying the The Chilean experience is useful in this policy leave for testing hypothesis. So, tradeoffs in policy packages that the respect. More than a decade of fiscal simulation models relying on "borrowed" Bank discusses with its clients. Future restraint, and a consistent use of different parameter estimates have been used for a modeling exercises would nevertheless nominal anchors eventually achieve wider range of applications in developing benefitfrom direct econometric estimates stable low inflation. There were also the countries. rather than "borrowed" parameter esti- drawbacks of low average growth and se- This survey starts with a presenta- mates. vere crisis along the way. We conclude tion of the core structure of simulation This paper is a product of the Trade arguing that"heterodox" programs might models for trade policy analysis. It shows Policy Division, Country Economics De- provide a suitable alternative. that a few share parameters and elastici- partment. Please contact Karla Cabana, This paper is a product of the Debt ties, leading to a four-way sectoral classi- room N10-037, extension 37946. and Macroeconomic Adjustment Divi- fication: exportables, importables, non- sion, Country Economics Department. tradables, and import-dependent sectors. Please contact Miguel A. Kiguel, room The rest of the survey deals with a range 4. Inflationary Rigidities and N11-059, extension 37464. of applications derived from this core Stabilization Policies model. Applications to trade policy Miguel A. Kiguel and Nissan Liviatan 5. Comparisons of Real Output in Three of the models are modifica- Manufacturing tions of static one-period models: A tight fiscal stance can stop episodes of * Model 1. Measuring the costs of hyperinflation. But it cannot, on its own, Angus Maddison and Bart van Ark protection in a regime of quantitative re- overcome the inertia of rising prices in strictions characterized by rent-seeking. countries suffering chronic inflation. International comparisons of real output * Model 2. Measuring the costs of Such countries can nevertheless and productivity should rely not on offi- protection when there are economies of strengthen their stabilization efforts by cial exchange rates but on standardized scale in some sectors and a restrictive anchoring nominal prices to the money valuations of the different elements of trade policy impedes entry by new firms supply or the exchange rate. output. and allows incumbents to price above av- erage cost. Orthodox stabilization policies - those The most direct way of comparing output * Model 3. Designing optimal trade based on a tight fiscal stance - are very in different countries is to use the official policies when budgetary revenue is con- effective to stop hyperinflation, as in exchange rate to convert GDP in one strained and fiscal authorities cannot Bolivia in 1985. Wage and price inertia country's price into the price of another resort to direct taxation because of a weak are eliminated through the process of country - and in multicountry compari- fiscal system. hyperinflation, while the unsustainabil- sons to convert it into a common currency, Policy, Research, and External Affairs Working Paper Series 5 such as the U.S. dollar. But exchange 6. Farm-Nonfarm Linkages in include services, which are among the rates mainly indicate the purchasing Rural Sub-Saharan Africa fastest growing rural nonfarm activities. power of currencies over tradables, not * Rural towns, crucial for the devel- the average purchasing power of curren- Steven Haggblade, Peter B. Hazell, and opment of the rural nonfarm economy, cies over all goods and services. And even James Brown have to be assured of adequate economic for tradables, the use of exchange rates is and institutional infrastructure, espe- problematic because of currency fluctua- The links between agricultural growth cially ground transport, comunications, tions and capital movements. and the rural nonfarm economy, known to and efficient credit and labor markets. With the measurement of compara- be strong in Asia, are weaker in Africa but * Investments in rural roads and tive real output across countries inter- still important to the rural poor. Crucial transport systems have to be adequate to twined with assessments of purchasing for strengthening these links are policies ensure that viallagers have easy access to power, the question becomes: what is the and investments that (1) promote small- rural towns. best way to make those assessments. holders, (2) improve rural infrastructure, * Investments in people's skills have to Most purchasing power parities have (3) encourage commerce and services, (4) accompany the investmentsininfrastruc- been developed for the components of foster the development ofrural towns, and ture to develop all types of rural busi- final demand - for consumption, invest- (5) explicitly recognize women as key ac- nesses. ment, and so on. This expenditure ap- tors in rural development. * Direct assistance to rural nonfarm proach is useful for looking at an entire enterprises - such as credit projects, es- economy but it cannot be used directly for Agricultural growth stimulates the rural pecially those for working capital - can analyzing individual sectors because it nonfarm economy through a variety of be much more cost effective than techni- does not show real product by industry. links - some operating through produc- cal assistance and projects providing The production approach used here tion relations, others through consumer modern workshop facilities. looks at the industry of origin - and spending patterns. In Asia these links are * Because women will be the key ac- provides a basis for growth accounting, strong: a $1 increase in agricultural in- tors in the transformation of Africa's comparative structural anaylsis, studies comes will generate about 80 cents in ad- rurla economy-in trading, in processing of technological performance, and work ditional rural income, mainly among sup- and preparing food, and in many other on labor productivity and total factor pro- pliers of rural nonfarm goods and serv- services - governments and assistance ductivity. ices. In Sub-Saharan Africa, however, agencies must explicitely recognize this The method essentially takes the these links are much weaker: a $1 in- role and ensure that credit schemes are value of output in national prices and crease in agricultural income will gener- open to women as well as men. uses unit values from census data to stan- ate only about 50 cents of additional rural This paper is a product of the Agricul- dardize ouput uniformly and consis- income. tural Policies Division, Agriculture and tently. So, rather than use a common con- One reason for these weaker links in Rural Development Department. Please version factor (the exchange rate) it uses Sub-SaharanAfricais that thereislessir- contact Cicely Spooner, room N8-039, ex- a standardized basis of valuation. rigation, which creates jobs in construc- tension 30464. Applied to the manufacturing sectors tion and maintenance. Another is the of Brazil, Mexico, and the United States, lower population density, increasing the the revaluation of output in national and distances to markets and diminishing the 7. Institutional Aspects of Credit U.S. prices provides a sounder basis for competitiveness of remote producers. A Cooperatives constructing relative indicators of pro- third is the pattern of household con- ductivity. It also reveals much about sumption, with less diversity in both food Avishay Braverman and J. Luis Guasch trade protection policies and their inci- and nonfood consumption. Government dence on different sectors of the economy. policies and poor infrastructure also put If credit cooperatives are to be viable and The approach shows, in addition, brakes on the nonfarm economy. help farmers, particularly small-scale which data are anomalous and which Demand clearly is the main con- farmers, they must pay more attention to analytically useful in industrial censes. It straint on the rural nonfarm economy. So the design of their operations - to the thus provides important lessons for the the first task is to get agriculture going - accountability of managers, to the struc- development ofthe Bank's database-on in short, to bring faster agricultural turingofincentives, and to the monitoring how toincrease its reliabilityand improve growth to Sub-Saharan Africa. The focus and enforcement of repayments. its relavance to operations. It also shows should be on small-scale farming, be- how new insights might be gained by ex- cause of its many links to the rural non- Few farmers have obtained credit from ploiting some official sources which, farm economy. the second task is to be formal sources - this, despite the re- though rich in detail, often remain un- ready when it comes. Here are some key markable expansion of credit throughout tapped by international agencies. considerations for policy formulation and the rural areas of developing countries This paper is a product of the Socio- future research: over the last three decades. Small-scale economic Data Division, International * Investment codes and related laws farmers have fared the worst, having Economics Department. Please contact that discriminate against small, rural been largely screened out offormal credit. Estela Zamora, room S7-136, extension firms have to be redressed. The obstacles they face include higher 33706. * The focus on small-scale, rural transaction costs, greater perceived manufactiring has to be redirected to risks, and patronizing lenders. 6 Policy, Research, and External Affairs Working Paper Series To overcome these obstacles, small- sons. The distribution of land is no worse with an unusual degree of international scale farmers have formed organized in Africa today, and the distribution of cooperation. credit groups and cooperatives. But such income is better, than in Asia before the endeavors have failed more often than green revolution. Moreover, there are few The piojections for economic growth in they have succeeded. landless people in Africa. In addition, the the industrial countries during 1985-95 The high failure rate of these organi- technical packages in the field and the have been revised steadily downward - zationsis of concern for tworeasons. They pipelines are scale-neutral, giving no to a pessimistic 2.5 percent a year. Can command a large amount of resources. edge to large farms over small ones. For this trend be reversed? And they are important in the economic example, improved seeds are suitable for The crucial element in achieving development of rural areas, particularly small-scale applications, as are changes high growth rates is a rising rate of in- in improving the plight of small-scale in -Itivation that conserve moisture. vestment, itself a reflection of confidence farmers. And Africa's social institutions support in the economy. The conditions that Because the proper design of these people with a safety net and, through stimulate higher investment can result organizations considerably increses their extended families, redistribute income from spontaneous market developments likelihood of success, policies to promote gains - while non farm activities often or from sharp changes in economic policy. appropriate designs could be much more provide an important source ofincome for Chances that the former will occur, effective than mere subsidies, the pre- the poor. while slim, depend on putting in place dominant policy instrument so far. Equitable growth, though possible,is policies that favor a surge in investment- More specifically, the focus of such not assured, however. Several research led growth. These include reducing gov- policies should be on the optimal nature and policy initiatives will be needed to ernment deficits and promoting techno- and scope ofjoint-liability arrangements, capitalize on the potential logical innovation and entrepreneurial on the gathering and use ofinformation in * Research must continue to focus activities, particularly by small firms. setting incentives, and on the rigidity of on technologies appropriate for small Maintaining low inflation rates and enforcement rules. farms and on crops, especially food crops, strong demand are equally important. This paper is a product ofthe Agricul- important to the poor. Despite the existence of many of these tural Policies Division, Agriculture and * Policymakers must no longer re- conditions for some time, growth has Rural Development Department. Please strict assistance to two categories of non- slowed even further. contact Cicely Spooner, room N8-039, ex- farm activity that are particularly impor- Expansionary government policies tension 30464. The paper will also appear tant for equitable rural growth - service may be a more plausible route, although in Pranab Bardhan (ed.), Economic The- enterprises and nonfarm activities of the pace is crucial. Too rapid an advance ory forAgrarian Institutions, Oxford Uni- women. could propel inflation; a slower strategy versity Press (forthcoming). * Rural infrastructure has to be up- could be too diffuse to overcome the pres- graded to permit the widespread dissemi- ent downturn. Opting for bold efforts is nation of technical advances and to en- probably more promising, although even 8. Prospects for Equitable Growth able the nonfarm sector to benefit from here policymakers face skepticism that in Rural Sub-Saharan Africa the increased demand emanating from independent government policies can rising agricultural consumption and pro- work in today's interdependent global Steven Haggblade and Peter B. Hazell duction. markets. * Governments will need to monitor One possible solution is to strive for The prospects for equitable growth in land tenure and tenancy to ensure that international policymaking and to regain African agriculture are good as long as landlords and large farms do not monopo- some degree of exchange-rate stability. governments monitor land rights, up- lize the fruits of technological advance. This kind of international coordination grade rural infrastructure, foster farm- This paper is aproductofthe Agricul- could be the impulse for rapid growth, as nonfarm linkages, and focus agricultural tural Policies Division, Agriculture and it was after the Second World War. research on crops and technologies impor- Rural Development Department. Please This paper is a product of the Inter- tant to smallholders. contact Cicely Spooner, room N8-039, ex- national Economic Analysis Division, tension 30464. International Economics Department. Improving agricultural technology in Please contact Joseph Israel, room S7- Africa has been difficult because of the 218, extension 31285. continent's fragile soils, its patchwork of 9. Can We Return to Rapid climates, its poor potential for wide- Growth? spread irrigation, and its weak institu- 10. Optimal Export Taxes for tions and infrastructure. So, when ad- Andrea Boltho Exporters of Perennial Crops vances do occur, they are likely to be limited to specific zones, worsening the Probably not, for the likelihood ofsponta- Mudassar Imran and Ron Duncan regional inequalities and in and between neous market forces favoring private in- countries. vestment is slim. A more promising route Governments relying heavily on export What, then, are the prospects for for returning to rapid growth in the indus- taxes for revenue tend to tax commodity equitable agricultural growth in regions trial countries is to rely primarily on a exports more heavily, which is consistent that benefit from new technological ad- government-led expansion to promote with short-run elasticities ofdemand and vances? They are good for several rea- investment - something possible only supply. But this makes them more suscep- Policy, Research, and External Affairs Working Paper Series 7 tible to losing their market share over the 11. The Selection and Use of 12. Teacher-NonTeacher Pay long run. Pesticides in Bank Financed Public Differences in C6te d'Ivoire Since the estimate of the optimal export Health Projects Andre Komenan and Christiaan Grootaert tax is based on the price elasticity of Bernhard Liese and Norman Gratz demand and the price response of the Although teachers in C6te d'Ivoire receive commodity from other sources, should When there is no alternative to chemical a rent component in their base salaries, it policymakers look at short- or long-term pesticides, they should be used with envi- does not put them ahead of nonteachers, elasticities? The difference is crucial, ronmental and biological methods to cut who are likely to receive better in-kind especially where there is a large gap be- costs, reduce contamination, and lower benefits, bonuses, and commissions in tween the two. Governments weighing the possibility of resistance to the pesti- addition to their salaries. the optimal export tax have a choice - cide. accepting lower tax revenues now and Because base salaries for teachers in C6te - reaping higher revenues in the future, or Three methods are available for control- d'Ivoire are higher than wages of workers setting their sights on high short-term ling vector-borne tropical diseases - in other occupations, there is some ques- tax revenues and losing out in the long environmental, biological, and chemical. tion about whetherteachers are overpaid. run. Environmental control to permanently But other workers widely receive bene- A comparison of the estimated opti- alter the conditions that allow vectors to fits, bonuses, and commissions and earn mal export tax rates for major developing breed and develop is the preferred the same as teachers. Even allowing for country producers of cocoa, coffee, tea, method, but it is not always feasible. higher educational requirements, differ- and rubber with current tax rates shows Biological control is species-specific and ent types of teachers, and longer vaca- the following. When the government may only be effective under narrow eco- tions, teachers are not better paid than depends heavily on the tax forits revenue, logical circumstances. employees in other fields. it taxes on the basis of the short-run For control of most diseases, there- Moreover, while salaries for teachers elasticities. This tax rate is much higher fore, pesticides are the only alternative. and other workers having similar educa- than if the long-run elasticities were Whenever possible, these chemicals tional backgrounds in C6te d'Ivoire are used, which is usually the case when the should be used along with environmental almost the same, nonteachers earn twice taxes are a small proportion of govern- orbiologicalmethods andthe appropriate as much as teachers having similar ment revenues. But the higher tax rate drug or vaccine. This willcutcosts, reduce lengths of service. makes the country susceptible to the loss contamination from pesticides, and lower Policymakers should thus be cau- of market share over time because it re- the possibility of resistance to the pesti- tious when considering budget cuts that duces the incentive for its own producers cide. would lower teachers' salaries, cuts cer- (while raising world prices) and encour- Public health officials must be con- tain to make the teaching profession less ages the substitution of other commodi- cerned that the compound chosen is safe attractive. ties by other producers. for the user as well as for inhabitants and This paper is a product of the Educa- Actual export tax rates applied by domesticanimalsinthetreatedarea.The tion and Employment Division, Popula- Cameroon and Nigeria on cocoa and by method of control must be appropriate for tion and Human Resources Department. Sri Lanka on natural rubber were much each targeted vector, because there are Please contact Cynthia Cristobal, room higher than the optimal rate even when wide biological differences among spe- S6-001, extension 33640. based on short-run elasticity estimates cies. and may well have contributed to reduc- Some further considerations in the tions in their world market shares. selection of a pesticide for a public health 13. Objectives and Methods of a Recent reductions in export taxes by program to control a particular vector of World Health Survey dominant rubber exporters appear to disease are: have exerted downward pressure on * The chemical must be a narrow Trudy Harpham and Ian Timaeus world prices, which is consistent with spectrum pesticide theory. * It should be effective in the pro- Designing and administering a world This paper is a product of the Inter- posed geographic area health survey will not be easy, but one of national Commodity Markets Division, * The target vector should be evalu- the gains from such a survey could be an International Economics Department. ated to determine if it is resistant to a improvement in the methods governments Please contact Audrey Kitson-Walters, given chemical use to conduct and analyze health studies. room S7-053, extension 33712. * The proposed pesticide must not pose a hazard to species that are not tar- Many developing countries are trying to geted. improve the routine collection of health This paper is a product of the Popula- information by strengthening surveys, tion, Health, and Nutrition Division, censuses, and registration systems. At Population and Human Resources De- the international level, too, efforts are partment. Please contact Sonia Ains- under way to provide information on worth, room S6-065, extension 31091. health and health interventions, includ- ing statistical reporting programs of the 8 Policy, Research, and External Affairs Working Paper Series U.N. and the World Bank. * The relationship between prices culture: In view of the limited financial re- for domestic goods and exchange rates. * Changes in farming systems - sources in the developing countries, * Thecostsandrisksof borrowingin from slash- and-burn to multiple-crop- would a world health survey complement foreign currencies. ping, these health information systems and * The effects of exchange rates on ex- * Changes in land rights -from col- contribute to long-term health care? Is it pected receipts and payments in foreign lective ownership to contractual arrange- reasonable to expect that such a survey currencies. ments, could identify the patterns and causes of Whatifacountryonly wants tohedge * Changesininstitutions-asmore disease and at the same time measure the itself against the impact of commodity formal credit and marketing services effectiveness of investments in health? price and exchange rate movements and become available. Although a series of coordinated does not want to speculate on relative Equally crucial to Africa's agricul- country health studies could be valuable, exchange rate movements? Its optimal tural development will be parallel efforts there are many tradeoffs. Considering currency composition will then hinge on to remove policy barriers that have un- the variety ofhealth problems and priori- the covariances between commodity dercut agricultural production or hurt ag- ties in developing countries, it is probably prices and exchange rates, the covari- ricultural productivity. These barriersin- more important to develop the expertise ances between exchange rates, and ex- clude high taxes, price controls, unfavor- to conduct and analyze health studies pected net foreign currency receipts. able exchange rates, and inefficient par- than to devise a standard questionnaire This paperisaproduct of the Officeof astatal marketing boards. to collect health data. As for the cost-effec- the Vice President, Development Eco- In addition to policy reform, long- tiveness of health programs, a world nomics. Please contact Sook termimprovementinAfricanagriculture health survey is not the appropriate ve- Bertelsmeier, room S9-039, extension will require developing and extending hicle for such evaluations, but it can 33767. new production tech-nologies. It will also address such concerns as access, cover- require creating institutional structures age, patient costs, and financing systems. to strengthen national research capabili- ThispaperisaproductofthePopula- 15. Stimulating Agricultural ties, and designing policies and invest- tion, Health, and Nutrition Division, Growth and Rural Development in mrent strategies to improve the links be- Population and Human Resources De- Sub-Saharan Africa tween the farm and nonfarm sectors in partment. Please contact Amelia Men- rural areas. ciano, room S6-278, extension 33612. Vijay S. Vyas and Dennis Casley This paper isaproduct of the Agricul- ture and Rural Development Depart- Restoring agricultural growth in Africa ment. Please contact Hilda Vallanasco, 14. The Optimal Currency will require new production technologies room J2-262, extension 37591. Composition of External Debt appropriate for differentfarming systems. It will also require eliminating govern- Stijn Claessens ment policies that discriminate against 16. Antidumping Laws and farmers. Developing Countries By choosing the appropriate currency composition of their external debts, devel- Economic growth in Sub-Saharan Africa Patrick Messerlin oping countries can reduce the exposures depends on reversing the region's deterio- associated with exchange rates, interest ration in agricultural performance - a Antidumping laws can be a back door to rate, and commodity price uncertainties. reversal that is crucial both for meeting protection, jeopardizing trade liberaliza- domestic consumption needs and for gen- tion in developing countries. The increased volatility of exchange erating foreign exchange earnings rates, interest rates, and goods prices has through exports. But efforts to restore Current GATT-consistent antidumping focused fresh attention on the importance agricultural growth are hampered by the laws have a strong protectionist drift and for developing countries of reducing their ecology of the region, undermined by poli- a pro-cartel bias. They endanger the very risks in these markets. These countries cies that jeopardize agricultural and ru- edifice of the international trade system generally cannot use such conventional ral development, and complicated by based on GATT rules. hedging instruments as currency and sluggish global economic growth as well LDCs and NICs are deeply involved commodity futures because of a variety of as agricultural policies in industrial in antidumping actions, both as defen- institutional and other constraints. But countries. dants and as prosecutors. Their exports they can use the currency composition of Given the region's necessary transi- represent 50 to 60 percent of the new their external debt to hedge against ex- tion from a land-extensive to a land-in- cases investigated by the United States change rates and commodity prices. tensive farming system, attempts to and the European Community. They are The optimal currency composition of improve agricultural production and to hurt not only by antidumping actions their foreign debt portfolios depends on lay the groundwork for sustained rural initiated by other countries but by their the following factors: development will depend on the correct own antidumping laws, which may jeop- * Domestic production structures. choice of policies. In making these ardize their trade liberalization pro- * The shares of spending on differ- choices, policymakers must consider grams. ent goods by consumers. some important changes in African agri- LDC and NIC involvement in anti- Policy, Research, and External Affairs Working Paper Series 9 dumping matters will be along-term phe- a small dent in the debt problem. As for require appropriate training credentials nomenon, asitisnotrelatedtoshort-term more ambitious schemes, such as an in- of new employees. macroeconomic variations. In the Uru- ternational debt facility, there is little Until now, vocational and technical guay Round, LDCs and NICs should play prospect that governments or commercial education has regularly been under- an active role in reforming GATT rules to banks will accept the losses such afacility funded by government and provided by reduce the GATT bias in favor of "injured would recognize. enterprises. This tradition of enterprise- industries" that compete for imports and Thus itismore likely thatthe current based training reflects a link between to make GATT rules conform more to country-by-country approach will evolve training and industry that many indus- their ongoing trade liberalization pro- - with the introduction of some new trial nations are only now trying to estab- grams. assets and perhaps the development of lish. But this training has generally been Why avoid antidumping actions? debt conversion techniques in conjunc- inefficient, overspecialized, and far too * Three years after investigations tion with long-term adjustment pro- time-consuming for what it accom- were initiated, antidumping measures grams. The banks, too, might be willing to plished. reduced import quantities by 40 percent. grant debt relief if it is associated with a Authorities in Beijing are encourag- * The measures taken are severe, in- change in economic policy in the debtor ing provincial, county, and municipal au- creasing values roughly 23 percent, on top country or with guarantees of some type. thorities to attain 50 percent enrollment of other protection. They also encourage For some countries, both creditors and in secondary schools of general education price-fixing agreements - and create a debtors might prefer interest rate reduc- and 50 percent (greatly increased) enroll- trade diversion, particularly for LDC and tions to write-downs of the debt. ment in vocational and technical schools NIC exports. Fundamental policy changes in the - to support the goal of expanding the * Rents accruing to foreign firms be- debtor countries have been slow in com- service sector and self-employment. The cause of antidumping protection are sub- ing. Reforms will be more likely if the overall pattern will be to strengthen the stantial for industrial countries, less im- debtor nations can be sure that financing free-standing secondary technical and vo- portant for LDCs, and almost nil for will continue over several years. The cational schools; to introduce vocational NICs. The costs for foreign exporters are benefit of such an approach is that it programs in the general education high the net result of losses in export quanti- moves toward a longer-term solution to schools; and to develop enterprise-based ties and the gains in rents received on the the debt crisis, enabling governments to skilled workers schools. remaining exports (a net loss of roughly concentrate on domestic economic man- The core system of lifetime employ- 17 percent of initial export values for agement rather than debt negotiations. ment is to be replaced by a system of LDCs and 25 percent for NICs). Because the debt crisis dominates poli- contract labor, permitting managers to This paper is a product of the Inter- cymaking in these countries, a shift to- hire workers for fixed periods and allow- national Trade Division, International ward longer-term development would ing workers limited latitude for negotiat- Economics Department. Please contact itself contribute to growth. ing compensation and terms of employ- Salome Torrijos, room S8-033, extension This paper is a product of the office of ment in return for surrendering tenure. 33709. the Vice President, Development Eco- (The old system of low, nationally deter- nomics. Please contact Sushma Rajan, mined wage scales remains in place; room S9-035, extension 33766. whether andhow a system ofbonuses will 17. Economic Development and be used to improve worker-manager in- the Debt Crisis centives remains to be seen.) 18. China's Vocational and This paper is a product of the Educa- Stanley Fischer Technical Training tion and Employment Division, Popula- tion and Human Resources Department. Debtors and creditors, including the inter- Harold Noah and John Middleton Please contact Cynthia Cristobal, room national institutions, should work toward S6-001, extension 33640. longer-term adjustmentplans that ensure China is reforming its vocational and debtor countries of adequate resource technical education and training to meet flows over several years and that lead to the skilled labor requirements ofa chang- 19. C6te dIvoire's Vocational and needed policy changes during the period of ing economy. Technical Education adjustment. To attain the number of skilled and semi- Christiaan Grootaert The prolonged debt crisis of those highly skilled workers needed for its projected indebted countries whose debts are owed development, China must give higher Formal vocational and technical educa- primarily to the commercial banks has priority to vocational and technical train- tion has been geared too much toward jobs resisted all the creative financial engi- ing and education, in the modern sector, which cannot absorb neering efforts of the last few years. Enterprises are being asked toimple- many new workers. Informal training - The Baker initiative, which built on ment a policy of "training before employ- chiefly apprenticeship training -doesn't increasedlendingflows from the commer- ment." Rather than hire and train un- prepare trainees adequately to do account cial banks and multilateral institutions, skilled workers assigned to them by gov- work. To develop the unrealizedpotential has produced only fitful growth. And new ernment labor bureaus (the previous of the informal sector, both formal and financing arrangements have made only system), managers are now expected to informal training should be redirected toward the informal sector. 10 Policy, Research, and External Affairs Working Paper Series C6te d'Ivoire spends more of its budget changes that also spur more growth for countries, the restrained exporter up- (42 percent) on education than any other each dollar of imports. Put differently, grades quality, and consumers end up country in the world. Part of its spending Can African countries reduce their his- paying more. on formal vocational education and train- torically high import dependence? Can ing should be redirected toward training they resume growth without substan- The voluntary export restraints (VERs) in the informal sector. tially increasing their imports? that the U.K., France, and Germany The public costs of formal vocational One set of policies affecting the im- negotiated with Japanese automakers and technical education (VTE) per stu- port efficiency of growth includes those show why VERs do not protect domestic dent are four to seven times higher than that improve the incentives for agricul- industries and probably end up costing the costs to individuals because of gener- ture and for restructuring the manufac- consumers more. ousscholarshipprograms,thehighcostof turing sector. Another set includes First, most EC countries followed expatriate teaching staff, and the un- macroeconomic changes that affect the suit after the British negotiation with deruse of facilities during the current re- real exchange rate and the level and Japan in 1976 (the domino effect). cession. Specific policy measures that composition of public spending. Such Second, the VERs did not arrest would increase the social rates of return policy changes have been under way to import penetration by third countries. oninvestmentsinvocationaltrainingand varying degrees in several African coun- When Japanese imports were restricted, education include: tries - among them, Ghana, Kenya, the French simply bought Italian and * Reducing scholarships toVTE stu- Zaire, Zambia, Nigeria, Tanzania, Ma- German cars. dents. dagascar, and C6te d'Ivoire. Third, the Japanese upgraded the * Replacing expensive expatriate What, then, are some of the policy quality of cars sold on the French market (mostly French) teachers with Ivorians. outcomes that change the import inten- between 1981 and 1983. (The VER was * Building fewer new buildings and sity of growth? not strictly binding in France until 1984 making better use of the old ones. Some shifts reduce import depend- and in Germany until 1985.) * Upgrading the apprenticeship sys- ence. One is a shift from public consump- Fourth, between 1979 and 1986 tem by setting up short-term vocational tion to private consumption. Another is a French, German, and Japanese produc- and technical (especially evening) depreciation of the real exchange rate. ers supplied an increasingly similar prod- courses that complement apprenticeship And a third is a shift to agricultural uct mix on the French car market, training. These would include courses for growth. whereas the Italians created a distinctly the self-employed on, say, credit and mar- By contrast, opening the trade re- different type of product. keting to help them run their own busi- gime and promoting exports would en- Fifth, in 1984 and 1985 the quota nesses. courage imports (and exports). Restruc- raised auto prices in France about 9 per- * Promoting the employment of for- turing industry to increase its productiv- cent, costingFrench consumers about 320 mal VTE graduates outside Abidjan, the ity would also increase some imports (but million francs and saving only about 300 magnet for most rural migrants. reduce others). jobs. This paper is a product of the Educa- What emerges from this analysis is This paper is a product of the Trade tion and Employment Division, Popula- that some policy changes and structural Policy Division, Country Economics De- tion and Human Resources Department. adjustments in Africa can change tradi- partment. Please contact Sheila Fallon, Please contact Cynthia Cristobal, room tional import intensities. But if African room N10-017, extension 38009. S6-001, extension 33640. countries are to achieve faster sustained growth, imports will need to increase substantiallyfrom the recently depressed 22. Methodological Problems in 20. Imports and Growth in Africa levels. And countries will have to use Cross-Country Analyses of those imports far more efficiently than in Economic Growth Ramon L6pez and Vinod Thomas the past. This paper is a product of the Trade Jean-Paul Azam, Patrick Guillaumont, Faster economic growth in Africa involves Policy Division, Country Economics De- and Sylviane Guillaumont a recovery in the growth of imports -and partment. Please contact Karla Cabana, greater efficiency in their use. room N10-037, extension 37946. Cross-country studies provide a weak basis for the formulation ofeconomicpoli- Broad comparisons show that growth is cies in developing countries. linked to imports, but country compari- 21. Effects of European VERs on sonsovershortperiodsshowthelinktobe Japanese Autos Many cross-country studies have been more flexible than fixed. Countries can conducted over the last 20 years to ex- adjust import intensities in the short Jaime de Melo and Patrick Messerlin plain how various factors affect economic term - maintaining growth, even with growth rates in the developing econo- depressed imports. Even forso highly differentiated a product mies. The data in these studies - which ForAfrica, in these stringent times, a as cars, voluntary export restraints do not underlie international economic compari- big question has been whether better protect domestic industries or consumers. sons and serve as the basis for economic domestic policies induce structural Demand is deflected to unrestrained third policyrecommendations -giveresearch- Policy, Research, and External Affairs Working Paper Series 11 ers the systematic and scientific informa- analysis is complicated by two inherent change reflects lessons about th eSec- tion required for their investigations. But difficulties. First, because the two types tiveness of different types of tra-inig. the conclusions are often fragile and of health care programs improve the In the past ten years the most striIk- sometimes contradictory. health of different target groups, some ing achievement of VET has been the cle- Research results are sensitive to the common measure of the effectiveness of velopment of national training systems choices of components, the aim of the the two programs must be agreed upon. from nonformal training centersn and investigation, and the type of model used. Here the healthy-life-years saved by the postsecondary technical education insti- In general, researchers need to have bet- two alternative programs is proposed and tutions. This has happened largely in ter statistical data, particularly on eco- implemented as a useful common meas- middle-income countries, where project nomic policy indicators, and must subject ure of effectiveness. investments have emphasized expansion the selected sample to careful tests. The second difficulty is that ofmodel- ofinstitutions and the link between train- Cross-country studies are particu- ing the joint costs of simultaneously pro- ing and employment. In middle-income larly unreliable when it comes to estimat- ducing more than one health care service. countries all types of training - secon- ing the economic impact of government In some situations the degree of "joint- dary, nonformal, post-secondary, and budgetary and regulatory policies. These ness" of the cost structure and the associ- VET teacher training - have been suc- studies thus provide only a weak basis for ated production technology have an im- cessfully established. developing country economic policies. portant impact on the relative cost-effec- Investments in low-income coun- This paper is a product of the Socio- tiveness of the two alternative ap- tries, especially those in Sub-Saharan economic Data Division, International proaches. Africa, have been less successful. Im- Economics Department. Please contact Using the method described here, plementation weaknesses and stagnat- Estela Zamora, room S7-136, extension economists can address this problem in a ing economies have made it diffic,it to set 33706. way that does justice to both the superior up any type of training. Efforts are ham- efficiency of the mobile teams and the pered by inefficiency and poor participa- superior comprehensiveness of the fixed tion. Investment in national training 23. Cost-Effective Integration of centers. Special purpose models such as programs has just begun in these poorer Immunization and Basic Health this one can guide policy decisions since countries, and success is uncertain be- Services In Developing Countries: they are less complex than more general cause of continuing economic constraints. The Problem of Joint Costs models and can be easily understood by These patterns suggest that the level decisionmakers. of economic development and the conse- A. Mead Over Jr. This paper is a product ofthe Popula- quent size and dynamism of industrial tion, Health, and Nutrition Division, employment have apowerful influence on The debate between those who favor deliv- Population and Human Resources De- the outcome of investments in vocational ering comprehensive primary health care partment. Please contactNoni Jose, room education and training. Therefore, future from fixed health centers and those who S6-105, extension 33688. investment strategies should differ sub- favor delivering selective primary care stantially among countries at diffirent from mobile health teams can be decided, levels of industrialization. in principle, on empirical grounds. Key 24. World Bank Investment in In middle-income countries where requirements for choosing the more cost- Vocational Education and Training national training systems already exist, effective approach in a given developing VET investments should emphasize re- country are (1) an effective measure com- John Middleton and Terri Demsky habilitation, quality improvement, and mon to both types of health care programs further development of institutiona' effi- and (2) an approach to modeling joint The challenge facing future World Bank ciency. costs. investment in vocational education and Some of the lower-middle-income training is to bring past successes in (and larger low-income) countries are in With limited budgets for rural primary middle-income countries to the lower in- the early stages of developing national health care, developing countries are come countries. Strategies naturally will training systems and can benefit -iom the under pressure to integrate the basic have to vary greatly from country to coun- experiences of the more advanced coun- medical services that government health try, tries. VET investments in those ceuntries centers provide with the vaccination pro- should support institutional develop- . grams that mobile immunization teams World Bank investment in vocational ment and policy issues, including separa- handle. For health planners, the question education and training (VET) has aver- tion of vocational training from oth.er edu- is whether to organize the integrated aged $500 million a year in the 1980s. cation and development of alternatives to services around the fixed health centers Since 1980 there has been a significant direct government financing. or around the mobile health teams. shiftawayfrom investments in secondary In small low-income countries, re- Implicit in this decision is a choice be- diversified vocational schools to nonfor- cent Bank experience suggests that re- tween more comprehensive health care mal training centers and university pro- sources be concentrated in nonformal from the fixed center versus more selec- grams. Investments in industrial train- training centers, training quality, devel- tive care from the mobile teams. ing have increased while those in agricul- opment of management capacity in train- Application of cost-effectiveness tural education have been reduced. This ing institutions, and aggressive market- 12 Policy, Research, and External Affairs Working Paper Series ing of training opportunities and services. the apprenticeship system was the most 1. Long perspective with multiple This paper is a product of the Educa- cost-effective. investments: It took 15 years and more to tion and Employment Division, Popula- These findings echo those of case establish each of the three programs and tion and Human Resources Department. studies in other countries. But, to con- as many as five project investments. Please contact Cynthia Cristobal, room clude that vocational training schools are 2. Expanding industrial employ- S6-001, extension 33640. not cost-effective on the basis of eventual ment: Industries in all three countries earnings alone is to ignore part of the had a strong demand for skilled workers. picture. The goals of the vocational secon- 3. Small formal beginnings and in- 25. Israel's Vocational Training dary school in Israel extend beyond those cremental expansion: The first projects of providing usable labor market skills. were relatively small and simple. In the Adrian Ziderman These wider social and educational goals middle and later stages the three coun- are largely absent from the narrower and tries were able to build and expand on Vocational secondary schooling costs more work-oriented types of training. In their own experience. much more than other types ofjob training any cost-benefit evaluation of vocational 4. Responsive planning: The train- in Israel - and appears not to lead to schooling, these goals would have to be ing systems were planned in response to, correspondingly higher earnings. given more weight. not anticipation of, employment demand. This paper is a product of the Educa- 5. Early and sustained involvement Eighty percent of the trainees headed for tion and Employment Division, Popula- of enterprises: Sustained efforts were Israel's labor force go to full-time voca- tion and Human Resources Department. made to link training with employment tional secondary schools that devote a Please contact Cynthia Cristobal, room by involving employers. third to a half of the curriculum time to S6-001, extension 33640. 6. Evolution of policy and manage- general studies. Students tend to come ment capacity to match system complex- from a higher socioeconomic level than ity: As the training systems grew, quasi- those in other training programs. 26. Changing Patterns In autonomous national agencies were cre- The rest of Israel's vocational stu- Vocational Education ated to manage job training. dents are evenly divided among the Min- 7. Increasing attention to alterna- istry of Labor's remaining three pro- John Middleton tive financing sources: Efforts were made grams. The apprentice attends school one to find financing other than government day a week and works on the job the rest Investment in secondary vocational appropriations from general tax reve- of the time. The student is typically a low schools has declined in favorofnonformal nues. academic achiever with a low socioeco- teaching systems, which take a long time 8. Investment in quality: The qual- nomic background. and multiple investments to establish. ityandrelevance of teaching and learning Students in industrial schools spend The shift leaves secondary education in was improved. three days a week in the plant where the need of new direction. 9. Flexibility of curriculum and in- school is located and three days in the stitutional design: The training institu- school. The program is less demanding One of the long-standing issues in educa- tions that were created could respond and more practical than the vocational tion development has been productive job easily to changing economic circum- school curriculum. No tuition is charged training in rapidly changing economies. stances. and trainees are paid for their work. The argument has been made that voca- Although investment has been shift- The one-year full-time training tional secondary schools are not well- ing into nonformal training, secondary courses for 16 and 17-year-olds, many of equipped for this task - that they often education isin needof new directions. Di- whom are drop-outs, concentrate on prac- become second-best educational alterna- versified secondary schools have not pro- tical training. Those who complete the tives for young people rejected by the vided that direction, leaving questions course get additional trainingin the army academic mainstream. Although voca- about how secondary schools might meet during their compulsory three-year serv- tional and academic schooling often re- social objectives cost-effectively. ice. sult in similar levels of education and This paper is a product of the Educa- Of the four types of training in Israel employment, the higher costs of the voca- tion and Employment Division, Popula- - vocational secondary schools, appren- tional schooling make it a less attractive tion and Human Resources Department. ticeship courses, industrial schools, and alternative. Please contact Cynthia Cristobal, room full-time training courses - vocational In the past 23 years of Bank lending S6-001, extension 33640. school is by far the most expensive. In for vocational education and training 1977 Michael Borus found that the cost of (VET), there has been a clear shift away apprenticeship courses was one-seventh from vocational secondary schools toward 27. Family Background and that of vocational schools; industrial various forms of training, outside the Student Achievement schools and training courses cost only a formal educational system. third to a quarter as much. This 7-year Some of the nonformal training pro- Marlaine E. Lockheed, Bruce Fuller, longitudinal study confirms Borus' ear- grams have been quite successful. Nine and Ronald Nyirongo lier tentative findings, concluding that characteristics have contributed to the since post-training earnings were success of three such programs in Korea, Prior research has underestimated the roughly the same for all four programs, Jordan, and Brazil: influence offamily background on student achievement in developing countries. Policy, Research, and External Affairs Working Paper Series 13 Past research in developing coun- and Human Resources Department, arrangements. In Chile the aim was to tries has shown that school-related influ- Education and Employment Division. avoid currency appreciation in the event ences have a greater effect on student Please contact Cynthia Cristobal, room of temporary increases in copper prices. achievement than does family back- S6-001, extension 33640. In Cameroon, the government has repa- ground, a finding that contrasts sharply triated only part of the oil earnings, and with research in industrialized countries. included only some of these revenues in This has led to the conclusion that schools 28. Temporary Windfalls and the budget. in developing countries are more effective Compensation Arrangements Compensation schemes will work in than schools in industrialized countries, other developing countries whose major But the earlier work suffers from con- Bela Balassa export is a staple commodity, subject to ceptual flaws. It has defined family back- sharp price fluctuations, and which ac- ground in material terms and failed to Developing countries that export a single counts for a large share of gross domestic consider other motivational factors. Ear- major commodity subject to considerable product. In this way, the exchange rate, lierresearchhas also usedmeasurements price instability can even out temporary the money supply, and the budget will be (such as level of parental education and fluctuations in export prices by setting up unaffected. occupational status) more appropriate to compensation arrangements that hold the This paperis a product ofthe Office of the industrialized world than to the class proceeds of a booming sector in a special the Vice President, Development Eco- structure of the country being studied. fund outside the budget. nomics. Please contact Norma Campbell, Two studies of student motivational room S9-047, extension 33769. behaviorin Thailand and Malawi address Sharp fluctuations in the export prices of these shortcomings. In the Thailand a major staple commodity have three study, conventional measures of family jarring effects on economic activity. First, 29. The Relative Effectiveness of background (parental education and oc- price hikes in a booming sector lead to a Single-Sex and Coeducational cupation) were kept constant. Student deterioration in the position of other ex- Schools In Thailand achievement in both urban and rural porters as resources are redirected to the settings was related to such motivational desired sector and shortages emerge - Emmanuel Jimenez and variables as educational expectations, and falling prices in a sagging sector af- Marlaine E. Lockheed attitudes and effort. fect other, unrelated exports. Second, The Malawi study employed defini- governments tend to spend additional Single-sex schooling is more effective for tions of family background more relevant revenue generated during the boom and girls, but coeducational schooling is more to a developing country: labor demands to keep on spending even after prices fall. effective for boys in improving student placed on children, basic attributes of Third, the export surge generates a do- performance in mathematics. The differ- houses, and mother tongue. These vari- mestic expansion, bumping up against ences are due to peer group effects, rather ables were more consistently related to production limits that bring on inflation than to school or classroom charcteristics. pupil achievement than were the conven- and, if a reversal occurs, unemployment. tional indicators, parental education and To reduce the effects of highly un- Several studies of the relative effective- occupation. stable commodity prices and increase the ness of single-sex and coeducational If, as these two studies indicate, governments share in the proceeds of the schools have shown that single-sex secon- family background is as important to booming sector, developing countries can dary education promotes both academic students in developing countries as in funnel the revenue from higher export achievement and orientation, particu- industrial ones, two types of action are earnings into a special compensation larlyforgirls. "Single-sex" education also suggested. First, education programs fund.Thefundworkslikethis: Bysetting includes coeducational schools where could be designed to take into account up a variable export levy somewhere be- students are separated into single-sex family background characteristics of stu- tween the actual export price and an classes for instruction. dents. They might include earlyinterven- agreed-upon base, the government appro- Most studies of single-sex education tion programs, such as preschool or a priates the windfall revenues. In a down- have made little or no attempt to control change in school schedules to better meet turn, the fund pays producers the base for factors such as student background, patterns of child labor. Second, education price. school type (public or private), and school systems could work to improve student The fund is set up to handle these selection by parent or students. These motivation and parental support directly transactions outside the budget. This has factors can affect achievement and skew by promoting the importance of educa- the effect of: analyses that seek to compare only the tion. * Limiting price changes between effect of single-sex education versus co- In sum: Researchers should be more domestic and imported goods. education. careful in their modeling of family and * Holding down government spend- Mathematics test scores of Thai school characteristics in the developing ing when export earnings are high (since eighth-graders, obtained during the world. Failure to recognize the family's the spending programs may not be re- 1981-82 academic year, are compared for early and apparently lasting influence is versible). students in coeducational and single-sex a failure to accommodate education pro- * Reining in inflation to prevent a schools. The study overcomes the meth- grams to indigenous realities, wage-price spiral. odological problems by holding constant This paper is a product of the Population Chile and Cameroon have set up such student background, school type, and 14 Policy, Research, and External Affairs Working Paper Series school selection. Moreover, the study technologically advanced industries contact Norma Campbell, room S9-047, minimizes the effects of non-measured employing technical and skilled labor extension 33769. variables such as a student's ability, would more than offset losses in indus- motivation, or previous achievement. It tries using chiefly semi-skilled and un- 31. Public Finance and Economic does this by measuring performance at skilled labor. At the same time, these Development the beginning and again at the end of the losses would occur over a ten-year period, year to focus on the educational "value thereby limiting the cost of adjustment. Bela Balassa added" during that year. The cost of adjustment in the devel- Girls in single-sex Thai schools oped countries would decrease further if Budget deficits tend to lead to a deteriora- scored higher in mathematics achieve- outward-oriented policies gained wider tion of the balance of payments. Further- ment at the end of the eighth grade, but acceptance in the developing countries as more, increases in government consump- the reverse was true for boys, who exhib- these policies ensure the upgrading and tion and the public investment have ad- ited higher scores in coeducational diversification of exports and permit in- verse effects on economic growth. schools. Why was this so? creased intra-industry specialization The largest factor affecting student that limits pressures on particular indus- This paper reports on tests of alternative performance was the student's peer tries in the developed countries. Thus, hypotheses as to the effects of a budget group. The data did not permit an analy- the argument of the proponents of the deficit, examines the influence of the size sisofhowpeergroupsaffectachievement, fallacy of composition thesis is turned on of the government on economic growth, but studies in developed countries sug- its head: the difficulties of adjustment in and investigates the impact of public in- gest that class participation and leader- the developed countries can be reduced if vestment on private investment, total ship opportunities are suppressed for more developing countries adopt outward investment, and economic growth. girls in coeducational settings and for oriented policies, rather than persisting The econometric results provide evi- boys in single-sex settings. in exporting a limited number of simple dence that a substantial part of the This paper is a product of the Educa- manufactures. budget deficit of the developing countries tion and Employment Division, Popula- This conclusion gains in force if one is externally financed. Also, the budget tion and Human Resources Department. considers that the foreign exchange ob- deficit appears to adversely affect private Please contact Cynthia Cristobal, room tained through the exportation of manu- investment. However, a correlation be- S6-001, extension 33640. factured goods is spent by the developing tween the budget deficit, on the one hand, countries to purchase manufactured and the money supply, inflation rates, goods from the developed countries. and economic growth, on the other hand, 30. The Adding Up Problem Thus, the balance of trade does not has not been observed. change and, under outward orientation, At the same time, there is a negative Bela Balassa the incrementin foreign exchangeis often correlation between the ratio of govern- utilized in the same industries via intra- ment consumption to GDP and economic Rather than market constraint in the industry specialization. growth. This relationship applies to all developed countries, export growth in the Also, developing countries can export developing countries as well as to the developing countries is largely deter- to other developing countries. With the regional subsamples of countries in Af- mined by supply factors. This conclusion industrialization of outward-oriented rica, Asia, and Latin America. supports the views of those who advocate countries, they can increasingly ex- Finally, there is a negative correla- the application of outward-oriented poli- change manufactured goods with coun- tion between public investment, on the cies in the developing countries, tries at lower levels of development, one hand, and private investment, total thereby providing an impetus to their investment, and economic growth, on the This paper presents empirical evidence economic growth without encroaching on other. It further apppears that the nega- pertaining to the "adding up problem" developed country markets. tive effects of public investment on eco- and the "fallacy of composition." It is The findings of this paper have im- nomic growth can be decomposed in two shown that, rather than market con- portant policy implications. They sup- parts: their adverse impact on total in- straint in the developed countries, export port the views of those who advocate the vestment and their unfavorable influence growth in the developing countries is application of outward-oriented policies on the efficiency of investment. largely determined by supply factors. in developing countries. This conclusion These findingshave importantimpli- Thus, the deceleration of economic is strengthened if consideration is given cations for the developing countries. growth in the developed countries after to the possibilities of increased trade They show that budget deficits have ad- 1973 was accompanied by an acceleration among the developing countries them- verse effects on the balance of payments of the growth of the exports ofthe develop- selves. Finally, outward orientation pro- as well as on domestic investment. It fur- ing countries. motes efficient import substitution ther appears that increases in govern- It further appears that, under realis- through the reform of the system ofincen- ment consumption adversely affect eco- tic assumptions, the future growth of tives. nomic growth. Finally, increases in pub- manufactured trade between developing This paper, a product of the Office of lic investment not only crowd out private and developed countrieswouldresultina the Vice President, Development Eco- investment but tend to lower the affi- net employment gain for the latter. This nomics, is a background paper for the ciencyofinvestment, with adverse effects would happen as employment gains in 1988 World Development Report. Please on economic growth. Policy, Research, and External Affairs Working Paper Series 15 The conclusions point to the need for local governments. potential to reduce a country's debt and reducing budget deficits in developing To date, a few of these funds have restore economic growth. countries. They further favor lowering improved the capacity of local govern- This paper is abackground paper for government consumption as well as pub- ments to operate, expand, or recover the 1988 World Development Report. lic investment in these countries. costs. But the record of recent minicipal Please contact Rhoda Blade-Charest, This paper, a product of the Office of development fund programs is better. room S13-060, extension 33754. the Vice President, Development Eco- The newfunds improve the distributionof nomics, is a background paper for the funding for urban investment and 1988 World Development Report. Please strengthen municipal governments. . 34. Fiscal Issues In contact Norma Campbell, room S9-047, This paper is a background paper for Macroeconomic Stabilization extension 33769. the 1988 World Development Report. Please contact Rhoda Blade-Charest, Lance Taylor room S13-060, extension 33754. 32. Municipal Development Funds Fiscal austerity's threat to normal policy and Intermediaries goals looms even larger because many of 33. Fiscal Policy In Commodity- its effects are unexpected and poorly Kenneth Davey Exporting LDCs understood. Where rapid urbanization strains the ca- John Cuddington Akey question for stabilization programs pacity oflocal governments to provide nec- is this: How do governments get into essary public services, municipal develop- Commodity-exporting countries have fiscal difficulty in the first place? ment funds can channel new investments sometimes found themselves worse off af Three views predominate: the politi- to municipalities and strengthen local ter a boom than before it, due to fiscal cal deficit, the structural deficit, and the government. mismanagement of the boom proceeds. inflation tax. In the first view, the state is Good fiscal control during booms can forced toward taxing too little and spend- Urban populations are growing at nearly temporarily accelerate the rate of eco- ing toomuch,bothtopayoff specific inter- double the rate of population growth in nomic development. est groups and to sustain employment developing countries, putting consider- through aggregate demand. In the sec- able pressure on local governments to Revenues in countries that rely heavily ond view, the economy suffers a contrac- expand their physical and social infra- on one or two primary commodities tend tionary shock - such as falling terms of structure. Crowded cities are short of to fluctuate widely with prices in interna- trade or interest rate incursions on exter- funds and unable to attract investments tional markets. This fluctuation is espe- nal debt - which the government tries to to expand the facilities, services, and cially wide when export taxes are a large offset by fiscal means in the short run. In enterprises needed to upgrade urban partofthetotaltaxbasebutalsowhenthe the third view, the state indulges the areas. To compound the problem, munici- private sector reaps most of the gains desire to use revenue from the inflation pal governments, which bear most of the from booming prices. tax in the absence of other sources. responsibility for urban areas, lack the Most developing countries have over Fiscal deficits thus have numerous financial and technical resources. consumed in response to windfalls from causes-not all of them irrational, not all One way to route new investments to surges in world prices. In many cases adding to aggregate demand. Reducing local municipalities is to establish mu- government spending has outstripped the deficit is nevertheless the sine qua nicipal development funds. These funds the gain in revenues. These sharp in- non of orthodox stabilization packages. lend money to municipal clients (or pro- creases in government spending are diffi- How does such austerity affect an econ- vide a mix of grants and loans) for long- cult to reverse when the boom ends and omy's chances of achieving the normal term conventional investments in urban often lead to large fiscal deficits rather policy goals of: infrastructure, commercial plants, hous- than surpluses. * Maintaining socially acceptable ing, and other important facilities. Countries like Cameroon and Colom- capacity use and growth? These funds have attracted the sup- bia, however, whose policies emphasized * Keeping inflation tolerable? port of international aid donors because conservative fiscal management, have * Altering the distributions of in- they offer a way to provide wholesale generallybenefitedfrombooms. Themost come and wealth? funding for a wide range of urban invest- effective government policies: * Maintaining self-reliance in trade ments. Most of the recent aid projects are * Allocate public investment pro- and external finance? at an early stage. Donors have focused on grams to sound projects that do not in- It makes each of these tasks harder, developing appraisal skills and establish- volve burdensome recurring costs. because of the incomplete understanding ing technical standards for the projects, * Keep government spending atlev- of the likely effects of fiscal measures. but equity is a prominent objective, par- els consistent with long-run budget ex- First, policymakers need to know ticularly for investments in water supply, pectations. more about the specific effects of different sanitation, and other neighborhood im- * Maintain prudent external bor- policies. For example, cuts in public in- provements. Typically the funds combine rowing and foreign exchange reserve poli- vestment may also cause private capital financing with measures to strengthen cies. formation to decline. Changes in the the financial and technical capacity of Programs along these lines have the prices that public enterprises charge for 16 Policy, Research, and External Affairs Working Paper Series food or essential services can have strong * Itis vital that recurrent and devel- expenditures. distributional repercussions. And the opment expenditure programs be consid- Most social security systems in de- bidding up of interest rates can, if accom- ered simultaneously in each sector, since veloping nations are running substantial panied by other incentives, make capital a country's ability to sustain the recur- surpluses. If the systems are to meet repatriation and emigrant remittance rent costs arising from new investment future obligations, reserve funds and more likely. may be doubtful. In restructuring recur- surpluses should be invested in safe as- Second, fiscal measures should not rent budgets, it is important to establish sets with real positive rates of return. be independent of other policy moves. If "norms" for the level and distribution of But many countries lack well-devel- devaluation causes contraction, teaming expenditure to provide properly for key opedfinancial marketsand good domestic it with fiscal restraint may lead to ex- services. opportunities for productive investment. treme losses of output - the overkill for * In the long run, the budgeting and The government usually controls social which orthodox programs are often criti- planning process should be made public security systems - and often uses the cized. in order to educate public opinion about surpluses to finance government deficits. Third, fiscal measures can some- economic alternatives, build a consensus, Economists are divided over how- times substitute for other (less savory) and spread responsibility for public social security systems affect private policy changes. For example, the nar- spending choices. saving and capital accumulation, which rower and more directed fiscal interven- * Monitoring development projects leads to long-term growth. They also tions can avoid many of devaluation's un- and programs requires explicit informa- disagree on the inefficiencies which social" pleasant economywide effects (political tion on actual expenditures of individual security systems introduce into labor visibility, output contractions, and price projects and the entire program, includ- markets. inflation because of the higher costs of ing simple breakdowns by implementing Itis clear, however, that investing so- imported inputs). agency, sector, source of finance, and so cial security funds in government securi- This paper is a background paper for on. For investment programs, it must be ties increases the risk of the social secu- the 1988 World Development Report. possible to relate expenditure informa- rity system's insolvency. Please contact Rhoda Blade-Charest, tion to a financial plan for each project. Governments facing fiscal difficul- room S13-060, extension 33754. The use of standardized project profiles ties find it tempting to expand the money for all approved projects is an invaluable supply and drive up inflation. This cuts technique. government obligations to social security 35. Improving the Allocation and * The financial woes of developed reserve funds by reducing the real value Management of Public Spending countries increase the value of external of the investments in government bonds. aid and the leverage exercised by aid There is also constant pressure for Stephen Lister agencies. To minimize friction with aid many governments to increase benefits agencies, governments should exercise without increasing contributions. Al- The reforms most needed to rehabilitate a careful aid management by monitoring though such action is expedient, it often developing country's planning and budg- project preparation and implementation, proves unsustainable. A government's eting system are generally simple organ- working to minimize project problems, ability to resist such pressure thus has a izational measures, not sophicsticated and encouraging dialogue between the direct bearing on the long-term success of analytical techniques. government and aid agencies. the system. This is a background paper for the One system that stands out as sound, When a country's planning and budgeting 1988 World Development Report. Please with wisely invested reserves, is the regu- system is dilapidated, an important first contact Rhoda Blade-Charest, room S13- lated private social security system in stepistorehabilitatebasicbudgetaryand 060, extension 33754. Chile. accounting functions and to generate This is a background paper for the public expenditure data that can provide 1988 World Development Report. Please a starting point for rational planning. 36. Social Security Finance In contact Rhoda Blade-Charest, room S13- Other basic measures include: Developing Countries 060, extension 33754. * The budget process should first de- termine what resources are available and Douglas J. Puffert adopt aggregate revenue and expendi- 37. Black Market Premia, ture targets. Then the entire set of public Social security systems in developing Exchange Rate Unification, and expenditure issues should be looked at si- countries can provide a pool ofinvestment Inflation in Sub-Saharan Africa multaneously. If total expenditure is al- capital to spur economic growth. But lowed to be the outcome of the aggrega- many systems now showing surpluses Brian Pinto tion of sectoral bids, the overall expendi- may become insolvent because of poor ture is almost certain to be unsustain- management. The black market premium on foreign able. exchange is an implicit tax on exporters. * The responsibility for reconciling Social security systems usually cover less Therefore, eliminating the gap between expenditure bids with agreed overall tar- than 10 percentofthe population of devel- the official and black market exchange gets must he decentralized. Sectoral min- oping countries. Yet in a number ofcoun- rates without raising taxes or cutting istries should be given ceilings within tries, these systems make up a large pro- government spending could raise infla- which to prepare their estimates. portion of public sector revenues and tion substantially. Policy, Research, and External Affairs Working Paper Series 17 The links between exchange rate and fis- ernmental grant systems that fail to In many African nations, the fiscal bal- cal reform are developed for countries achieve their desired objectives. ance is extremely fragile, so fiscal re- where the black market premium on for- A country's grant system is the product of straint is necessary for stabilization and eign exchange is exceptionally high, often its political environment. Such systems adjustment efforts to succeed. exceeding 100 percent, as has been re- tend to develop over time in response to Governments tend to increase public cently observed in Africa. Exchange rate current political needs and then become expenditures when export commodity reform is motivated by the allocative goal institutionalized. Since they have devel- revenues are high - and maintain public of stimulating exports through real de- oped in a haphazard fashion over time, spending even after revenues fall. This is preciation. By interpreting the premium grant "systems" commonly are not sys- a formula for building unmanageable as a tax on exports, it is argued here that tems at all. Hard-pressed government debt. Botswana and Cameroon, which this goal is equivalent to reducing the ministries seldom undertake any thor- exercised restraint during boom times, premium, or unification of official and ough analysis of these arrangements, are exceptions to the rule in Africa. black market exchange rates. hence their overall impact is unknown in Inflation, driven by public spending, Unification also has fiscal implica- spite of the importance of this use of re- has serious consequences such as the tions. In the common case of govern- sources. erosion of the real value of taxes, adding ment's being a net buyer of foreign ex- Grants from central governments be- to public deficits. However, attempts to . change from the private sector, there is a come more important sources of local reduce inflation through fiscal austerity trade-offbetween the premium (tax on ex- revenue as local governments are ex- may have undesirable side effects, if aus- ports) and inflation (tax on domestic pected to playlargerroles in the provision terity is pursued in the wrong way when money) in financing the deficit. There- of public services. public sector real wages are driven down fore, unification could raise the inflation Grants are usedin hopes ofachieving below subsistence, productivity is re- substantially as the lost revenue from a wide variety of goals. One common ra- duced. exports is replaced with a higher tax on tionale for intergovernmental grants is to Low public sector productivity re- money. This will occur even if real gov- redistribute national income or equalize sults in poor delivery of human services, ernment spending remains constant, living standards by helping governments the deterioration of infrastructure, and unless there is a fiscal response to com- deliver public services in economically low generation of revenue, hindering eco- pensate for the loss of export revenues. depressed areas. nomic growth. The analytical ideas are illustrated Since transfers may be seen locally as Fiscal deficits drove real exchange with the unification experiences of "costless" gifts from the higher level of rates up in the late 1970s and early 1980s Ghana, Nigeria, Sierra Leone, Zaire, and government, there is little pressure on - and fiscal policy should now facilitate Zambia. In order to avoid costly surges in localities to mobilize resources of their real depreciation adjustment by pulling post-unification inflation as recently ob- own or to spend the funds efficiently. Few deficits down. served in Sierra Leone and Zambia, ex- developing countries have the resources External aid has often supported un- change rate reform may have to be slowed to conduct audits to ensure the accounta- sustainable fiscal policy. Far from lessen- down to accommodate fiscal reform. This bility of local government spending. ing the need for structural adjustment, it applies especially when the premium is The goal of assisting decentralized should now be used for rehabilitation and high, with significant revenue and redis- decisionmaking by transferring funds to infrastructure development. tributive implications, and policy credi- local units can also conflict with the objec- Market-oriented exchange rates are bility is low. Even so, discrete maxi-de- tive that central government revenues be not a substitute for fiscal restraint, but a valuations mightbe preferable to acceler- spent efficiently. Decentralization im- complement. Flexible rates alone failed in ated crawls. Based on the country experi- plies local control over the use of funds; Zambiaand SierraLeone. Combined with ences, some guidelines are suggested for the desire for effective use of centrally prior fiscal restraint, however, they suc- the transition to unified rates. Lastly, a collected funds calls for considerable ceeded in Ghana. changed emphasis in policy conditional- oversight of local spending. This is a background paper for the ity is argued for. This is a background paper for the 1988 World Development Report. Please This paper is a background paper for 1988 World Development Report. Please contact Rhoda Blade-Charest, room S13- the 1988 World Development Report. contact Rhoda Blade-Charest, room S13- 060, extension 33754. Please contact Rhoda Blade-Charest, 060, extension 33754. room S13-060, extension 33754. 40. Financial Deregulation and the 39. Fiscal Policy In Low-Income Globalization of Capital Markets 38. Intergovernmental Grants In Africa Developing Countries Eugene L. Versluysen Stephen A. O'Connell Larry Schroeder Rapid financial deregulation and the glo- Fiscal restraint, a precondition for eco- balization of capital markets have led to The method a central government uses to nomic recovery in much ofAfrica, should dangerous financial volatility that could transfer funds to local jurisdictions can go hand-in-hand with improved public have a destabilizing impact on major greatly affect a country's development ef- sector efficiency in delivering basic hu- economies. To reduce this volatility, new forts. But the effects of the transfers are man services and upgrading infrastruc- regulation may be needed. seldom analyzed, resulting in intergov- ture. 18 Policy, Research, and External Affairs Working Paper Series Financial deregulation in recent years ices in developing countries, but in most impact ofpay and employment policies on has vastly increased the ability of finan- countries it needs reform. government performance. cial markets to allocate international capital efficiently. It has also sparked ex- The property tax is the most widely used Governments should pay more attention plosive growth in financial transactions source ofmunicipal tax revenue in the de- to the influence of pay and employment and resulted in a restructured, more veloping world, but its current yield is policies on their ability to provide goods competitive, and less costly financial often insubstantial. and services efficiently. services industry. Poor policy often sets tax rates too Rapid and sustained expansion of But deregulation has proceeded so low, offers excessive exemptions, and government employment is common in rapidly that the volume of purely finan- fails to adequately respond to inflation. developing nations. Governments often cial transactions now greatly exceeds Poor administration results in incom- find it politically difficult to dismiss pub- that of transactions driven by interna- pletetaxrolls, haphazardvaluations, and lic workers, even in the face of rising tional trade in goods and services. Finan- low collection efficiency. deficits. cial activity is now "delinked" from other Toincreasetheyieldandimprove the An increase in public employment - factor markets and increasingly driven by fairness of the tax, both the policy and ad- without a commensurate increase in speculation for short-term profits rather ministrative problems must be ad- complementary inputs can add to labor than by broader economic activity. dressed. Tax reform too often consists of redundancy. Increases in salary costs This new pattern has led to growing a one-time general revaluation or rate may also crowd out expenditures for economic uncertainty and instability. increase. Taken alone, neither has a materials, equipment, construction, in- Markets now run around the clock and sustained impact on the property' tax's frastructure, and other inputs. respond so rapidly that there is a growing performance. Many governments use public jobs as danger of chain reactions that could pre- Tax policy must ensure that rates are a means of lowering urban unemploy- cipitate global market failures. set high enough to make the tax worth ment. This frequently results in a bot- Deregulation has also made the con- collecting. Where significant inflation tom-heavy structure, with employment duct of national monetary policy more exists, a policy of annual adjustments in concentrated in lower salary grades, and difficult and the monitoring of markets rates or valuations should be instituted. far too many workers for managers to use more complex. For the United States, de- Administrative reforms should sup- effectively. regulation has increased the abillity to port simple procedures for property dis- It is also common for governments, in borrow abroad, thus contributing to fiscal covery and valuation, suited to the char- times offiscal crisis, to reduce the relative laxity. In that country, there is a need for acteristics of the local tax base and the pay of more skilled and experienced per- a single regulatory agency to coordinate skills tothe taxing authority. Procedures sonnel rather than fire less skilled and the supervision ofrelated financial activi- for updating property records to reflect redundant labor. This prompts some ties - to lessen the risk of compounded changes in the tax base deserve particu- managers and professionals to quit and market failures. lar attention. Collection systems should leads others to reduce their work effort or Some countries, such as England, be designed to make compliance conven- moonlight. It also takes a toll on civil have moved to strengthen the capitaliza- ient; andnoncompliance subjecttocostly, service morale and discipline. tion ofbanks and securities firms. Others swift, and sure penalties. Arecent study ofgovernment policies (Canada, France, Italy, and Spain) are Central governments can achieve re- in Sub-Saharan Africa found, for ex- making progress. But there is acute need form on a nationwide scale -even where ample, widespread declining levels ofreal for improvement in the United States, the property taxislocally administered- pay, especially at higher salary grades, where many large banks are undercapi- by delivering standardized packages of and excessive compression of the govern- talized in relation to their exposure on training and technical assistance to local ment pay structure. These policies have LDC loans. governments. contributed to growing government inef- Regulators in the major trading na- This is a background paper for the ficiency. tions need to address the possibility of a 1988 World Development Report. Please Government employment practices full-scale breakdown of the financial sys- contact Rhoda Blade-Charest, room S13- need to be reformed not only because tem. 060, extension 33754. growing wage bills are outpacing tax and This is a background paper for the export revenues, but also because effec- 1988 World Development Report. Please tive public administration is soimportant contact Rhoda Blade-Charest, room S13- 42. Government Pay and to development. In many countries, a 060, extension 33754. Employment Policies and smaller, better-paid civil service might Government Performance in outperform a larger, more poorly paid Developing Economies work force. Because government eco- 41. Urban Property Taxation in nomic and social roles are so large in Developing Countries David L. Lindauer many countries, better performance would mean faster development. William Dillinger Excessive spending on public employment This is a background paper for the has contributed signicantly toftscalcrises 1988 World Development Report. Please The property tax can be an efficient, equi- in many developing nations. Less visible, contact Rhoda Blade-Charest, room S13- table means of financing municipal serv- but also important for development, is the 060, extension 33754. Policy, Research, and External Affairs Working Paper Series 19 43. Tax Administration in taxpayer a number in a master file. Com- relative to GDP has grown in most devel- Developing Countries: Strategies puters also facilitate information gather- opingnations. Demographic factors, pref- and Tools of Implementation ing, cross checking, and audits. erences for public provision of goods and This is a background paper for the services, and increasing unit costs of Tax Administration Division, IMF Fiscal 1988 World Development Report. Please government production are all likely to Affairs Department contact the World Development Report havebeen influential. Development theo- office, room 813-060, extension 31393 (38 rizingitselfas well as the "demonstration Developing nations should adopt less pages). effect" ofadvanced capitalistand socialist sophisticated taxes (such as taxes on goods economies may also have played a role. and services) to broaden the tax base, and This is a background paper for the use more efficient administrative tech- 44. The Size and Growth of 1988 World Development Report. Please nique (such as withholdings and comput- Government Expenditures contact Rhoda Blade-Charest, room S13- erization). At present, potential tax bases 060, extension 33754. are often not exploited because the appli- David L. Lindauer cation of existing law (particularly for income taxes) is not possible. Over the last 20 to 30 years government 45. How Much Do State-Owned spending as a share of GDP has grown Enterprises Contribute to Public In many developingnations, tax adminis- worldwide. But in comparing developing Sector Deficits In Developing trators often make their own policy be- and developed nations, the current levels, Countries - and Why? cause they are unable to enforce the laws. growth rates, composition, and determi- Administrators face major problems: nants ofgovernment expenditures exhibit Govindan Nair and Anastasios Filippides A large portion of the economy is at a significant differences. subsistence level and does not keep rec- State-owned enterprises in developing ords. Where records are kept, accounting The growth of governmentin the develop- countries contribute substantially to pub- is not reliable. Taxpayer cooperation is ing economies is compared with the expe- lic sector deficits - partly because they alsolowforavarietyofreasons: shortage rience oftheindustrial countries. Relying tend to rely on capital-intensive produc- of trained officials, a tradition of corrup- on measures of government expenditure tion techniques and subsidization tion, and because taxes are not often seen as proxies for government size the follow- (through price controls) of output. More to produce better government services. ing is observed: attention must be paid to cost effectiveness These problems induce governments * In the developing nations, central and cost recovery. to rely heavily on trade taxes. But this is government expenditures as a share of costly. Export taxes tie revenue to unpre- GNP range from 10.8 percent to 62.1 Data for 1980-85 show that value added dictable export commodity prices which percentandexhibitgreatervariancethan by state-owned enterprises (SOEs) in aggravates fiscal stabilization problems. is found in the industrial countries. developing countries hovers at around Import duties lead to excessive protection * Developing economies, especially one-tenth of GDP at market prices. In of inefficient domestic industry. the low-income nations, devote, on aver- this they are comparable to SOEs in in- Administrative problems also lead to age, smaller percentages of GDP to gov- dustrial countries. the selective collection of income tax. ernment spending than do OECD coun- In another respect they are different: This discriminates against the most ac- tries. But compared with the historical their share of gross investment averages cessible target: the modern sector of the experience of the industrial nations, low three times their share of value added. economy, which is crucial to growth and and middle income nations already con- This reflects the relatively capital-inten- development. sume much higher fractions of GDP. sive nature of SOE activities in develop- Governments should shift away from * For the last 20 to 30 years, expan- ing countries, possible biases toward trade taxes to consumption taxes, such as sion in the share of government spending capital-intensive production techniques, sales tax, particularly of the value added as a percentage of GDP appears to have and heavy subsidization (through price variety. They should also move toward been the norm in both developing and de- controls) of SOE output. more broadly based income taxes (includ- veloped countries. On the whole, SOEs in developing ing interest and dividends - not just * Transfer payments in developing countries contribute substantially to wages), with realistic rates. Assessment nations are still at low levels when com- public sector deficits, typically finance based on "presumptive" rather than ac- pared with advanced economies but ap- less than one-fifth of their investment, tual calculation methods can also help pear to be growing quickly. Government contribute far less to national savings extend the tax base to the self-employed, consumption expenditures tend to be than to national investment, and contrib- to subsistence farmers, to traders, and to growing faster than GDP. ute heavily to the savings-investment smaller firms. * Available data make it difficult to imbalance in many countries. Countries The single most effective way to im- draw firm conclusions about what in- differ in how they finance the SOEs' say- prove tax administration is to use a sys- creases in government input costs versus ings-investment gaps, but often the SOEs tem of income withholdings (for all com- increases in level of public output contrib- account for much of the outstanding ex- ponents of income). Another important ute to the growth in public spending. ternal debt and at the same time draw tool is computerization. This can simplify Numerous arguments can be raised heavily on government budgets. withholding and collection by giving each to explain why the size of government Some SOE expenditures - particu- 20 Policy, Research, and External Affairs Working Paper Series larly on investments in infrastructure - * Development of a well-designed policy-makers cannot ignore capital are crucial to a nation's development and program of operationally oriented, de- mobility even in situations where domes- to the alleviation ofpoverty. Butreducing tailed case studies of specific country tic nationals do not invest abroad and for- SOE deficits and keeping them from be- experiences (successes and failures) from eign investors do not invest domestically. coming a long-term drain on public fi- which to draw lessons for future opera- The potential for capital to move across nance will require more attention to cost tions and country and economic sector international boundaries creates an op- effectiveness and cost recovery in SOE ex- work. portunity cost for investment in a particu- penditures and more rigorous appraisal Addressing these issues may also lar country and throughout the world. In of SOE investments. have implications for the type of lending determining marginal effective tax rates This is a background paper for the instrument the Bank uses. Reforms of it is necessary in addition to traditional 1988 World Development Report. Please public spending are usually dealt with considerations, such as tax rates and the contact Lupita Mattheisen, room S13- through structural adjustment loans, distribution ofthe taxbase, toincorporate 067, extension 33757. backed up by technical assistance opera- the following factors: tions - but these may not always be * Source rules (the basis for taxa- suitable. If major policy decisions are tion). 46. The Management of Public required to bring about important long- * Nexus rules (which define who Expenditures: An Evolving Bank term structural changes, a broader, more must file and pay income taxes). Approach flexible lending instrument may be more * Attribution rules (about account- appropriate. ing methods). Robert Lacey One approach being explored is to * The scope of bilateral accommoda- finance a time slice of the country's public tion between countries. The key to better management of public investment program (either on a sector- None of these factors is superior eco- spending, including investmentprogram- by-sector or aggregate basis, depending nomically to the others as a basis for de- ming, lies in the process by which pro- on the scope of the reforms to be intro- termining tax policy. If tax policy is to en- grams are identified, prepared, approved, duced) to support not only more appropri- courage international capital flows, ex- and implemented. Strengthening this ate programs but also institutional and plicit tradeoffs may have to be made be- process should lead to expenditure pro- procedural reforms of the ways in which tween increased tax revenues and incen- grams that are a more appropriate size public expenditures are prepared and tives to invest. and are more attuned to overall develop- implemented. This approach could com- In addition, tax policy should be ment goals. bine quick-disbursing balance of pay- evaluated with respect to net, not gross, ments support with the longer-term ap- capital flows. Tax policy that increases The Bank is paying increasing, though proach needed to encourage institutional foreign investments in a capital import- still unsystematic, attention to the insti- reform. ing country by X percent is poorly de- tutional dimension of public expenditure This is a background paper for the signed if it increases the flow of domestic management. This implies analysis of 1988 World Development Report. Please investments abroad by a larger percent- the processes and procedures by which contact Lupita Mattheisen, room S13- age. programs are put together with an as- 067, extension 33757. International capital mobility pro- sessment of the strengths and weak- vides both costs and opportunities for nesses ofthe institutions involved and the developing tax policy within a country. links between them. Advising govern- 47. Considerations for the Since investors treat taxes as a cost of ments on these aspects requires more Development of Tax Policy When doing business, each country's tax price expertise than most Bank staff members Capital is Internationally Mobile should reflect its opportunity cost of in- possess. The Bank should develop staff vestment (either foreign or domestic). skills in this area through: Robert F. Conrad These tax prices will differ between coun- * Better coordination in the Bank of tries. Uniformity of taxes across coun- public expenditure reform issues. For tax policy to encourage maximum in- tries can therefore distort rather than * More intensive, systematic staff vestment of capital (both foreign and improve investment. As long as there is training, and more contact with academ- domestic) it is necessary to take into ac- reasonable competition among the sup- ics and other outside experts through count the potential mobility of capital pliers of capital, tax competition among such vehicles as seminars. across international borders. Economic governments may make distribution * Closer collaboration and more analysis of investment incentives should within the system more efficient. In such systematic exchange of views between therefore incorporate the effects of vari- a context international cooperation may operational staff and the Policy, Plan- ables such as source rules, nexus rules, not be the best method for the develop- ning, and Research complex, including attribution rules, foreign tax credits, and ment of tax policy for factors that are incorporation of feedback from the semi- so on, in addition to traditional variables internationally mobile. nars held by the Economic Development such as legal tax rates and the revenue im- Equity across countries, however Institute. plications of the distribution of the tax defined, should be measured by how the * A closer working relationship with base. net benefits ofcapital investment (includ- the IMF, especially the Fiscal Affairs De- ingtax revenues) are distributed-notby partment. To encourage investment and savings, how the tax base is distributed. In par- Policy, Research, and External Affairs Working Paper Series 21 ticular, tax treaties should not be evalu- greatest potential to damage as their has proven effective in accommodating ated solely on revenue potential nor welfare effects are likely tobe substantial economic, distributional, and financial should they be canceled unilaterally. but difficult to measure quantitatively. objectives - primarily through carefully Insteadthey shouldbe evaluatedon prag- The latter half of the paper reviews designed tariff structures. matic grounds in terms of their effects on the literature on a more direct but nar- In the other six sectors the focus is investor confidence and their administra- rower measure of the incentive effects of heavily on either distributional (health, tive costs. taxation: how do taxes affect output education, housing) or financial (fertil- This is a background paper for the growth rates? Some new evidence on this izer, ports, railways) concerns - with 1988 World Development Report. Please issue is provided using a comprehensive little attempt to incorporate economic contact Lupita Mattheisen, room 813- sample of 111 countries. Empirical esti- pricing principles. 067, extension 33757. mates from this cross-country data show Efficiency pricing is not irrelevant or the growth rate of output to be negatively impossible in these sectors, and - even if correlated with the level of government used only as a benchmark - could im- 48. Do Taxes Matter? A Review of spending but positively correlated with prove sector management and project the Effect of Taxation on Economic the growth rate of government spending. selection and design. Behavior and Output Estimates of the effect of tax rates on The fiscal dimension of public sector output growth rate are also mixed: they pricing has received little attention in Jonathan Skinner are sometimes negative, sometimes zero. most sectors. In view of the serious con- This is a background paper for the straints on growth that several less devel- Taxes that are moderately distorting are 1988 World Development Report. Please oped countries face because of scarce fis- potentially the most damaging because contact the World Development Report cal resources, this is a major shortcoming their effects may be substantial yet go office, room S13-060, extension 31393(38 - and deserves priority attention in the unnoticed. pages). formulation of future price recommenda- tions. Taxpayers are most concerned about the This is a background paper for the private burden (costs) of taxation as 49. Public Sector Pricing Policies: 1988 World Development Report. Please measuredby what they pay to the govern- A Review of Bank Policy and contact Lupita Mattheisen, room S13- ment. However, taxes can generate a net Practice 067, extension 33757 (122 pages with gain to society if governments use the tables). revenues wisely. Economists, on the DeAnne Julius and Adelaida P. Alicbusan other hand, are more concerned about the social burden (costs) of taxation inde- Six sectors- health, education, housing, 50. Fiscal Policy and Stabilization pendently of the way in which the reve- fertilizer, ports, and railways - have in Brazil nue is used. Taxes change prices and made little attempt to incorporate effi- factor returns (wage rates, the rate of ciency pricing into public sector pricing. Celso Luiz Martone return on capital, and soon). When taxes And most sectors pay far too little atten- are imposed, consumers and producers tion to fiscal objectives in public pricing. The"heterodoxshock"approachtostabili- try to avoid the tax by consuming or pro- zation is based on a flawed concept of ducing less of the taxed item (good, activ- Nearly a decade has passed since the inflation. The countries that entered this ity, or income). The extent of avoidance Bank codified its position on cost recovery path are likely to remain for a long time accelerates with increases in the tax rate. policies for public sector projects, in Op- under a controlled economy, sacrificing This distortion of taxpayer behavior re- erational Manual Statement (OMS) 2.25. theirgrowthpotentialforsomestability in duces their welfare and results in a net OMS 2.25 recommended that a common income distribution and less explosive ("deadweight") loss to society when mar- analytical framework be used in all sec- inflation. kets are functioning well. tors to determine appropriate pricing To illustrate this broader welfare no- guidelines and cost recovery targets. The theoretical basis for the "heterodox tion of the economic inefficiency of taxa- That framework involved two steps: shocks" recently implemented in Argen- tion, some heuristic examples are chosen, * Estimating efficiency prices - tina and Brazil is that chronic inflation is first from historical and then from more prices that would maximize the net eco- essentially inertial - the product of stag- - recent accounts. It is shown that in some nomic benefit from the project. gered prices and wage adjustments. The cases the behavioral effect of taxation is * Adjusting those prices to take into underlying assumption is that the eco- dramatic (for example, in production, account nonefficiency objectives (dis- nomic process is a cooperative game. trade, and consumption) while in other tributional, fiscal, or financial) and im- Withoutlegal andother forms of coercion, cases the evidence is mixed (for example, plementation constraints. however, individuals tend to cheat - to in savings and investment). In general, In a review of 13 sectors, the authors fix their prices above average to start very low tax rates have little impact on have found that those Bank guidelines with. economic behavior, while very high tax are followed fairly closely in seven sec- The inertial hypothesis ofinflation is rates generate efficiency costs that no- tors: coal, irrigation, oillgas, power, a good description of the dynamics of body can ignore. However, when taxes roads, telecommunications, and water/ inflation but it is not a theory of the are moderately distorting, they have the sewerage. In these sectors, the approach nature of inflation - so the proposed 22 Policy, Research, and External Affairs Working Paper Series remedy (the "heterodox shock") cannot be 51. On Participating In the self-defeating in these negotiations and implemented successfully. International Capital Market give more discretionary power to admin- Moreover, applying that kind of istrative authorities in the developed shock destroys the spontaneous opera- V. V. Bhatt countries. Without a negotiated system tion of the price system by suppressing of multilateral rules, it is easier for the the information content conveyed by Developing countries should participate economically strong countries to domi- prices and by distorting the allocation of actively in the international capital mar- nate the weaker ones through political 'resources. ket as well as in the Uruguay Round of and economic power. Once a government engages in such multilateral trade negotiations on serv- This is a background paper for the an experiment, it is led to repeat it peri- ices, to seize export opportunities relating 1989 World Development Report. Please odically to survive. The countries that to skill-intensive services - such as finan- contact the World Development Report entered this path are likely to remain for cial services and computer software, in office, room S13-060, extension 31393 (36 a long time under a controlled economy, which countries like India may have a pages with tables). sacrificing their growth potential on be- comparative advantage. half of some stability in income distribu- tion and less explosive inflation. Since 1970, the international credit mar- 52. Financial Innovation and Eventually this "muddling through" ket has grown in size and sophistication. Credit Market Development policy may break down, precipitating It offers developing countries many op- hyperinflation and consequent structural portunities to meet their growing need for V. V. Bhatt changes - but this does not seem to be an external resources, to manage optimally imminent or even a necessary outcome, their foreign exchange assets and liabili- The function of a central bank is to pro- A basic flaw of the "heterodox" stabi- ties, to accelerate their pace of develop- mote financial innovations that enlarge lization programs was to assume that ment, and to expand export possibilities the capital market by introducing new stabilizing the price level (through a in financial services (particularly rele- credit instruments, cultivating new mar- general freeze) was a precondition for vant for countries like India). kets, and introducing new institutional fiscal equilibrium and eventual fiscal It is essential for developing coun- structures. The central bank's goal reform - instead of the reverse. The fis- tries to participate in this market, but to should be to reduce overall costs and risks cal austerity promised after stabilization do so they must develop institutional and on credit transactions. was never accomplished - blocked by policy frameworks that help them estab- bureaucrats and special interest groups lish their creditworthiness, integrate Marx, Shumpeter, Kuznets, and others interested in maintaining the status quo. their domestic financial markets and or- have written about how technical innova- The challenge in these countries is to ganically link them to the international tions affect economic development, but devise economic programs that could capital market, and develop appropriate little attention has been paid to how fi- make long-term stabilization programs institutional expertise and technology. nancial and fiscal innovations affect de- viable and politically acceptable. India is one of the few developing velopment. In this sense, stabilization is less a countries capable ofdeveloping the exper- Financial innovations tend to reduce technical economic problem than an in- tise and technology needed to participate transaction costs and risks- both subjec- tertemporal political problem of how to in the international capital market. It is tive and objective - and thus to expand compensate the losers, on the one hand, urgent that India do so qu8ickly, to re- and integrate capital markets, Financial and on the other hand to convince the duce the foreign exchange cost of operat- development accelerates the pace of eco- majority that the trade-offbetween sacri- ing in this market and to enlarge its nomic development by encouraging say- ficed current consumption and increased export effort. ings and investment and increasing out- future consumption is worthwhile. The To take advantage ofexport possibili- put. precarious political systems in these ties for financial and other services and Public or government intervention - countries have been unable to deal with products, developing countries should through a government's central bank - is conflicts and support consistent long- also participate actively in the Uruguay essential to a sound credit system. term policies. Round of multilateral trade negotiations A central bank in a developing coun- This is a background paper for the on services. trymusthave a development orientation. 1988 World Development Report. Please The idea is to open up opportunities The single most important criterion of contact Lupita Mattheisen, room S13- to export skill-intensive services- such as central bank effectiveness is the extent to 067, extension 33757 (36 pages with financial services and computer software, which the bank's policies reduce overall charts and tables). in which countries like India may have a costs and risk on credit transactions. comparative advantage. Increased com- To perform its regulatory function petition would also tend to improve the effectively and to promote a sound, domestic financial system, which would healthy financial or credit system, a cen- stimulate productivity and investment in tral bank must have a degree of auton- the productive sectors. omy. Since 1965 this autonomy has been Confrontation and rhetoric about eroded in both the developed and the special and differential treatment are developing countries because of the im- Policy, Research, and External Affairs Working Paper Series 23 pact of fiscal policy. decade ago about Europe and the Far In reaction to the shock of sharply The result has been unstable credit East, tworegionswhereventurecapitalis declining commodity prices (at a time of and the international debt crisis, which nowgrowingfast. In many countries, the heavy commitments on public expendi- already affect the development process right conditions already exist for venture tures), the Malaysian government drasti - and the functioning of international capital to succeed. cally cut back on public spending and credit markets. Governments can create an enabling allowed the exchange rate to depreciate This is a background paper for the climate for venture capital by improving freely. 1989 World Development Report. Please the macroeconomic environment, trying A sharp decline in export income, contact the World Development Report to change attitudes about risk and en- combined with rising import costs and office, room S13-060, extension 31393(32 trepreneurship, improving information reduced public spending, caused severe pages with tables). and infrastructure, and providing and disinflation - which manifested itself in promoting the availability of venture an increased number of nonperforming capital funds. loans in the financial sector. This culmi- 53. Venture Capital and Hard facts about venture capital are nated in the failure of 24 deposit-taking Entrepreneurial Development scarce, as participants have not been cooperatives in mid-1986 and required eager to spread the word about the results the central bank to inject substantial Fernan Ibafiez oftheirinvestments. Mostoftheinforma- fresh capital to aid three commercial tion available is through self-promoting banks. The same doubts being expressed about success stories. The Bank might con- Losses to ailing financial institutions the possibilities for venture capital in the sider: between 1985 and 1986 amounted to as developing countries were expressedadec- * A systematic review of the experi- much as 4.7 percent of 1986's GNP. The ade ago about Europe and the Far East, ence with venture capital in selected Malaysian authorities adopted several two regions where venture capital is now countries. rescue packages and bank restructuring growing fast. Venture capitalists tend to * Interviews with investee compa- exercises to protect depositors -including invest in good entrepreneurs, not good nies to assess theimpactof different types a unique plan for converting deposits into projects. of investment. equity (the 50:50 solution). * Assessing the efficiencyof different Malaysia's experience shows that Venture capital is a temporary-equity or types and procedures of investment, structural adjustment to shocks emanat- quasi-equity investment in a growth-ori- * Comparing the results of equity ing from changes in the external environ- ented, usually small or medium-size busi- and venture financing with conventional ment have pervasive microeconomic ef- ness managed by a highly motivated en- or developmental term credit financing. fects, particularly in the financial sector. trepreneur. Management assistance of- * Analyzing the essential character- Effectively tackling financial dis- ten comes with the investment. For the istics of a successful entrepreneur. tress requires both macroeconomic policy investment, the investor expects either a This is a background paper for the adjustments and timely changes in bank- minority share in the company or the 1989 World Development Report. Please ing legislation and in the machinery for irrevocable right to acquire it. contact the World Development Report supervising banks - to address the prob- Unlike traditional investors, venture office, room S13-060, extension 31393 (38 lems offraud and poor bank management capitalists prefer good entrepreneurs to pages). that typically emerge in times of financial good projects - and minority rather than distress. controlling interest, which tends to turn 54. Bank Restructuring In This is a background paper for the an entrepreneur into an efficient em- Malaysia, 1985-88 1989 World Development Report. Please ployee. Collateral often takes the form of contact the World Development Report such intangible assets as research re- Andrew Sheng office, room S13-060, extension 31393 (37 sults, innovative marketing ideas, or pages with charts and tables). technical skills. Venture capitalists usu- Malaysia's experience illustrates the per- ally expect more risk and a longer initial vasive microeconomic effects - particu- period of negative cash flow than tradi- larlyinthefinancialsector-ofstructural 55. Financial Liberalization in tional investors. adjustment to external shocks. Effectively Developing Countries Venture capital cannot be expected tackling financial distress requires both to grow in the developing countries at the macroeconomic policy adjustments and Bela Balassa same pace as it did in its early years of changes in banking legislation and super- development in the United States and vision - to address the problems of fraud Higher real interest rates increase finan- Canada. But there is no reason to believe and poor bank management that often cial intermediation, which in turn raises that enabling conditions cannot be im- emerge in times offinancial distress. the rate ofeconomic growth in developing proved so that it can contribute to indus- countries. trial and entrepreneurial development in Between 1983 and 1986, Malaysia em- the Third World. The same doubts being barked on a structural adjustment pro- McKinnon and Shaw define financial lib- expressed about venture capital in the gram to control its fiscal and balance of eralization to mean the establishment of developing countries were expressed a payments deficits. higher interest rates that equate the 24 Policy, Research, and External Affairs Working Paper Series demand for, and the supply of, savings. been traditionally discussed in terms of countries - hence the inclusion of busi- The two authors express the view that interest rate levels whereas the liberali- ness saving and government saving that higher interest rates will lead to in- zation of the capital account would lead to do not respond to interest rates. There creased savings and financial interme- the equalization of domestic and foreign are further errors associated with the diation as well as to improvements in the real interest rates, with allowance for measurement of interest rates and infla- efficiency of using savings. exchangerate changes. Butthere are also tion rates, which are necessary to derive In turn, van Wijnbergen and Taylor other important issues relating to inter- real interest rates. claim that higher interest rates on time est rates. These include flexibility over At the same time, people may not deposits do not necessarily lead to in- time, the avoidance of interest subsidies, react to small transitory changes in inter- creased financial intermediation because an appropriate structure of rates accord- est rates. In fact, the effects of interest of shifts from curb markets, which are not ing to maturity, and interest rate differ- rates on savings appear to be the strong- subject to the reserve requirements that entials reflecting risk. est in countries, such as Korea, where apply to time deposits. This means that More generally, there is need in most large changes in interest rates occurred. the authors contrast distortions due to developing countries for improvements in Finally, there is evidence that nega- reserve requirements with distortions the functioning of the financial sector. tive real interest rates bring a shift to due to interest rate limitations on time This paperis a product of the Office of gold, real estate, and consumer durables, deposits. the Vice President, Development Eco- which latter are included in savings as Abolishing excessive reserve re- nomics. Please contact the World Devel- measured in national income statistics. quirements would eliminate distortions opment Report office, room S13-060, ex- There is further evidence of capital flight while prudential considerations point to tension 31393 (26 pages). in response to higher interest rates the conclusion that reserves should be abroad. held against time deposits and against This is a background paper prepared curb market liabilities as well. At the 56. The Effects of Interest Rates for the 1989 World Development Report same time, substituting time deposits for on Savings in Developing in the Office of the Vice President, Devel- unproductive assets-such as gold, cash, Countries opment Economics. Please contact the and commodity stocks -will increase the World Development Report office, room extent of financial intermediation. In- Bela Balassa S13-060, extension 31393 (24 pages). creases in savings will have the same effectwhile increased efficiencyin theuse Time-series estimates for individual of savings will add to economic growth. countries and cross-section and time-se- 57. Financial Distress of Industrial Balassa summarizes available em- ries estimates for a number of countries Firms on the Greek Banking pirical evidence, indicating that higher show the positive effects ofinterest rates on System real interest rates increase the extent of savings. financial intermediation while increased Dimitris Antoniades and Dimitris Kouzonis financial intermediationraises the rate of This paper provides evidence on the ef- economic growth in developing countries. fects of interest rates on savings in devel- The failure or distress of a number of Reference is also made to empirical evi- oping countries. While the evidence is not Greek industrial firms has hurt Greek dence on the effects of interest rates on conclusive, time-series estimates forindi- banking - and reform of Greece's finan- savings cited in the author's "The Effects vidual countries as well as cross-section cial system is a prerequisite for industrial of Interest Rates on Savings in Develop- and time-series estimates for a number of restructuring. ing Countries." Furthermore, evidence is countries point to the positive effects of provided on the effects ofinterestrates on interest rates on savings. At the same Since the late 1970s, industrial activity in investment efficiency and on economic time, a variety of factors may have re- Greece has been deteriorating rapidly. growth. duced the statistical significance of the An increasing number of industrial firms The paper notes, however, that ex- estimates. have experienced distress and failure. cessively high interest rates will have Firstofall,estimatesofsavingsinde- About 40 percent of manufacturing unfavorable economic effects. Such a veloping countries are subject to consid- enterprises reported losses during 1979- situation can be avoided if the liberaliza- erable error. These estimates are usually 86. Since 1982, the manufacturing indus- tion of the banking system takes place obtained as the difference between do- try overall has reported a negative net under appropriate conditions, including mestic investment and foreign saving, income. monetary stability and the government both of which are observed with error. Because of their extensive indebted- supervision of the banks. This would There are poor data on domestic fixed ness, the widespread distress of indus- further the goal of establishing equilib- investment and, especially, on inventory trial companies has affected the sound- rium interest rates. accumulation that constitute domestic ness of Greek banks - especially the Domestic financial liberalization investment. In turn, foreign saving is state-controlled commercial banks that may eventually be followed by the liber- derived as the difference between exports account for more than 70 percent of Greek alization of the capital account. But this and imports, both of which are observed deposit and loan markets. would have to be preceded by trade liber- with considerable error. The financial position ofGreek banks alization to avoid unnecessary resource Also, while ideally the estimate has been further undermined by large shifts. should relate to personal saving, such losses in nonmanufacturingcompanies- Domestic financial liberalization has data are rarely available in developing especially construction and engineering. Policy, Research, and External Affairs Working Paper Series 25 Distress and failure in Greek indus- bank financial intermediation. Raising Development Economics. Please contact trial firms must be dealt with through nominaldeposit rates tofullyoffset higher the World Development Report office, broad macroeconomic, financial, and in- inflation requires maintaining progres- room S13-060, extension 31393 (57 pages dustrial reform. Antoniades and Kouzi- sively higher real deposit rates. These real with figures and tables). onis outline the main goals or targets of rates can reach unsustainable levels even reform in three areas: at "only" double-digit inflation rates. Macroeconomic reform 59 - 60 Assigned to the * Reducing inflation and the public Based on macrofinancial data from 117 background papers of the World deficit. developing and industrial countries for Development Report Financial reform the year 1985: * Free interest rates determined by * Regression analyses indicate that market conditions. higher inflation lowers overall financial 61. Student Performance and * Reduction of the public deficit and depth, whereas higher nominal deposit Schools Costs In the Philippines' the public sector borrowing requirement rates raise it. However, the effects of High Schools (progress on this front is expected to be inflation are more corrosive than nominal slow). depositrates are salutary. Consequently, Emmanuel Jimenez, Vicente Paqueo, and * Modernization of banking activi- raising nominal deposit rates to fully off- Ma. Lourdes de Vera ties, particularly of portfolio manage- set higher inflation requires maintaining ment capabilities. progressively higher real deposit rates. Private schools in the Philippines are * Prudential regulation and super- These real rates can reach unsustainable substantially more effective than their vision of banking, aimed at restoring levels even at"only"double-digit inflation public counterparts in teaching language investor confidence through more trans- rates. skills, and much less costly per pupil than parent activities. * Analyses ofvariation indicate that public schools. * A stronger capital market, with overall financial depth, nonmonetary fi- more tradable bonds and other securities nancial depth, and the weighted real re- A key consideration in the policy debate and eventual reorganization of the stock turn on financial assets vary systemati- on the appropriate role of private schools market. cally across geographical region and in predominantly public school systems is Industrial restructuring across per capita income groups (a proxy cost effectiveness. The questions are: Do * Repayment of the foreign debt of for wealth or development). In contrast, private school students learn more than problematic companies through the Busi- monetary depth is broadly similar across their public school counterparts? Andisit ness Reconstruction Organization (OAE). both income groups and geographical more or less expensive to educate stu- * Repayment of domestic debt regions - except in the EMENA region dents in private schools? through a combination of methods. (Europe, the Middle East, and North Past studies in the Philippines and * Systematic liquidation of nonviable Africa), which is unusually deep (reflect- elsewhere have claimed that the educa- companies. ing exceptionally high M1:GDP ratios in tional achievement of students in the * Restructuring of problematic but six of the 18 sample countries). private schools is higher than that of viable companies. Sometimes this means * Deep financial systems typically students in public schools. These studies consolidation, but often - particularly in reflect nonmonetary depth, except in the provide, however, only weak evidence one large textile company - it means countries of EMENA, where they reflect regarding the relative cost effectiveness breaking the company up into smaller, monetary depth. of public and private schools. A funda- more flexible units. Although Neal could not determine mental weakness is the potentially seri- This paper, a background paper for which factor is responsible, either anoma- ous problem of selectivity due to unobser- the 1989 World Development Report, is a lous macrofinancial behavior or poor data ved differences between the student productofthe Office ofthe Vice President, quality (or both) produce odd results population of each type of school. Most of Development Economics. Please contact when the data from the Sub-Saharan the studies do not compare costs in the the World Development Report office, region are used in the regression analy- two types of institutions. room S13-060, extension 31393 (28 pages ses. Taking selectivity into account, the with tables). The appendix lists the following paper finds that controlling for the effects macrofinancial indicators for each of the of students' socioeconomic background, 117 countries: The ratio of liquid liabili- individual motivation, and innate ability, 58. Macrofinancial Indicators for ties (of the financial system) to GDP - the private schools show a significant 117 Developing and Industrial financial depth, the ratio of quasi-liquid edge over public schools in both English Countries liabilities to GDP - nonmonetary depth, and Pilipino (about 15 percent of the and the ratio of Ml to GDP - monetary sample mean achievement scores). Pub- Craig R. Neal depth. Also listed are: Per capita income, lic schools, on the other hand, had a slight inflation rates, and the weighted real (roughly 4 percent) advantage in mathe- return on financial assets (the liquid lia- matics. Reducing inflation is the only sustainable bilities of the financial system). A comparison of cost per student re- way to increase the size of a country's This paper, a background paper for veals a substantial advantage for private financial system and thus promote the the 1989 World Development Report, is a schools: public schools in the Philippines economic efficiencies associated with product ofthe Office ofthe Vice President, spend on average roughly twice as much 26 Policy, Research, and External Affairs Working Paper Series as private schools. These findings sometimes necessary because of a short- ofJapanese consumers? None ofthestud- strongly suggest that private schools are age of Arabic-speaking faculty and a lack ies resolved these questions. an efficient purveyor of secondary educa- of appropriate Arabic texts, hurts stu- This paper is a product of the Inter- tion in the Philippines, a conclusion that dents not proficient in those languages. national Trade Division, International shouldbe taken into account in theformu- The cost of underwriting university Economics Department. Please contact lation of policy measures that could education at a time of slow economic ex- Jean Epps, room S8-037, extension threaten the existence of such schools. pansion raises the issue of whether it is 33710. This paper is a product of the Educa- better to have unemployed high school tion and Employment Division, Popula- graduates or unemployed university tion and Human Resources Department. graduates. 64. Cocoa and Coffee Pricing Please contact Cynthia Cristobal, room This paper is a product of the Educa- Policies In Cdte d'Ivolre S6-001, extension 33640. tion and Employment Division, Popula- tion and Human Resources Department. Takamasa Akiyama Please contact Cynthia Cristobal, room 52. Universities in Arab Countries S6-001, extension 33640. Facing increasingly tough international competition in coffee and cocoa markets, George I. Za'rour Cbte d'Ivoire can increase export revenues 63. Does Japan Import Less Than from the two commodities 8 percent in The quality of higher education in the It Should? 1995 and about 12 percent in 2000 by Arab world has suffered because of the increasing coffee production and cutting -apid growth of university systems. De- Kenji Takeuchi back on the expansion in cocoa produc- spite popular demand, several Arab gov- tion. ernments are questioning the wisdom of Conflicting studies on Japan's imports of continuing to expand these systems. manufactures leave open the question of Coffee and cocoa are C6te d'Ivoire's two whether the country's import volume is most important commodity exports, ac- Half the Arab universities in existence lower than normal. counting for about 50 percent of total :oday were established after 1970. En- exports. In the 1970s, C6te d'Ivoire capi- rollment has increased even faster - Japan's continuing large current account talized on high world prices and a drop in leading to overcrowding, unqualified fac- surpluses have promoted a series of in- production by other competitors to in- ulty, and insufficient equipment and fa- vestigators to examine the volume and crease revenues from these crops, but in cilities. the structure of the goods that Japan the mid-1980s the situation changed. Several Arab nations have already imports. Falling world prices and an appreciating moved to control (in some cases, to re- The usual chargeis thatJapan'slevel currency cut into sales of Ivorian coffeee duce) enrollment. They have done this of manufactured imports is too low and and cocoa at the same time that interna- partly because of the fall in oil revenues that it is low because Japan has erected a tional supplies mounted. Brazilian coffee and partly in recognition of the problems wall of trade barriers thatlimits access by growers increased production after the related to the rapid growth of the univer- foreign suppliers of manufactured goods. previous year's drought, and production sity systems. Recent studies have looked at this ques- of cocoa rose in Ghana, Malaysia, and In- Open admissions policies in some tion to see if Japan's overall imports are donesia. As several major producers systems have led to high failure and drop- lower than they should be, and specifi- backed up their export efforts with ag- out rates, as well as to the shunting of cally if Japan imports fewer manufac- gressive exchange rate policies, C6te many students by default into "schools of tures than other industrial countries. d'Ivoire's exporters lost their competitive last resort:" the arts, social sciences, and A review of the econometric litera- position. law. ture gives diverse results. Gary Saxon- To offset the slump in revenues, the As student enrollment expanded house, Luca Barbone, Marcus Noland, government will have to reverse this rapidly, the quality of education suffered and C. Fred Bergsten and William Cline decline in competitiveness. Astudy of the and many universities became less at- found no strong evidence that Japanese markets for both these commodities un- tractive to highly trained faculty. This imports are abnormally low when allow- der different pricing and subsidy policies pattern has contributed to national and ances are made for economic circum- confirms that coffee production should be regional brain drain, stances. But other economists came to the increased, even at the cost of some reduc- Overcrowding has also led to a opposite conclusion. Bela Balassa, Kazuo tion in the output of cocoa. This will avoid greater reliance on lecturing as a means Sato, and Robert Z. Lawrence concluded large government subsidies to cocoa of instruction, a method not particularly that Japanese imports were distinctly growers and will increase future exports conducive to the development oferitical or lower than other countries. Geoffrey of both products. incisive thinking. Faculty accessibility Carliner tended to support the latter One way to do this is to devalue by 10 and strong faculty support for student de- group. to 15 percent. Alternatively, the govern- velopment seem to be the exception Japan does import a lower volume of ment could reduce cocoa producer prices rather than the rule at many Arab univer- manufactures, why is that so? Is it be- and increase coffee producer prices. Al- sities. cause of trade and tariff barriers, the though either of these policies would Instruction in French or English, Japanese marketing system, orthe tastes overcome short-term problems, a more Policy, Research, and External Affairs Working Paper Series _ 27 fundamental change should be consid- This paper is a product of the Popula- could be invested in saving the lives and ered. Under current market conditions, tion, Health and Nutrition Division, health of women who do want to have government-established producer prices Population and Human Resources De- more children. are no match for rapidly changing world partment. Please contact Sonia Ains- This paper is a product of the Health markets and exchange rates. Unless C6te worth, room S6-065, extension 31091. Advisor, Population and Human Re- d'Ivoire adopts a flexible pricing policy, sources Department. Please contact the country may face continuing prob- Amelia Menciano, room S6-278, exten- lems in international competitiveness. 66. Slowing the Stork: Better sion 33612. This paper is a product of the Inter- Health for Women Through Family national Commodity Markets Division, Planning International Economics Department. 67. Price and Tax Policy for Semi- Please contact Dawn Gustafson, room S7- Anthony R. Measham and Roger W. Rochat Subsistence Agriculture in 044, extension 33714. Ethiopia Family planning saves lives and improves the health ofwomen through fewer births, Robert D. Weaver and Saad Ali Shire 65. Interaction of Infant Mortality fewer high-risk pregnancies, and fewer - and Fertility and the Effectiveness crudely performed abortions. Tax and food price policies are important of Health and Family Planning mechanisms for affecting smallholder Programs Each year 500,000 women die from food supply. causes related to pregnancy - 99 percent Howard Barnum of them in developing countries. While In the case of semi-subsistence agricul- many of those pregnancies are unwanted ture where wage employmentis not avail- Health and family planning programs and could have been prevented by family able, therole playedby prices and taxesin can draw on each other's strengths to planning, only a minority of developing determining production and consump- lower the number of births and reduce country couples use effective contracep- tion decisionsis notclearly established by infant mortality. tive methods. For some women, preg- economic theories of household choice. nancy represents a major health risk. This study demonstrates that where The interaction of fertility and infant Many of them are among the poorest of choices in production, consumption, and mortality is well established. Lower in- the poor, living in rural areas of South leisure can be made independently, farm- fant mortality can lead to lower fertility Asia and Sub-Saharan Africa, and have ers will decide what to grow on the basis by reducing the need for replacement low education, high fertility, and poor of their preferences for marketed goods, births. Conversely, birth spacing im- health and nutritional status. and will also be affected by the level and proves the chances of child survival. To There is also a huge pool of women of type of taxation. find out how these programs reinforce lower risk who want no more children and The model shows the impact of four each other, a study done in Indonesia whose health would benefit substantially taxes - agricultural revenue, land (ei- estimated the effects that family plan- from limiting the number of children they ther a head tax or a tax based on land ning programs have on infant mortality bear. In virtually all developing coun- area), production, and marketed goods and the effectsofreducedinfantmortality tries, the number of women who want no consumption - on crop production and on fertility. The research compared the more children exceeds the number of tax revenues. The results demonstrated cost-effectiveness of health and family contraceptive users. What factors deter- that a production tax curtailed output planning programs and looked at mine women's use of contraceptives, and while a lump-sum land tax expanded whether the interaction of infant mortal- how can family planning programs reach production. The impact of a tax on agri- ity and fertility influenced estimates of the large numbers of women at risk from cultural revenue or on products sold in the costs of both programs. further pregnancies? the market depends on the farmers' pref- The results demonstrate a substan- The most successful family planning erences for marketed goods. tial spillover effect, confirming that the policies offer women a variety of contra- For Ethiopia, a model of production interaction does raise the cost-effective- ceptive methods tailored to specific age was estimated for eight food crops for ness of both programs. And the study groups and educational levels. Commu- semi-subsistence households. In general, shows that nonhospital health care is nity-based programs that provide a high production responded to changes in rela- - substantially more effective than hospi- quality of family planning services and tive expected prices, land availability, tal care at reducing infant mortality. emphasize theimportance ofthemother's level of household demand, and sowing These findings are sufficiently con- health will increase the likelihood that period rainfall. Production of teff, wheat, sistent that policymakers should con- these programs will reach women whoare chick peas, and sorghum was found to sider the mortality-fertilityinteraction as not practicing contraception at present. increase with higher prices, and produc- a regular part of the appraisal of health The question that is always asked is, tion of field peas was found to fall. Evi- and population projects. Integrated pro- What will it cost? Much program experi- dence suggests that expanding the grams offerlower costs andmore effective ence suggests that family planning is one amount of arable land will raise farmers' promotion. They also improve efforts to of, if not the most cost-effective means of output of wheat, chick peas, maize, and assure infant survival and achieve birth averting maternal deaths. The savings sorghum. prevention objectives. generated by family planning services These results give strong evidence of 28 Policy, Research, and External Affairs Working Paper Series the role of producer and consumer prices cycles and cars: both get you where you veloping nations, facing similar situ- in semi-subsistence agriculture. In addi- want to go but at certain costs with cer- ations, might also consider more commu- tion, the results show the importance of tain benefits. Although both kinds of nity funding for school systems. production capacity, household demand, lamps give light, they are not directly This paper is a product of the Educa- and climatic factors, supporting a bal- comparable because they differ so greatly tion and Employment Division, Popula- anced approach to agricultural develop- in their characteristics: it takes 18 kero- tion and Human Resources Department. ment that recognizes the joint roles of sene lamps to give off the light of a single Please contact Cynthia Cristobal, room prices, production capacity, and demand. 60 watt incandescent bulb. S6-001, extension 33640. This paper is a product of the Inter- This paper, a product of the House- national Commodity Markets Division, hold Energy Unit in the Energy and Sec- International Economics Department. tor Management and Assessments Divi- 70. Vocational Education and Please contact Dawn Gustafson, room S7- sion, Industry and Energy Department, Economic Environments: Conflict 044, extension 33714. has also appeared as an Industry and or Convergence? Energy Department Working Paper. Please contact Vonica Burroughs, room Arvil V. Adams and Antoine Schwartz 58. Domestic Lighting S3-002, extension 36060. Macroeconomic policies have a direct Robert van der Plas impact on the ability ofa nation to provide 69. Does Local Financing Make vocational education and training effi- Electric lights are superior to kerosene Primary Schools More Efficient? ciently. lamps in almost all ways - they are far The Philippine Case more energy-efficient, but their high front- A better understanding of the relation- end costs keep many people from enjoying Emmanual Jimenez, Vicente Paqueo, and ship between economic policies and hu- their advantages. Ma. Lourdes de Vera man capital formation through voca- tional education and training (VET) will The average amount of fuel consumed for Philippine schools that rely more heavily help both development strategists and lighting is much higher in villages with- on local sources of income are more cost- education planners. out electricity than in villages with it - effective than those that are more depend- Income policies that make the mar- five times higher in Indonesia, twice as ent on central funding. ketlesscompetitive, although designed to high in India. Moreover, people with correct social inequality, often distort the kerosene lamps have much lower lighting In the highly centralized system of the demand for VET and lead to inefficiencies levels than people with electric lights. Philippines, local funding provides the in its delivery: Why, then, do people still use kero- only source of flexibility to meet specific * Effective minimum wage policies sene lamps when electricity is available? and urgent needs. make enterprises less willing to provide Mainly because they fit well with a poor The government in Manila, which skills training financed by reduced family's spending patterns. The price of a pays all teacher salaries, finds it easier wages. wick lamp is low. The monthly cost of politically in times of fiscal belt-tighten- * Government regulated wage using it is low. And kerosene can be ing to cut recurrent costs. Although local structures that result in wage compres- bought in small quantities as needed. funds are relatively small percentage of sion, as seen in many developing coun- But the marginal cost of adding an- the education budget, they make an im- tries, reduce the incentive of workers to other kerosene lamp is greater than the portant contribution to covering mainte- invest in skills training. marginal benefit. The addition ofanother nance and operating costs. For example, Capital subsidies, and other relative lamp neither increases the level of light- the quality of both textbooks and school factor cost distortions, may encourage the ing nor improves the quality-but it does buildings appears to increase with the adoption of capital-intensive technolo- increase the consumption of kerosene. level of local funding. gies that are inconsistent with a country's People have figured this out. A sur- The total cost of education per stu- occupational skills mix and skills train- vey of a few households in Rwanda and dent also appears to lower in schools with ing resources. Such distortions will also Burundi in October 1987 showed that greater local financing, regardless of the debase the value of existing skills by ac- households relying on kerosene wick perceived quality of the school. Adminis- celerating their depreciation. lamps use only one for the whole house. trators and teachers have greater incen- Trade policies can also influence in- Households with electric lights are tive to be cost-effective when forced to centives for efficiency in VET. accustomed to much higher levels of light consider the effect of their behavior on the * Protectionist trade policies pro- -forwhichtheyhavetofinanceaconnec- people who live and work in the local vide shelter to inefficient domestic pro- tion charge and installation cost and for community. ducers and reduce the market incentives which they pay more for regular use. The policy implications of these find- for efficiency in VET. Such households typically have four or ings for the Philippines are important. * Export-led trade policies, coupled five lamps in the whole house and good They strongly suggest that decentraliza- with competitive markets for capital and lighting levels in each room. tion will increase efficiency. Without an labor, tend to encourage the search for The difference between kerosene and increase in local funding, the quality of cost-effective forms of VET. electric lamps are like those between bi- primary education will suffer. Other de- Making economic policymakers Policy, Research, and External Affairs Working Paper Series 29 aware of the consequences of their poli- ing to the teacher lecture was positively counterparts. In addition, school expen- cies for human resources development associated with achievement, while time diture data show that unit costs for pri- will hopefully lead to the more sensitive spent doing seat or blackboard work had vate schools are dramatically lower than development of these policies. By the a negative impact. In Swaziland, by com- those of public schools. same token, making those responsible for parison, seat and blackboard work had The comparative advantage of pri- the development of education and train- positive effects, but listening to lectures vate schools has important policy impli- ing programs aware of the constraints was unrelated to achievement. cations for public schools. Some efficiency economic policies provide to their actions Teaching time spent monitoring and gains can come from replicatingthe input will hopefully create opportunities for evaluatingstudentperformancehadgood mix (teacher/student ratios, teacher adapting to these constraints. The paper results in Swaziland, but no effects in Ni- qualifications) of private schools. The offers an agenda for the further study of geria. In Swaziland, the use of published data show that private schools, among this relationship and its outcomes. materials was negatively related to other practices, make more efficient use This paper is a product of the Educa- achievement, while in Nigeria the use of ofteachers and have better teaching proc- tion and Employment Division, Popula- textbooks had a positive effect. esses (more tests, more homework, or- tion and Human Resources Department. Teacher effectiveness depends on derly classrooms). Please contact Cynthia Cristobal, room finding the appropriate mix ofalternative Also effective would be to mimic the S6-001, extension 33640. uses of instructional time. Since this organizational incentive structures of seems to differ according to the locale, private schools. Their administrators more local research on teaching quality is have considerable economic and bureau- 71. School Effects on Student needed. cratic autonomy, and are motivated to en- Achievement in Nigeria and This paper is a product of the Educa- courage better teaching practices - us- Swaziland tion and Employment Division, Popula- ing staff more effectively and cheaply - tion and Human Resources Department. because they must compete for students Marlaine Lockheed and Andre Komenan Please contact Cynthia Cristobal, room and remain accountable to parents who S6-001, extension 33640. pay the bills. Student achievement is directly related to This paper is a product of the Educa- effective teaching practices, which differ tion and Employment Division, Popula- from country to country. Conventional 72. The Relative Efficiency of tion and Human Resources Department. school and teacher quality variables are Public Schools in Developing Please contact Cynthia Cristobal, room found less effective in boosting learning Countries S6-001, extension 33640. than teaching quality variables. Emmanuel Jimenez, Marlaine Lockheed, and Multi-level analyses showed that differ- Vicente Paqueo 73. Taxation and Output Growth in ences between schools accounted for sub- Africa stantial variance in eighth grade mathe- Private schools are a cost-effective option matics scores in Nigeria and Swaziland. for expanding secondary education in Jonathan Skinner However, conventional school and some developing countries. Theymayalso teacher quality variables, such as class provide some lessons for improving the A revenue-neutral shift from import taxes size, length of school year, and teacher efficiency of public schools. and personal and corporate levies to sales education and experience had no effect on or excise taxes may increase growth rates student achievement. In many developing countries, the na- in developing countries. The study - the first completely tional commitment to universal educa- comparable cross-national comparison of tion conflicts with the necessity for fiscal Can tax policies be designed to encourage school/classroom effects in Africa - restraint. One option for expanding edu- economic growth in developingcountries? shows that differences in achievement cation is to charge fees for public school- One view holds that by providing the gov- not attributable to student family back- ing. ernment with a stable source of funding ground are largely due to differences in But recentWorldBank studies of sec- and reducing the current account deficit, teaching quality (teacher's use of time for ondary level data in Thailand, Colombia, tax revenues encourage long-term lecturing, testing, etc.). Tanzania, and the Philippines point to a growth. In this view, the economic distor- This finding is important because second, more cost-effective option: rely on tions aggravated by tax rates are slight in little research has been conducted in de- private schools to handle the growing comparison to such institutional con- veloping countries to test the assumption demand for education. straints as price controls, foreign ex- that enhancing student achievement Private school students generally change allocations, and trade quotas. depends on the ability of teachers to outperform public school students on The other view is that high marginal manage the learning environment. The standardized math and language tests. tax rates constrain long-term economic study indicates that the size, direction, This finding holds, even after studies development by discouraging business and shape of the relationship between account for the fact that, on average, pri- expansion, investment, and foreign teaching time use and student achieve- vate school students in these countries trade. The contention is that the benefits ment vary from one country to another. come from slightly more advantaged of a carefully designed, moderate tax In Nigeria, student time spentlisten- backgrounds than their public school structure exceed the costs of budget defi- 30 Policy, Research, and External Affairs Working Paper Series cits or spending cuts. ment exchange rate policy similar to forcement and collection of the tax is rela- Thispaperteststheseviewsbymeas- those in Mexico, and the estimated say- tively inexpensive, since the tax can be uring the effect of government spending ings behavior of domestic consumers. added to commercial charges, and the and taxation on output growth. In theory, Mexican public spending increased services quickly turned off for nonpay- higher tax rates shift investment and from 25.6 percent of GDP in 1973 to 46.5 ment. It is not difficult to distinguish in employmentto sectors withlow-oreven percent in 1982. This rise was accompa- most cases between business and per- negative - tax rates, such as import-sub- nied by dramatic increases in inflation, sonal use of these services. ET taxes stitution or underground sectors. The the government deficit, and external avoid the problems of smuggling and lower returns to investment and labor in debt. evasion commonly associated with taxing these sectors mean that the economy will Policymakers look at such a situation the production or use of commodities that generally record lower growth rates. and automatically conclude that stabili- can be imported. Data from 31 African countries show zation depends on reduced public spend- On equity grounds, in Cbte d'Ivoire at the medium- and long-term effects of fis- ing. But when applied to Mexican data for least, ET taxes are clearly the most desir- cal policies on growth during 1965-73 and 1983-85, the model shows that public able excise taxes. Ranking alternative 1974-82. Government investments for spending cuts alone may be inflationary if commodity taxes with high income elas- the earlier period were sufficiently pro- they cause a reduction in the productivity ticity, telephone services clearly domi- ductive to justify the distortions imposed of private capital. nate - and electricity consumption . by the relatively high tax rates necessary The model does notestimate the elas- nearly dominates - the taxation of alco- to finance them. By 1974-82, however, ticity of private output to public infra- holic beverages and public transporta- the return on government investments structure. But even if low elasticity is tion. had fallen to almost zero, suggesting that assumed, spending cuts may produce a These conclusions on the distributive the burden of personal and corporate reduction in private productivity that will impact of alternative indirect tax meas- taxes led to a contraction in growth. Al- have an undesirable effect. ures are reached through the application though taxes on imports did not affect A decline in productivity may out- of the relatively new concept of marginal output directly, such taxes reduce invest- weigh the impact of falling monetary conditional welfare dominance. A com- ment and thereby indirectly curtail growth rates and reduced budget deficits. modity tax dominates others on social growth. On balance, sales and excise If it does, the benefit of spending on infra- welfare grounds when a marginal shift in taxes had the most moderate effects on structure outweighs its costs. If, how- the balance of commodity taxation to- growth and investment. ever, government spending produces no ward that particular commodity en- In sum, a balanced increase in gov- useful infrastructure, a reduction in hances social welfare. ernment spending financed by sales and spending will have the desired result of Using household budget data, such excise taxes, or by a shift from personal reducing inflation. dominance can be established statisti- and corporate taxes to consumption Various simulations with the model cally and shown graphically without re- taxes, can increase growth rates. indicate that dogmatic recommendations sort to normative considerations. This This paper is a product of the Public for spending cuts can at times be counter- approach suggests that ET services may Economics Division, Country Economics productive. be an underexploited tax base in many Department. Please contact Ann Bhalla, This paper is a product of the Public developing countries. room N10-059, extension 37699. Economics Division, Country Economics ET taxes may also meet the test of Department. Please contact Ann Bhalla, relatively high efficiency if they can be room N10-059, extension 37699. implemented through a two-part pricing 74. Fiscal Stabilization and schedule that charges a flat fee for access Exchange Rate Instability to service and an additional escalating fee 75. Welfare Dominance and the for marginal use. Andrew Feltenstein and Stephen Morris Design of Excise Taxation In the This paper is a product of the Public CMte d'lvolre Economics Division, Country Economics Cuts in public spending can, in some Department. Please contact Ann Bhalla, cases, be inflationary and should be coor- Shlomo Yitzhaki and Wayne Thirsk room N10-059, extension 37699. dinated with appropriate exchange rate and monetary policies. The concept of conditional welfare domi- nance can be used to determine which ex- 76. The Shadow Price of a Tax A perfect foresight, intertemporal gen- cise taxes are preferable, both for equity Inspector eral equilibrium model can be used to and administrative feasiblity. Applied to analyze the fiscal impact of reductions in C6te d'Ivoire, the technique shows that the Shlomo Yitzhaki and Yitzhak Vakneen public spending. The model permits a most effective excise taxes would be on consistent analysis of government spend- electricity and telephone services. To make sure that tax collectors do not ing, deficit financing, and exchange rate abuse their powers and that taxpayers behavior. There is a compelling fiscal rationale for obey the law, governments can analyze the It incorporates features important to encouraging greater reliance on taxing tax administration's methods of selecting analyzing public policy in Mexico, includ- the consumption of electricity and tele- and inspecting tax returns. ing the cost of producing government in- phone (ET) services. frastructure, a tax system and govern- ET taxes are easy to administer. En- Policy, Research, and External Affairs Working Paper Series 31 The effects of tax evasion on tax rates and Exports in general, and agricultural ex- tional. government revenues have focused fresh ports in particular, are more responsive attention on the question of tax admini- to price incentives in Sub-Saharan Africa Experts on the new economics of trade re- stration. Because of the difficulties of than in developing countries as a whole. strictions address such questions as: measuring the consequences of good or These are the results of an econometric Are there holes in the case for free bad administration, policymakers cannot investigation on the effects of real ex- trade? rely on a wide range of specific informa- change rates on exports. It further ap- It is difficult to know when there is tion on this subject. pears that in Sub-Saharan Africa the profit to be captured by trade interven- An economist faced with widespread impact of real exchange rates is greater tion and difficult to design the appropri- tax evasion is likely to recommend on agricultural exports than on the ex- ate trade intervention policy. A tariff will harsher penalties for violations of the tax ports of goods and services. sometimes capture the foreign profit law. The argument is that compliance Within Sub-Saharan Africa, market- while a quota will give away the domestic, and high penalties go hand in hand. But oriented countries generally gained, and or vice versa, and as Gary Saxonhouse stiffer penalties only work when the ad- interventionist countries lost, export observes, "Capturing a strategic sector ministrators are honest; if they are not, market shares as the former, but not the and its attendant economic rents may be the recommendation may backfire as latter, group of countries maintained very important for firm equity holders . high penalties increase the power of the realistic exchange rates and did not ap- without being ofmuch significance for the tax inspector, and provide incentive for preciably bias the system of incentives economy as a whole." corruption. against exports. The differences in poli- Why are trade restrictions imposed? Using this model, which shows the cies, and in export performance, are even Trade policy is often aimed at none- process of auditing tax returns as a deci- greater if comparisons are made between conomic objectives. About one sanction in sion tree, governments can verify that the private market economies and 6tatist three succeeds in its objective. Is this additional power is not abused and that countries in a three-fold classification score good or bad? According to Stephen the administration is efficient. The main scheme that puts some countries in an Krasner, "Since economic sanctions are idea is to introduce economic considera- intermediate category. likely to be used only when other policy tions into the process of selecting and in- These results are supported by the instruments fail, this level of success is specting tax returns. By calculating the findings ofaWorld Bank study on agricul- indeed surprising." investmentin the inspector's time at each tural exports in Eastern and Southern According to Rudiger Dornbusch and stage (the taxpayers is likely to appeal), Africa. Accordingtothis study, industrial Jacob Frankel, "Net foreign demand is a and the increase in revenue that will protection and overvalued exchange more important determinant of protec- result, it is possible to calculate the mini- rates adversely affected the exports of the tionism than domestic demand." (Protec- mum amount of tax evasion that justifies region. Another Bank study has found tion is provided mainly to offset losses of continuing with the audit - the shadow that in Sub-Saharan Africa agricultural sales to foreign competition, not to com- price of a tax inspector. growth rates were higher in countries pensate forlosses attributable to aninter- The administration can recommend whose currency depreciated, than in nal cause such as a shift of demand away that auditors only pursue a file if the tax countries whose currency appreciated, in from the product.) increase ishigh enough tojustifycontinu- real terms. How do U.S. policy actions and those ing the process. By equalizing the return Kenya and the Ivory Coast exemplify of other nations interact? per unit of time, the administration gives market-oriented, and Tanzania and Says the reviewer: "The two prin- the same treatment to all taxpayers. If Ghana interventionist, countries in Sub- ciples of policy advice that this book the guidelines are followed, the produc- Saharan Africa. Pairwise comparisons brings forward, 'Rules, not discretion,' tivity of the inspectors will improve as between Kenya and Tanzania and be- and 'Tit-for-tat retaliation,'could be used well. tween the Ivory Coastand Ghanahave in- both to endorse most of the protectionist This paper is a product of the Public dicated the superiority of the market- legislation submitted to the U.S. Con- Economics Division, Country Economics oriented approach in promoting exports gress in the past 20 years, and to indict Department. Please contact Ann Bhalla, and agricultural production. the GATT as wrong-headed. This is room N10-059, extension 37699. This paper is a product ofthe Office of probably a result of policy interpretations the Vice President, Development Eco- made for the convenience of analytical nomics. Please contact Norma Campbell, models rather than analysis fitted to the 77. Incentive Policies and room S9-047, extension 33769. facts of policy." Agricultural Performance in Sub- Says the reviewer about the "us" Saharan Africa these economists represent: 78. Economists, Institutions, and We produce a quality product. Bela Balassa Trade Restrictions: A Review We sell it very poorly. Article We place self-destructively narrow It has often been said that Sub-Saharan limits on the topics we will analyze. African countries do not respond to price J. Michael Finger This paper is a product of the Inter- incentives because of rigidities and in- national Trade Division, International flexibilities in their economic structure. Experts on international trade analyze Economics Department. Please contact This is notthecase, however, as this paper the "new" rationale for trade intervention Nellie T. Artis, room N10-013, extension shows. and conclude it is neither new nor ra- 38010. 32 Policy, Research, and External Affairs Working Paper Series 79. Quantitative Appraisal of in the non-recipient countries while real (and popular resentment offoreign inves- Adjustment Lending discount rates increase in the majority of tors), the resistance of such important the loan recipients. Finally, expenditure- interest groups as labor unions, and the Bela Balassa GDP ratios increased less in the loan inability of many governments to prepare recipient than in the non-recipient coun- adequately for the complex tasks of priva- Up to 1987, the average decline in the GDP tries. tization. But as a result of the push for growth rate in adjustment loan recipient Datahave alsobeen providedforloan privatization, or reprivatization (the di- countries was less than in the comparator recipients and non-recipients in Sub- vestiture of nationalized enterprises that groups. Similar results are obtained for Saharan Africa, low-income countries, were once private), some countries have per capita GDP. lower middle-income countries, and up- resisted starting new public enterprises per middle-income countries. The results or expanding old ones. And some govern- This paper presents a quantitative analy- show that the relative position of loan ments have encouraged joint ventures sis of adjustment programs in developing recipients improved in three out of four (with private partners, shareholders, or countries that received structural adjust- country groupings in regard to per capita employees) to limit the flow of govern-- ment loans or sectoral adjustment loans incomes, the exception being Sub- ment funds and to make public enter- (for short, adjustment loans) from the Saharan Africa. prises more responsive to market pres- World Bank. The method applied has The quantitative appraisal of adjust- sures. involved examining changes in various ment programs thus points th the overall Among developing countries, divesti- performance indicators following the re- success of these programs. This conclu- ture has been most effective in Chile and ceipt of the first adjustment loan, further sion is strengthened if use is made of Bangladesh. Africa has moved slower contrasting the results with those for weighted performance indicators, the than Latin America. Many developing comparator groups of countries that did weights being the numberoftimesacoun- countries have preferred more informal not receive adjustment loans. tryreceived an adjustment loan. Weight- liquidation of public enterprises - At the same time, the loan recipient ing improves the relative performance of through"mothballing"and slow death (by countries made an adjustment effort in the loan recipients in regard to practically denial of funds) - because it attracts less the period following the first loan. To all economic growth indicators, as well as adverse publicity than outright divesti- begin with, economic expansion was con- for export growth, domestic savings, ex- ture. centrated in the traded goods sectors, in- ternal debt, inflation, money supply Privatization tends to increase effi- dustry and agriculture, both of which ex- growth, the real discount rate, and the ciency, but only if managers face a com- perienced an improvement in the loan re- government budget balance while little petitive rather than a monopolistic envi- cipient countries relative to the compara- difference is shown in regard to the rest of ronment - which may require not only tor groups. Also, the growth of consump- the indicators, the sale of public enterprises but bidding tion declined substantially in absolute This paperisaproduct ofthe Office of for franchises, breaking up monopolies, terms as well as relative to the non-recipi- the Vice President, Development Eco- and removing entry barriers. ent countries. In turn, an acceleration is nomics. Please contact Norma Campbell, Certain issues recur with privatiza- observed in the growth ofinvestment that room S9-047, extension 33769. tion and the contracting out of services, holds the promise for future economic particularly in the developing countries: growth. the ways competition and ownership af- Furthermore, the average export 80. Emerging Issues of fect performance, the tension between growth rate fell less in the loan recipient Privatization and the Public Sector multiple objectives (such as generating countries than in the comparator groups more cash yet lowering the price of shares and a much larger number of countries Samuel Paul to widen ownership), and the proper bal- experienced an improvement than a dete- ance between the enterprise's autonomy rioration relative to the non-recipients. Privatization in developing countries has and the government's role in regulating The loan recipient countries also attained been modest, with little contracting out of market power. The long-term benefits of a substantial improvement in their cur- services anda widegap between plans and privatization will not materialize if these rent account balance position as their do- achievements - but the push for privati- issues aren't thought through. mestic savings ratios declined less than in zation has limited expansion of public Contracting out of services, an im- the comparator groups. Finally, the loan enterprises. portant feature of privatization in Britain recipient countries improved their rela- and the United States, is rare in the tive position as far as external debt indi- Pressure to move toward privatization developing world, with such exceptions as cators are concerned. has mounted in the face of severe eco- Argentina and the Ivory Coast. Contract- Inflation, as measured by the con- nomic crises. Privatization in developing ing out, which is generally assumed to be sumer price index, deceleratedin amajor- countries has focused almost exclusively simpler than privatization, is most effec- ity of countries receiving adjustment on the divestiture of industrial and com- tive when competition exists among sup- loans vis-a-vis the comparators, although mercial enterprises, not public utilities or pliers, and when government is inexperi- the average increased substantially due sectors characterized by monopoly. The enced at delivery of the services being to hyper-inflation in Bolivia. In turn, pace ofprivatization has been slow andits contracted out but has incentives to pur- money supply growth rates increased impact modest. The reasons include the sue efficiency and is committed to over- more in the loan recipient countries than limited resources in the private sector seeing the contractors. Policy, Research, and External Affairs Working Paper Series 33 This paper is a product of the Public 82. Microeconomic Theory of the partment. Please contact Sonia Ains- Sector Management and Private Sector Household and Nutrition Programs worth, room S6-065, extension 31091. Development Division, Country Econom- ics Department. Please contact Dov Chernichovsky and Linda Zangwill Ernestina Madrona, room N9-057, exten- 83. Welfare Costs of U.S. Quotas sion 37496. Whether a nutrition program works de- on Textiles, Steel, and Autos pends on whether, and how, individual households make use of it. Jaime de Melo and David Tarr 81. Reaching People at the Periphery: Can the World Bank's Lack of food is no longer the major cause Protectionism is popular but costly: the Population, Health, and Nutrition of malnutrition. Many households and United States loses $21 billion a year in Operations Do Better? individuals remain malnourished when welfare costs through quotas on textiles, income and supplies of food are inade- steel, and autos. Richard Heaver quate. Nutrition policy and programs must be based on sound knowledge of Nontariff barriers prevent a transition to How can field workers be expected to serve household behavior patterns. Any in- the realities ofinternational competition, their most needy clients when program crease in household resources, whether and their welfare costs are huge. designers seldom try to identify and target through policy programs or through The United States loses an estimated these clients, understand their feelings growth and development, stops at the $14 billion a year in revenues through and behavior, or monitor whether they are household. The family can allocate the rents lost to exporting countries through being reached? added resources in any way it sees fit - export quotas. Add another $7 billion for and often does so in ways that are incom- distortionary costs. Many population, health, and nutrition patible with better nutrition and related Removing the remaining tariffs (an (PHN) programs are designed to elicit goals. average 3.5 percent in 1984) would pro- behavior changes in poor people living at Taboos about introducing solid foods duce a welfare gain of about $0.9billion - the geographic and social peripheries. for infants and appropriate foods during for a net benefit of $105 billion, measured Few programs specifically target the pregnancy and nursing do not change in terms of the discounted value of dis- disadvantaged, however, and research because there is more food in the house. placed workers'lost earnings over a life- about clients focuses mainly on routine The "shadow" price of food, at the house- time. statistics rather than on whether educa- hold level, involves such considerations This paper is a product of the Trade tion and services do or will meet clients' as whether family members understand Policy Division, Country Economics De- needs. the nutritional value of foods; are better partment. Please contact Karla Cabana, The health sector, in particular, has off selling than eating the food they grow; room N10-037, extension 37946. little understanding of what clients feel value time spent earning income more and why they behave as they do. Yet this than time spent preparing food or is precisely whatPHN program designers breastfeeding infants (and hence turn to 84. Black Markets for Foreign must know to increase acceptance of processed foods and bottle feeding); orex- Exchange, Real Exchange Rates, public health services amongclients most perience a psychological cost in eating and Inflation: Overnight versus inclined toward early mortality and least certain foods (as Jews or Moslems would Gradual Reform in Sub-Saharan likely to accept family planning. in eating pork, for example). Africa PHNprogramdesignshouldbereori- The microeconomic theory of the ented to: household focuses on the household's de- Brian Pinto * Learn about clients' perceptions cisionmaking about scarce food resources and behavior. based on such considerations as: Inflation could rise permanently and * Target the clients most in need of * The size of the family. substantially as a result of unifying offi- services. * The purchasing power of the cial and black market exchange rates, * Give public sector providers of family. even ifrealgovernment spending remains service stronger financial and nonfinan- * The availability of healthful foods. constant. cial incentives to understand and reach * The family's food preferences. out to clients. * Environmental variables (such as The black market foreign exchange pre- * Make more use of private or com- ethnic traditions and the homemaker's mium is an important implicit tax on munity-based delivery systems that are level of education). exports, creating a conflict between the responsive to client needs. * Family health (disease can limit fiscal goal of financing government * Carry out more studies that evalu- the absorption of nutrients). spending with a limited menu of tax in- ate program responsiveness to clients. Such determinants should be moni- struments and the allocative goal of This paperisaproductofthePopula- tored to anticipate malnutrition prob- stimulating exports. The premium is tion, Health, and Nutrition Division, lems unrelated to food supplies, solved for in a model that includes the Population and Human Resources De- This paper is a product of the Popula- portfolio balance approach to exchange partment. Please contact Sonia Ains- tion, Health, and Nutrition Division, rates, dual exchange markets, and seig- worth, Room S6-065, extension 31091. Population and Human Resources De- norage for financing the fiscal deficit. 34 Policy, Research, and External Affairs Working Paper Series The steady-state and dynamic impli- This paper is a product of the Debt 87. Vocational and Technical cations for inflation of floats as a vehicle and Macroeconomic Adjustment Divi- Education in Peru for unifying official and black market sion, Country Economics Department. rates are then analyzed. Inflation could Please contact Luis A. Riveros, room N11- Peter Moock and Rosemary Bellew rise substantially in the new steady state 061, extension 37465. as the lost revenue from exports is re- Peruvian vocational and technical stu- placed with a higher tax on money. Fur- dents often end up working in the same ther, the conditions under which under- 86. External Balance, Fiscal Policy, jobs for the same earnings as academic shooting or overshooting occur are par- and Growth in Turkey students - probably because teaching in ameterized. both streams is largely "chalk and talk" The paper is motivated by and illus- Ritu Anand, Ajay Chhibber, and and vocational and technical education trated with recent examples from Sub- Sweder van Wijnbergen students get little "hands-on" technical Saharan Africa. experience in school. This paper is a product of the Trade How did Turkey - alone among high- Policy Division, Financial Operations De- debt countries -sustain high real growth The costs of the academic and the voca- partment. Please contact Sheila Fallon, after rescheduling its debt? Can it con- tional and technical education (VTE) room N10-017, extension 38009. tinue on a high growth path and manage streams in Peru are very close. What's its external debt? more, the monetary returns to, and occu- pational profiles of, graduates of the two 85. Wage Responsiveness and Since Turkeyrescheduledits debt,itsreal streams are almost identical - with one Labor Market Disequilibrium GNP has grown 5 percent a year - com- exception. pared with an average 1.2 percent for For the self-employed who live in ur- Ramon E. Lopez and Luis A. Riveros other high-debt countries. ban areas outside Lima, the returns to How did Turkey translate the extra secondary technical education are signifi- Core unemployment may not affect mar- breathing space it gotfrnom foreign financ- cantly lower than the returns to secon- ket wages; transient unemployment does. ing into sustained high real growth? dary general education. This may be Policymaking should reflect the distinc- Turkey's financing needs for large because the quality of VTE programs for tion. public sector deficits generated high urban students outside Lima is generally medium-term inflation and high real in- lower than the quality of education for Core unemployment corresponds to the terest rates. But the thrust of Turkey's academic students in the same areas. structural and natural components of program was to keep savings andinterest Why, for other groups, do the two open unemployment, while transient un- rates up and to improve export perform- educational streams produce almost employment is associated with the labor ance. identical returns and graduates with market impact of cyclical fluctuations. Turkey's well-directed public expen- similar occupational profiles? VTE insti- Core unemployment may not signifi- diture program supported the private sec- tutions, funded at the same level as aca- cantly change market wages because it is tor through key investments in infra- demic institutions, can't afford the inputs associated with distortions in the labor structure, special incentives, and credit that make VTE genuinely technical, so market, a mismatch between jobs and for export and investment, the students get little "hands-on" techni- workers, and normal turnover. Turkey also inherited substantial ex- cal experience in school. Despite declared Core unemployment has persisted in cess capacity from heavy investment differences in emphases and goals, pro- Colombia, which has one the highest un- made in the 1970s. This allowed for a grams and curricula in the two streams employment rates in Latin America. quick improvement in output and exports are substantially alike - largely "chalk Argentina, which has the lowest un- once the exchange rate was aligned. and talk." employment rate in Latin America, expe- External debt does not threaten Tur- This paper is a product of the Educa- riences relatively higher cyclical employ- key's creditworthiness. Internal adjust- tion and Employment Division, Popula- ment fluctuations. ment is necessary for consistency with tion and Human Resources Department. Wage policies would be less effective inflation targets, but tighter external Please contact Cynthia Cristobal, room in improving the labor market in Colom- policies are both unnecessary and poten- S6-001, extension 33640. bia than microeconomic policies - in- tially damaging to Turkey's growth pros- cluding measures to deregulate the labor pects and internal balance. market, reduce the wage gap between the This paper is a product of the Public 88. Costs, Payments, and formal (protected) and informal (unpro- Economics Division, Country Economics Incentives in Family Planning tected) sectors, increase labor mobility, Department. Please contact Ajay Chhib- Programs and provide more trainingorjob informa- ber, room S9-041, extension 33776. tion. John A. Ross and Stephen L. Isaacs Stabilization and other policies to in- duce wage flexibility are more appropri- Countries differ in whether they charge ate for dealing with cyclical unemploy- clients for different forms of birth control, ment. Policy, Research, and External Affairs Working Paper Series 35 offer them free, reward people for using Countries adopting voluntary export re- signal the opportunity cost of extraction them, or penalize people for not using straints (VERs) often adopt a two-tier and development, capture the "natural them. export quota allocation system. This resource rent" and offer an acceptable system involves a "basic" allocation to the level of risk to the country. Governments in developing countries - restricted market and an "open" alloca- * A cash-flow and withholding-tax sys- concerned about rapid population growth tion to the nonrestricted market - analo- tem, initially for the mineral sectors and and the rising costs of family planning gous to sales in one market financing eventually for other sectors of the econ- programs - face difficult ethical and sales in another market. omy. The cash-flow tax would capture a practical considerations in deciding how The two-tier system allows the flexi- share of the "economic rent" from each to recover costs yet stimulate family plan- bilityrequired to diversifyexports in non- sector and be neutral across sectors. The ning. restricted markets, while fulfilling the withholding system would enable appli- Policies vary widely. Sri Lanka, for established quota in the restricted mar- cation of an income (as opposed to a con- example, charges for pills and condoms, ket. This diversification exacts a cost sumption) tax base at the individual offers IUDs andinjectables free, and pays because it results in extra sales at below level. the acceptor for sterilization. marginal cost. * A depletion account to preserve Pakistan and the Republic of Korea A rationale for pursuit of the two-tier the economy's capital stock. Natural re- charge for resupplies of pills, condoms, system can be found in the recent history sources are part of an economy's capital and spermicide and pay the acceptor for ofVER negotiations, in which discussions stock, which will fall unless "replacement sterilization. Bangladesh and Nepal give ofVERs between two major trading part- investment" is made as the resource is resupply methods free and pay the accep- ners spread to other trading partners as depleted. To ensure adequate saving for tor for sterilization (and, in Bangladesh, well. this "replacement investment," the ac- for using the IUD). The recent increase in antidumping count can be funded by the value of deple- Turkey, on the other hand, charges cases may in part be associated with the tion each year, equal to the minimum for sterilization but provides IUDs, pills, adoption of two-tier quota allocation sys- amount necessary to keep the aggregate condoms, and diaphragms free. Jordan tems. capital stock constant. charges for the IUD and offers the pill This paper is a product of the Trade This paper is a product of the Public free. Policy Division, Country Economics De- Economics Division, Country Economics Some countries offer community in- partment. Please contact Karla Cabana, Department. Please contact Ann Bhalla, centives for achieving family planning room N10-037, extension 37946. room N10-059, extension 37699. goals. Some offer families incentives for remaining small. Several countries, es- pecially in Asia, impose penalties on 90. A Framework for the Analysis 91. Israel's Stabilization Program families that exceed the norm. of Mineral Tax Policy in What practical and ethical consid- Sub-Saharan Africa Nissan Liviatan erations shape these policies? This paper reviews current practices and policies in Robert F. Conrad and Zmarak M. Shalizi A disinflation strategy that involved developing countries and considers the eliminating the fiscal deficit and chang- ethical issues that each kind of incentive Overreliance on production sharing and ing the rules of the government-labor and disincentive raises. resource rent taxes can expose small, open game reduced inflation in Israel from This paper is a product of the Popula- economies that are neither diversified nor more than 400 percent a year in 1984 to a tion, Health, and Nutrition Division, wealthy to unacceptable risks and fluc- low 20 percent a year in the third year of Population and Human Resources De- tuations in revenue. the program. partment. Please contact Sonia Ains- worth, room S6-065, extension 31091. Given the dual role played by the govern- The stabilization program Israel ment as resource owner and tax collector launched in July 1985 combined orthodox in many Sub-Saharaneconomies,itisim- fiscal and monetary policies with a 89. Export Quota Allocations, portant to separate "resource factor pay- heterodox incomes policy. Export Earnings, and Market ments" from taxes through the use of dif- The orthodox elements included a sharp Diversifications ferent instruments. The instruments to reduction in the fiscal-operational deficit be considered are: -8 percent ofGNPin the first six months Taeho Bark and Jaime de Melo * A factor payment system that in- - and tight monetary policy. cludes "ad rem"or "ad valorem"royalties. The heterodox element was to freeze Countries adopting voluntary export re- Production sharing, resource rent wages and prices and peg the exchange straints (VERs) often choose a two-tier schemes, and fixed fees could also be rate to the U.S. dollar. Wage and price quota allocation system, with extra sales used, but some form of unit payment is controls were relaxed in 1986 and 1987, to the nonrestricted market at below mar- necessary and justified, because natural leaving exchange rate policy (later ginal costs. One result may be the recent resources in the ground are inputs into pegged to the basket of currencies) as the increase in antidumping cases, the production process. Determined in a anchor in the new system. reasonable manner, such a royalty would The national coalition government 36 Policy, Research, and External Affairs Working Paper Series succeeded in neutralizing pressures for subsidy that encouraged both replanting 94. The World Bank's Population deficit spending. Under government and new planting. Lending and Sector Review pressure, employers' organizations and This paper is a product of the Inter- organized labor reached a wage agree- national Commodity Markets Division, George Simmons and Rushikesh Maru ment in July 1985 that prevented sub- International Economics Department. stantial unemployment. This approach Please contactDawn Gustafson, room S7- The Bank has established a population -not intended for use in normal times - 044, extension 33714. policy dialogue with governments - and proved effective in administering shock has successfully differentiated its popula- treatment. tion activities in different areas of the The result? At the end of the pro- 93. The Effects of Education, world. But the Bank's efforts to translate gram's third year, inflation is running a Health, and Social Security on population policy goals into effective pro- low 20 percent annually, compared with Fertility In Developing Countries grams and projects have been far from more than 400 percent in 1984. successful. Whether stabilization will survive Susan H. Cochrane the November 1988 elections remains to The Bank's decision to target its efforts to be seen. In most countries, spending on family "key" countries - such as Kenya, India, The stabilization programs in Argen- planning programs is more directly effec- and Bangladesh - has proven basically tina (in 1985) and Mexico (in 1988) were tivefor reducingfertility than spending on correct. In recent years, the Bank has similar in the initial stages to Israel's. any other individual service. Education, considerably increased its lending, num- This paper is a product of the Macro- health care, and social security programs her of projects, and attention to new ar- economic Adjustment and Growth Divi- may also help to reduce fertility, but their eas, especially Africa. In many countries, sion, Country Economics Department. impact differs from country to country, so however, fertility remains high. Please contact Nissan Liviatan, room the spending mix on these programs The Bank has been more successful N11-063, extension 37462. should be highly country-specific. in developing policy and creating pro- grams than in running effective projects. Spending on education does not auto- Projects have been commonly run 92. A Model of Cocoa Replanting matically reduce fertility. through ministries of health with little and New Planting in Bahia, Brazil, Fertility tends to increase, for ex- regional variation or autonomy and mini- 1966-85 ample, with small amounts of education mal roles for nongovernmental organiza- before falling off at the level of completed tions (NGOs) and the private sector. Pravin K. Trivedi primary school. Fertility responds more Built-in evaluation has not always been strongly to female than to male educa- present, and postcompletion evaluation In Brazil, two decades ofhigh cocoa prices tion, and more strongly to education in has been late. As a result, projects have and low interest rates sparked significant urban than in rural areas. The specific not been able to recognize and respond to growth in new planting of cocoa trees. effect can be measured only by looking at specific and changing needs, and follow- Higher prices and low interest rates en- a particular population group. up projects have been unable to take into couraged new planting; but higher prices Health care services that reduce account findings of project completion discouraged replanting in the short term child mortality also reduce fertility when evaluation. while encouraging it in the long term life expectancy reaches a level where The Bank should be able to improve couples anticipate the need for fewer chil- projects by: In 1966, 90 percent of the cocoa growing dren. This differs from society to society * Developing stronger links with a areas in Bahia, Brazil had trees more and, in general, is a more costly way to range of government agencies and NGOs. than 30 years old. By 1985 most of the reduce fertility than family planning. * Focusing more attention on insti- area had been replanted or supplied with The general effect of social security tutional development and sustainability. new trees. systems on fertility is more difficult to * Emphasizing smaller, less com- Throughout most of this period there study and to quantify. A preliminary plex projects with more flexible and inno- were high or rising cocoa prices - and estimate, however, shows it to be the most vative designs. zero or negative interest rates. High costly method, compared with education, * Shortening project cycles so that prices and low interest rates directly health care, and family planning. mistakes can be avoided as new projects encouraged new planting, but their rela- The cost of averting births, for most are developed. tionship toreplantingis more complex. In countries, appears to be lowest when pol- The Bank should reassess its reli- the short term, higher prices discourage icy emphasizes family planning. The mix ance on supervisory missions for project replanting, which involves uprooting and of other programs depends on the coun- monitoring and consider greater use of a temporary loss ofrevenue. But over the try. resident specialists for constant guid- long run, higher prices increase expecta- This paperis a product of the Popula- ance. The Bank should also consider de- tions of future profits and encourage re- tion, Health, and Nutrition Division, veloping a systems approach to project planting. Population and Human Resources De- evaluation and schedule more regular Lowering the interest rate below its partment. Please contact Sonia Ains- project reviews. The Bank needs, in real level provided cocoa growers with a worth, room S6-065, extension 31091. addition, to increase its coordination with Policy, Research, and External Affairs Working Paper Series 37 other international donor agencies and The model is general enough for the public sector sources of services, the cost with private voluntary organizations. analysisofmanyindustriesinboth devel- and cost-effectiveness of different inter- This paper is a product of the Popula- oped and developing countries. ventions, and the limits of the private tion, Health, and Nutrition Division, This paper is a product of the Inter- sector in meeting contraceptive demand. Population and Human Resources De- national Trade Division, International This paperis aproductofthe Popula- partment. Please contact Sonia Ains- Economics Department. Please contact tion, Health, and Nutrition Division, worth, room 86-065, extension 31091. Jean Epps, room S8-037, extension Population and Human Resources De- 33710. partment. Please contact Sonia Ains- worth, room S6-065, extension 31091. 95. International Trade and Imperfect Competition: Theory 96. The Private Sector and Family and Application to the Automobile Planning In Developing Countries 97. Export-Promoting Subsidies Trade and What to Do About Them Maureen Lewis and Genevieve Kenney Junichi Goto Richard H. Snape In harnessing the private sector to provide The real world economy is much less more family planning services to both Allegedly subsidized exports from devel- competitive than an economics textbook middle and low income people, govern- oping countries are targets for counter- assumes, especially for automobiles. ments can use incentives to stimulate pri- vailing import tariffs. But what are ex- vate sector investment and can ensure port subsidies? Should they be ofconcern? This paper develops a formal general quality control through regulation. equilibrium trade model for imperfect Only when the United States started ex- competition, a model easily applied to The private sector might meet more of the periencing tough competition in world actual situations. Starting from the demandfor contraception, therebyreduc- markets did the questions of fair trade Krugman-Dixit-Stiglitz framework, the ing government's subsidies for contracep- and export subsidies move to center stage model incorporates labor market imper- tion. in the international trade discussions. fection and variable elasticity of substitu- The private sector is already in- But is "fair trade" a will-o'-the-wisp? tion between differentiated products. volved in many facets of family planning The 1970s Tokyo Round of multilat- The model shows that, in the long - from research and development to eral trade negotiations produced a Subsi- run, international trade brings about five production and to distribution and deliv- dies Code. But neither subsidies nor gains: ery. Itis the major source ofcontraceptive countervailing actions have been con- * Greater variety in consumption. resupply methods (oral contraceptives strained to the extent that negotiators of Consumers can enjoy a wider selection of and condoms) in most countries. And it is the code hoped. The code has evoked goods through the introduction of foreign an important source of more permanent discord, partly because "export-promot- goods. methods (sterilization and IUDs) in a few ing subsidy" is so difficult to define. * Efficiency in product markets. Mo- countries. The United States has been the chief nopolistic power of domestic producers is Some public efforts have been ex- implementer of countervailing duties weakened by foreign competition. erted to harness and collaborate with the (CVDs) - many of them viewed as a form * Technical efficiency. The unit cost private sector. These include incorporat- of harassement by foreign exporters, par- ofproductionisreducedby foreign compe- ingfamily planning with employee health ticularly of manufactured products. Few tition and by further use of increasing re- benefit packages (the most common expe- CVDs have been targeted at the United turns to scale technology. rience), social marketing projects (where States where -as in Europe - the most * Decline in structural unemploy- a subsidized contraceptive is distributed subsidized exports are agricultural ex- ment. Contrary to popular belief, foreign through commercial channels), and ports that injure industries not in the im- competition reduces unemployment in stimulants to private sector investment porting countries but in other agricul- the long run by rectifying labor market in family planning. tural exporting countries. imperfections. Few of the experiments have been Alternative approaches to that of the * Contribution to economic growth. evaluated, but some arrangements ap- Subsidies Code are: International division of labor encour- pear to be appropriate and effective in * Ignore domestic subsidies in ex- ages savings in fixed costs, and the saved raising contraceptive prevalence. More- porting countries andfocus only on export capital resources can facilitate economic over, steps could be taken to improve and subsidies. growth. expand the methods that donors and na- * Ignore the distinction between fair The model is also applied to the U.S. tional governments adopt to promote and unfair foreign competition and place automobile trade in 1986 to estimate the greater private sector investment in all industry safeguard actions on one magnitude of the five effects. The results family planning service delivery. track. suggest that the cost of trade restrictions Clearly needed is an evaluation ofex- * Attack import barriers, not subsi- is high because the restrictions further isting programs and projects. More needs dies, for without barriers to imports the increase the imperfect competition in the to be known about what determines con- extent of assistance tends to be limited by American auto industry. sumer reliance on private as opposed to transparency and by fiscal considera- 38 Policy, Research, and External Affairs Working Paper Series ions. ment that encourages more flexible and dies have contributed to lower prices for This paper is a product of the office of broader cropping systems rather than beef, sugar, and grains - which are the Research Administrator. Please con- commodity-support programs. important exports for several highly in- tact Jane Sweeney, room S3-026, exten- * Design laws and institutions that debted countries. Industrial countries sion 31021. facilitate efficient marketing by estab- have also recently imposed stricter im- lishing grades and standards for different port quotas and pressured highly in- commodities and developing and distrib- debted countries to accept additional 98. Diversification In Rural Asia uting farm inputs. "voluntary" export restraints. * Stimulate public investment in In general, highly indebted countries Agriculture and Rural Development Staff physical and social infrastructure, com- remain more protectionist than indus- munications, and information systems. trial nations. But growing protectionism The challenge to agriculture in East Asia * Develop a rural financial system in the industrial nations makes it more is tosustainricefarming while expanding that mobilizes rural savings, makes difficult for highly indebted countries to into a more flexible, diverse agriculture. credit available to traders, and diversifies pay off their debts, and ultimately re- The task foraidagencieswillbetocomeup the rural economy. bounds on creditor governments and with suitable analytical skills and techni- * Assess rural training and educa- banks. cal knowledge for the switch from com- tion systems and theircapacitytoprepare This paper is a product of the Inter- modity-based project lending to broader rural people for nonagricultural jobs. national Trade Division, International - sectoral support. This paper isaproduct ofthe Agricul- Economics Department. Please contact ture Production and Services Division, Salome Torrijos, room S8-033, extension As aresult of the declining contribution of Agriculture and Rural Development De- 33709. rice-based farming in East Asia, invest- partment. Please contact Shawki ment in agriculture must diversify to Barghouti, room N8-071, extension maintain rural incomes. 30345. 100. Public Infrastructure and In the short term, East Asian coun- Private Sector Profitability and tries should (1) diversify toward crops for Productivity In Mexico whichthereisapromisingmarket(fruits, 99. Trade Policies and the Debt vegetables, and livestock products rather Crisis Anwar Shah than sugar, rubber, coconuts, and palm oil) and (2) expand small-scale industry, Sam Laird and Julio Nogues Microeconomic analysis of Mexican in- marketing, and construction in rural dustry shows additional investment in areas. The highly indebted countries have been public infrastructure produces only a Long-term needs include sustained removing their trade barriers but creditor small increase in output. This suggests research on crop and livestock technology nations are increasing them. This makes that the policy emphasis in Mexico should with an eye to developing: it harder for the indebted countries to be on the better upkeep of existing infra- * Higher yielding secondary food export more and to service their debts. structuretoensurethecontinuityofpublic crops. services rather than on new capital invest- * Better integration of livestock and In the early 1980s, faced with a mounting ment. crop production. debt crisis, most highly indebted develop- * More flexible irrigation and drain- ing countries increased trade barriers to This paper specifies a microeconometric age systems (current rice irrigation sys- generate more foreign exchange - but in model (a restricted equilibrium frame- tems being suited only to rice). the last three to four years, they have work) to estimate the impact of invest- * Improved technology to lower the reversed course. ment in public infrastructure on private cost of production. Almost all highly indebted countries industrial profitability. Empirical results The policy dialogue should focus on have undergone real devaluations and basedon time series datafor 34industries key questions. How do differentcrops and many have undertaken significant liber- characterize the Mexican industrial livestock interact to affect overall output? alizations, so much so that some countries structure as having involuntary unem- What are the costs of various combina- (Bolivia, Jamaica, Uruguay, Mexico, Mo- ployment, deficient product demand, de- tions? How can the need for farm and rocco, Costa Rica) are less protectionist clining productivity growth, increasing regional specialization and cooperation than before the debt crisis. returns to scale, and short-run excess between small farmers be balanced with But industrial countries have im- capital capacity. Aggregate technological the broader need for flexibility? posed new nontariff barriers against change over the period studied has been Rather than focus on narrow issues imports from highly indebted countries. capital using and labor saving. such as the costs of protecting rice Canada, Australia, the EEC, and the Both labor and capital are underused farmers-or take a"pick-the-winner"ap- United States have greatly increased the in the short run. This disequilibrium has proach to diversification, the Bank should use of countervailing duties and anti- high efficiency costs that may be under- help: dumping actions. mining Mexico's international competi- * Create an overall policy environ- Industrial countries' export subsi- tiveness. Policy, Research, and External Affairs Working Paper Series 39 The long-run multiplier effect of public infrastructure on output as meas- ured by the output elasticity of public in- frastructure is positive but small. Since public infrastructure is also observed to have a small degree of complementarity with both capital and labor, better upkeep of the existing infrastructure would help improve the functioning of labor and product markets in Mexico. From the private sector's perspec- tive, however, the long-run productivity of private capital is much higher than the productivity of public capital. Therefore, new capital investment in the public sec- tor is not recommended at this time and should be undertaken only to rectify any identified constraints imposed by the in- adequacy of infrastructure in the private employment of private factors. This paper is a product of the Public Economics Division, Country Economics Department. Please contact Ann Bhalla, room N1O-059, extension 37699. Volume II Numbers 101 - 200 Policy, Research, and External Affairs Working Paper Series 2 3 101. Measuring the Impact of many less developed countries, both in the Jean Epps, room S8-035, extension Minimum Wage Policies on the short and long run. 33710. Economy The MFA consists of bilateral quotas Luis A. Riveros and Ricardo Paredes against textile and clothing exports from 103. Industrial Portfolio developing countries. It thus derogates Responses to Macroeconomic Traditional statistical techniques proba- two GATT principles: nondiscrimination Shocks: An Econometric Model bly underestimate the negative effects of and the avoidance of quantitative restric- for Developing Countries protective wage regulations on young and tions. Despite this derogation, the MFAis unskilled workers - who should be get- administered under the auspices of James R. Tybout and Taeho Bark ting training, not minimum wages. GATT. The primary purpose of the MFAis to Rapid changes in the exchange rate sig- Our knowledge about the harmful effects restrict LDC shipments of textiles and nificantly affect leverage and liquidity in of minimum wage regulations has been clothing. Although the MFA quotas cost the corporate sector. strongly influenced by statistical evi- the consumer in importing countries a dence from the industrial countries - great deal, they save (or create) few jobs. Under what macroeconomic conditions which is often based on indirect estimates The quotas are therefore a poor way to are industrial growth and financial sta- that do not take into account the many protectworkers from foreign competition. bility - or disaster - most likely in a "discouraged job seekers" who withdraw The MFA has a strong impact on semi-industrial country? from the labor force (and statistical LDCs in the short run for the following The question is addressed using an samples) because ofminimum wage regu- reasons: econometric model with the following fea- lations. Minimum wage regulations are * The forgone export revenue of tures. Each firm's net income is a fune- probably more harmful than economists LDCs, partly offset by the transfer of tion of macroeconomic variables (such as have assumed them to be. quota rents, is huge. output demand and interest rates) and Government regulation of the mini- * Since individual quotas under the firm-specific factors (such as physical mum wage is most likely to limit the job MFA are imposed on selected (often effi- asset shocks, currency exposure, and prospects ofyoung and uneducated or un- cient) exporting countries, unrestricted overall indebtedness). Each firm retains skilled workers. (inefficient) countries may be able to in- some portion of its income - how much Proportionately fewer women than crease their shipments at the expense of depends on dividend policy and past earn- men are affected by the minimum wage restricted countries. The MFA affects the ings performance. Retained earnings add because women withdraw from the labor pattern of trade. to net worth and are distributed among force and remain unemployed - or work * Since the MFA puts a cap on the specific assets and liabilities according to in the informal sector and productive quantity (not the value) of shipments, it the same macroeconomic and firm-spe- activities notaccountedforinlabor statis- encourages the upgrading of goods. cific variables. These incremental addi- tics. The MFA also has an impact on the tions to assets and liabilities set the stage Minimum wage regulations should economic development in the long run. for the nextperiod's adjustmentbehavior. probably not apply to young or unskilled On the positive side, attempts to evade Application of this model to Uru- workers or apprentices. It is less impor- MFA quotas stimulate foreign invest- guayan raw data yielded these basic find- tant to guarantee unskilled workers a ment from restricted suppliers, like Hong ings: minimum wage and more important to Kong, to nonrestricted countries. Invest- * Corporate income is very sensitive to provide them with training that will in- ments to less restricted regions have output demand and the cost of dollar crease their chances of rising above the helped economic development of coun- credit. need for wage protection. triesinAsia(andperhapstolessextentin * Fluctuations in corporate income This paper is a product of the Macro- Latin America and the Caribbean). have a clear, direct effect on the rate at economic Adjustment and Growth Divi- But the MFA discourages countries which net worth expands. sion, Country Economics Department. from becoming "too successful." For ex- * Firms absorb most short-run fluc- Please contact Raquel Luz, room N11- ample, when Bangladesh showed success tuations in net worth by adjusting assets, 059, extension 39059. in clothing exports with the help of a not debts. Korean company, the developed coun- * Corporate demand for peso credit 's tries negotiated bilateral restrictions very unresponsive to the real peso inter- 102. Effects of the Multifibre with the poorer country. Thus the MFA est rate. Arrangement on Developing tends to maintain the present configura- The findings imply that rapid Countries: A Survey tion of textile and clothing trade - and changesin the exchange rate oraggregate therefore discourages dynamic shifts in demand significantly affect leverage and Junichi Goto trade based on comparative advantage. liquidity in the corporate sector. This paper is a product of the Inter- This paper is a product of the Trade The Multifibre Agreement (MFA), the national Trade Division, International Policy Division, Country Economics D,vi- most important restriction on textile and Economics Department. Please contact sion. Please contact Karla Cabana, room clothing exports, has damaging effects on N10-037, extension 37946. 44 Policy, Research, and External Affairs Working Paper Series 104. Economic Effects of Financial lateralism and market access for small 106. Energy Issues in the Crises trading companies? Developing World Manuel Hinds The unconditional extension of the fruits Edited by Mohan Munasinghe of trade negotiations under the General and Robert J. Saunders The financial systems in financially dis- Agreement on Tariffs and Trade is giving tressed countries should be restructured way to bilateral and other discriminatory Lower oil prices are raising doubts about so that banks can acknowledge and allo- trade agreements. Led by the United the underlying assumptions and ambi- cate losses rather than protect inefficient States, GATT has taken a strong position tious energy programs of the last decade. companies - thereby throwing good against discrimination: the benefits of How - and how hard - do countries money after bad. negotiations under GATT generally have pursue the goal of energy efficiency in an been extended to all contracting parties uncertain energy market. Confronted with a financial crisis, gov- without specific conditions or reserva- ernments in many developing countries tions. This unconditional extension of The developing world still needs large protect their banks from bankruptcy by benefits - the unconditional most-fa- amounts of capital to meet its ever-ex- allocating resources to the least efficient vored-nation principle (MFN) - is now panding energy requirements. In most debtors-loss-makingfirms whose bank- under considerable pressure. countries, these capital requirements are ruptcy would lead to the failure of the Supporters of conditional MFN point a big part of the total investment plan. banking system. This crowds out efficient out that it ensures reciprocity and, by dis- The problems of debt and public revenues activities that could lead to economic re- couraging foot-dragging and free-riding, make the pursuit of efficiency as impor- covery. encourages negotiation. On the other tant a goal under declining fuel prices as Such misallocations of resources, hand, advocates of unconditional MFN it was under rising fuel prices. Other and the destabilizing macroeconomic argue that it ensures that the benefits of issues are less clear. forces they generate, will delay economic negotiations are not wasted, that it sim- In an era of uncertainty, how do oil- recovery until losses are allocated in a plifies administration of trade barriers, importing countries decide whether to way that mimics bankruptcy processes. reduces friction between nations, pro- pass savings along to the consumer in The financial system should be re- tects the small and weak, and facilitates lower oil prices or (considering the debt structured to curtail (through writeoffs the development and preservation of a crisis) to treat them as windfall revenue and recapitalization) the dependence of multilateral trading system. gains? Reducing energy prices is rela- banks on their bad borrowers. Banks and Although the United States has pur- tively easy, but raising them has histori- their depositors (or an important subset sued nondiscriminatory trade pacts since cally presented problems. What happens of them) should be protected to avoid the 1923, Washington has in a recent turn- when international prices go up again? monetary effects of a banking panic. But around pursued preferential trading ar- What strategies should such non- bank shareholders and managers should rangements, promoted forms of condi- OPEC oil-exporting countries as Malay- take their share of the losses - the share- tional MFN, and sought discriminatory sia, China, and Mexico adopt to offset holders by losing their investment treatment for some of its exports and export losses? (through writeoffs) and the managers by imports. No nondiscriminatory leader- How do developing countries decide being removed from their positions. ship has emerged to replace that of the whether to invest in further oil and gas Restructurings of banks should be United States. exploration or in alternative fuels, and used to bring about restructuring in the The threat to multilateralism and how much should the Bank support real sector: the failure of unviable firms small traders will be reduced if: them? what should be done with white (by foreclosing on the collateral and sell- * New trade-liberalizing "clubs" elephant projects? ing off assets) or the forced restructuring that are formed in the Uruguay Round, or How do governments arrive at a pro- of troubled but viable firms. elsewhere, are open to new members on ductive partnership between the public This paper is a product of the Trade the same terms that apply to the found- and private sectors? and Finance Division, Europe, Middle ers. What will happen in poorer develop- East, and North Mrica Department. * Compliance with the rules of such ing countries that cannot bear the high Please contact Luz Hovsepian, room H9- clubs is determined multilaterally and capital costs of investing in fuel-switch- 065, extension 37297. not unilaterally by any existing members. ing capabilities yet otherwise remain vul- * Markets that are levered open are nerable to sudden fluctuations in fuel opened in a nondiscriminatory manner. prices? 105. Securing Access to * Preferential trading arrange- How do decisionmakers assess the International Markets ments conform to the relevant GATT rule risks of energy investments in an uncer- - Article XXIV. tain energy market? Richard H. Snape * The main safeguard provision of This paper, a product of the Energy GATT(Article XIX) remains nondiscrimi- Strategy, Management, and Assessment Much of the action in international trade natory. Division, Industry and Energy Depart- negotiations is bilateral or otherwise dis- This paper is a product of the Research ment, has also appeared as an Industry criminatory, including action under Administrator's Office. Please contact and Energy Department Working Paper. GA TT auspices. Does this threaten multi- Jane Sweeney, room S3-026, extension Please contact Mary Fernandez, room S2- 31021. 147, extension 33637. Policy, Research, and External Affairs Working Paper Series 45 107. A Review of World Bank memory for project data. 109. Improving Power System Lending for Electric Power This paper, a product of the Infra- Efficiency in Developing Countries structure and Energy Operations Divi- Through Performance Contracting Mohan Munasinghe, Joseph Gilling, sion, Latin America and the Caribbean and Melody Mason Department, has also appeared as a In- Philip Yates dustry and Energy Department Working More people worldwide have access to Paper. Please contact Mary Fernandez, Utilities in developing countries may electric power - but the overall perform- room S2-147, extension 33637. want to consider a successful new ap- ance of sector utilities is deteriorating. proach to improving performance: engag- Bank lending should place greater em- ing a performance contractor to improve phasis on improved economic, financial, 108. How to Collect Data on their operations-in exchange for a share and managerial efficiency. Household Energy Consumption of the savings. The utility, in turn, fulfills its own performance contract with the gov- A review of about 300 power projects fi- Josef Leitmann ernment -getting more autonomy in ex- nanced by the World Bank and IDA be- change for better performance. tween 1965 and 1983 shows a declining Energy policy and activities should be trend in sector performance. More people based on accurate data about how house- In the United States, some large indus- have access to electric power, and more holds acquire and use energy - and such trial and commercial energy users have kilowatt hours are generated per capita, data is best acquired at the household successfully used energy performance but overall sector performance has de- level. contractors to effect energy savings in clined, while the quality of service is poor exchange for a share of the savings. and shows no signs of improving. This paper presents guidelines for ad- In some developing countries, gov- Therefore in its operations, the Bank ministering household energy surveys. ernments have considered various forms should put more emphasis on: Typically, country energy balances, of government/utility performance con- * Making energy production and national budget surveys, and micros- tract, whereby the governments give the allocation more efficient (supplying elec- tudies have been the source of informa- utilities more flexibility and autonomy in tricity at the lowest cost andbasing prices tion about residential energy consump- exchange for better performance. on real marginal costs) rather than using tion. A dedicated nationwide household Why not merge the two concepts? the supply of power to meet other goals energy survey will generate more rele- A utility could engage a performance such as social equity. vant data for planners, policymakers, and contractor to improve operations in ex- * Increasing incentives to make evaluators - but may overturn assump- change for a share of the savings - utilities more efficient and productive. tions in the process. thereby allowing the utility to fulfill its * Encouraging sector restructuring The subsidized promotion of lique- performance contract with the govern- and institutional reform, including fled petroleum gas (LPG) as a charcoal ment. The government would give the greater private participation, to improve substitute in Senegal, for example, was utility more autonomy in exchange for the social compact between government, based on the assumption that subsidies better performance. consumers, and the electric utility. alone would lead to widespread adoption This paper, a product of the Industry * Evaluating power projects with of butane fuel and that as the use of and Energy Department, has also ap- better understanding of power, energy, butane increased, the use of charcoal peared as an Industry and Energy De- sector, and national economic linkages. would decline. But a 1987 survey indi- partment Working Paper. Please contact * Striking a better investment bal- cated that although 65 percent of the Mary Fernandez, room S2-147, extension ance between power generation and dis- households in Dakar have LPG stoves, 33637. tribution. only 2 percent use the fuel exclusively. * Improving the quality of existing And in the households that use both LPG services (and reducing losses) through and charcoal, consumption of charcoal 110. Impact of Lower Oil Prices on rehabilitation and maintenance -rather has not changed. Renewable Energy Technologies than by simply expanding the system. In Niger, wealthy residents, because * Providing service on a priority of their lifestyle and income, were consid- Ernesto Terrado, Matthew Mendis, basis to the productive sectors, such as ered the logical market for modern fuels. and Kevin Fitzgerald industry and (when economically justi- But a 1986 study indicate that they used fled) agriculture. alot of wood because they could afford to Falling oil prices are most likely to affect * Using more risk and sensitivity buy it in bulk (which made it the cheapest the economic viability ofrenewable energy analysis, and more scenario-oriented fuel) and they suffered none of the health technologies that compete directly in the "what-if" treatment of uncertainty in or other disadvantages of wood fires be- modern sector as large-scale petroleum project preparation work rather than at cause their servants did all the cooking. substitutes. Projects that involve small- appraisal. This paper, a product of the Industry scale and rural applications are less likely * Setting more realistic targets for and Energy Department, has also ap- to suffer. physical and financial performance and peared as a Industry and Energy Depart- clearer identification of constraints on ment Working Paper. Please contact The economic sensitivity of renewable meeting those targets. Janine Littleford, room S4-038, exten- energy technologies to changing oil prices * Developing a better institutional sion 33627. is a function of a project's size and loca- 46 Policy, Research, and External Affairs Working Paper Series tion. Renewable energy technologies are ing over the past 40 years has totalled percent in the same period. those that make use of solar, wind, and over US$34 billion. But the demand in the developing biomass resources. About one-fifth of total Bank lending countries should grow about 50 percent Renewable energy technologies that is directed to the energy sector. More from about 16 mmbd in 1985 to 24 mmbd compete directly in the modern sector as than two-thirds of the Bank's energy in the year 2000. No other group of coun- large-scale petroleum substitutes suffer lending is for electric power, which tries will experience so great an increase the most from falling oil prices. These in- amounts to about US$2.0 billion a year - in demand for oil. clude "dendothermal" power plants, fuel and over US$19 billion in the past nine As a result of "industrialization" alcohol projects, bagasse production years. shifts from the industrial countries to the schemes, biomass gasifiers for process In other energy subsectors, the Bank developing nations, oil consumption in heat, wind farms, and industrial solar is emphasizing assistance for energy the industrial sectors of less developed water heating systems. supplies for the domestic market that countries has remained predominant The economic viability of small-scale could not be financed by export earnings over their transportation sectors. This or remote (rural) applications is less and serving as a catalyst for the develop- has important ramifications for fuel sub- likely to be a problem because: ment of these resources. stitution, efficiency improvements, and * They are generally smaller, so fuel This paper presents basic back- other policies. costs represent a smaller proportion of ground information on Bank lending in This paper, a product of the Energy total costs in the conventional alterna- energy, as ready reference for answering Development Division, Industry and tive. queries from companies, governments, Energy Department, has also appeared * Petroleum fuels are less available and other entities outside the Bank. The as an Industry and Energy Department and cost more in rural than in urban paper describes the Bank's role in energy Working Paper. Please contact Mary Fer- areas. lending - detailing in the annexes, the nandez, room S2-147, extension 33637. * Biomass fuels (such as wood for Bank's lending for gas, oil, electric power gasifiers) cost less in rural areas. projects and its recent energy sector Small-scale and rural applications loans. It describes projects by country, 113. Public Sector Pay and include biogas, biomass gasifiers for en- giving loan amounts and fiscal years of Employment Reform gine use, photovoltaic and wind water Board approval. pumps, solar crop dryers, and domestic This paper, a product of the Energy Barbara Nunberg solar water heaters. Some of these tech- Development Division, Industry and nologies, such as wind pumps and domes- Energy Department, has also appeared Overstaffed bureaucracies afflicted by tic solar water heaters, are used exten- as an Industry and Energy Department eroding salaries, demoralization, corrup- sively in many parts of the world. Working Paper. Please contact Mary tion, moonlighting, and chronic absentee- This paper, a product of the Energy Fernandez, room S2-147, extension ism are often unable to carry out the key Strategy, Management, and Assess- 33637. tasks of economic recovery. What should ments Division, Industry and Energy the Bank do about it? Department, has also appeared as an Industry and Energy Department Work- 112. A Visual Overview of World Four types of problems affect public sec- ing Paper. Please contact Janine Little- Oil Markets tor pay and employment: ford, room S4-038, extension 33627. * Too much spent on wages in the Kay McKeough, Jose Escay, public sector (and too little on supplies and Sompheap Sem and maintenance). 111. Recent World Bank Activities * Overstaffed bureaucracies. In Energy Oil consumption is expected to increase * The erosions of public service sala- far more in the developing countries than ries - with individual wages too low de- Industry and Energy Department in the industrial nations by the year 2000 spite the high overall budget for salaries. - as the industrial nations shift to a * Too small a gap between high and About one-fifth of total Bank lending goes service economy and the developing na- low wages - which constrains the gov- to the energy sector - and two-thirds of tions industrialize. ernment's ability to hire and keep quali- that supports electric power. Annual fled personnel at the middle and upper Bank energy lending has tripled in the last Total world demand for oil is expected to levels. decade. This paper provides background increase about 27 percent in the period The Bank has used structural adjust- information on that energy lending 1985-2000, from 57 million barrels a day ment loans, technical assistance projects, (mmb/d) to 73 mmb/d. and country economic and sector work to Annual Bank energy lending (including Demand in the centrally-planned address these problems. In its efforts to credits from the International Develop- economies (in which industry has been support reform of public sector pay and ment Association) has tripled, from US$1 protected from the effects of the oil employment, the Bank should: billion in fiscal 1977 to about US$3.7 shocks) should remain about the same. * Systematically analyze the poli- billion in fiscal 1987, but it decreased Oil consumption in the industrial tics of the reform process, and more fully somewhat in fiscal 1988. Its energy lend- countries is expected to grow only 19 research key pay and employment issues Policy, Research, and External Affairs Working Paper Series 47 (such as nonwage allowance systems and 115. Asia Region Population Population and Human Resources De- supplementary benefit schemes). Projections: 1988-89 Edition partment. Please contact Sonia Ains- * Allow flexibility (and some coun- worth, room S6-065, extension 31091. try autonomy) in designing reform, so a My T. Vu, Eduard Bos, and Rodolfo A. Bulatao country will "own" its own reform. * Look beyond short-term reform to The Asia region now has more than half 117. Europe, Middle East, and such medium-term issues as redeploy- the world's population and contributes North Africa Region Population ment, retraining, and pension and sever- half the world's annual population Projections 1988-89 Edition ance obligations. growth. * Recruit personnel specialized in My T. Vu, Eduard Bos, and Rodolfo A. Bulatao pay and employment operations or offer World population grew by about 88 mil- specialized training to Bank staff. lion in 1987. Asia contributed half this The region contributed about l5percentof This paper is a product of the Public growth, andby the year 2000 its contribu- the world's population growth last year, Sector Management and Private Sector tion is projected to be only 4 percentage and its population is expected to double by Development Division, Country Econom- points smaller. 2025. ics Department. Please contact Jayne The contrast between India and -Cheeseman, room N9-057, extension China illustrates the variation in the World population grew by about 88 mil- 61703. region between high fertility and high lion in 1987. The Europe, Middle East, mortality countries, especially in South and North Africa region contributes Asia, and low fertility countries in East about 15 percent of the growth, and this 114. Africa Region Population Asia. Although China has the largest contribution is projected torise gradually Projections: 1988-89 Edition population, India now contributes more until the end of the next century. The to world population growth than any population of the region is expected to MyT. Vu, Eduard Bos, andRodolfoA. Bulatao other country. At projected rates, India's double by 2025. population will overtake China's by the Demographically, the EMN region Its population - at the projected fertility end of the next century. has two distinct subregions. The Euro- and mortality rates - will double in 20 This paperis aproduct of the Popula- pean area has fertility and growth rates years. tion, Health, and Nutrition Division, among the lowest in the world, but crude Population and Human Resources De- mortality is slightly higher than in other World population grew by around 88 partment. Please contact Sonia Ains- subregions because of an older age struc- million in 1987. The number added each worth, room S6-065, extension 31091. ture. The Afro-Asian area has growth year will continue to rise for another rates closer to those of the Sub-Saharan decade. Africa region. The fast pace of population Africa now makes up only 9 percent 116. Latin America and the growth is attributed to relatively high of the world's population, but it will even- Caribbean Region Population birth and low death rates. tually contribute more to world popula- Projections: 1988-89 Edition The region includes the country with tion growth than any other region. Af- the world's highest population growth rica's contribution to world population My T. Vu, Eduard Bos, and Rodolfo A. Bulatao rate, Qatar, and the country with the growth is expected to rise from 17 percent lowest life expectancy, Afghanistan. today to 30 percent by 2025 and 45 per- The Latin America and Caribbean region This paper is a product of the Popula- cent around 2050. Africa's population contributes about lOpercent ofthe world's tion, Health, and Nutrition Division, growth rates are very high and, with growth and is projected to continue to do Population and Human Resources De- projected trends, will double the popula- so into the next century. Its population is partment. Copies are available free from tion in 20 years. expected to double by 2040. the World Bank, 1818 H Street NW, Africa includes the three countries Washington DC 20433. Please contact with the highest fertility rates in the The Latin America and Caribbean region Sonia Ainsworth, room S6-065, extension world -Rwanda, Kenya, and Malawi. It has the lowest mortality rate among the 31091. also includes five of the six countries with regions and, partly as a result, has a the lowestlife expectancies. Both fertility higher population growth rate than Asia. and mortality are projected to decline in The LAC region is more demographi- 118. Contract Plans and Public all countries, but will decline more slowly cally homogeneous than the other re- Enterprise Performance than in other regions. gions. Life expectancy is higher than This paper is a product of the Popula- elsewhere, and fertility moderate, though John Nellis tion, Health, and Nutrition Division, there are exceptions. Bolivia and Guate- Population and Human Resources De- mala have the highest fertility rates in Contractplans help clarifygoals, increase partment. Please contact Sonia Ains- the region, and Bolivia and Haiti have the managerial autonomy, and open a dia. worth, room S6-065, extension 31091. lowest life expectancy. logue between management and govern- This paperis a product of the Popula- ment - but their benefits have been over- tion, Health, and Nutrition Division, sold. 48 Policy, Research, and External Affairs Working Paper Series Roughly 100 public enterprises in devel- forecast commodity supply, demand, and despite the high real interest rates neces- oping countries (50 of them with Bank prices for use in project evaluation, mar- sary to induce private domestic savings in support) are using contract plans -nego- ket and policy analysis, global economic a period of declining foreign savings. tiated performance agreements between projections, and assessments of the devel- the government/owner and the enter- opment prospects in developing coun- Developing countries trying to emerge prises' managers or directors. tries, from recessionary spirals must recognize Contract plans have not improved In the 1980s, commodity market the importance of public-private interac- thefinancialperformanceofpublicenter- modeling became less experimental, tions in designing growth-oriented ad- prises dramatically. The processis proba- more realistic, and more directly oriented justment programs. They must appreci- bly more important than the product. to the kinds of commodity price forecasts ate the complex impact of fiscal policy on They do produce clearer goals, open a needed for overall Bank efforts - for the economy - the way government dialogue between management and the example: credit, investment, and (indirectly) ex- state, and offer such benefits as better * Short-, medium-, and long-term change rate policies affect export per- accounting, auditing, and management forecasts for market adjustments for co- formance and hence growth and capacity3 information systems, including physical coa and coffee. utilization, thus encouraging private in- and financial performance indicators and * What-if supply forecasts for coffee vestment. performance targets. under different price scenarios for coffee Turkey is an interesting country for The problem is, they have been over- and fertilizer. studying how public policy can stimulate sold. They are not the mechanism of * Analyzing and forecasting long- private investment. The reason is that choice for healing a sick company. They term changes in multiple-commodity unlike other high-debt countries, Turkey work best with firms that operate com- markets (say, for fats and oils and high has managed to increase the rate of in- mercially and already have decent man- protein meals or for different forms of vestment in recentyears despite external agement and sound financial and report- minerals). constraints and high real interest rates. ing procedures. * Analyzing the effects of changing Turkey's strategy nevertheless has In supporting contract plans, the inventories and oil prices and the availa- limits. The surges in public investmentin Bank should keep ambitions modest and bilityofsyntheticson the supplyand price 1986 and 1987 have since hurt macro emphasize the clarification of goals, in- ofrubber. stability. And private investment has creased managerial autonomy, and open * Analyzing the effect of adjusting tilted toward such nontradables as hous- negotiating between management and capital shocks on perennial tree crops. ing - partly as a result of special credit government. Contract plans should not * Examining the effect of changes in schemes directed at mass housing and be a condition of Bank adjustment opera- inventory or inflation on commodity price partly because housing investment is an tions - at least not until the process has movements. attractive hedge against inflation. Un- been tested and shown positive results in Researchers have made the models less corrected, this shift could hurt future the country. more realistic by factoring in such consid- export prospects. This paper is a product of the Public erations as risk (particularly for agricul- This paper is a product of the Public Sector Management and Private Sector tural supplies); the influence of synthetic Economics Division, Country Economics Development Division, Country Econom- substitutes on demand for primary com- Department. Please contact Ann Bhalla, ics Department. Please contact Rose modities; and the influence of noncom- room N10-059, extension 37699. Malcolm, room N9-055, extension 37495. petitive market structures on oil prices and trade patterns. Price and quantity forecasting has 121. Commercial Bank 119. Recent Developments in been the major focus of Bank modeling Provisioning Against Claims on Commodity Modeling: A World efforts, but the Bank also examines such Developing Countries Bank Focus other issues as investment policies, opti- mal market stabilization, and pricing Graham Bird Walter C. Labys strategies. This paper is a product of the Inter- Commercial banks, through their provi- A review ofthe state ofthe artofBank com- national Commodity Markets Division, sioning, recognize that they expect less modity modeling for forecasting and International Economics Department. than full payment on their developing analysis ofsupplies, demand, and prices. Please contact Aban Daruwala, room S7- country debt. Provisioning reduces the. 040, extension 33716. willingness ofbanks to provide new funds, The Bank has been on the cutting edge in increasing the importance of debt-reduc- the development and application of mod- tion schemes. Banks would like the multi- els of primary commodity markets and 120. Public Policy and Private lateral agencies to take the lead. One industries - those involving raw materi- Investment in Turkey answer, now or in the future, may be an als, agricultural products, and unproc- international bankruptcy court. essed or incompletely processed fuel and Ajay Chhibber and Sweder van Wijnbergen nonfuel minerals. With Mexico's announcement in 1982 The Bank's International Commod- Turkey's public policy for expenditure and that it could not meet its debt obligation, ity Markets Division uses these models to growth encouraged private investment the debt crisis - which arose from the Policy, Research, and External Affairs Working Paper Series 49 spate of lending that began with the 1973 122. Import Demand In corporating this constraint into the im- oil hike - became public. In 1985, Peru Developing Countries port demand equation is difficult for sev- limited payment on its debt obligations. eral reasons. At a minimum, the authors The 1985 Baker Plan - designed to lend Riccardo Faini, Lant Pritchett, recommend using the broadest possible more to heavily indebted countries in re- and Fernando Clavijo instrument list, including indicators of turn for structural adjustment within world demand, competitors' prices in them - had little impact on financial As a less restrictive trade regime is associ- export markets, exogenous capital flows, flows. In 1987, Brazil suspended interest ated with greater responsiveness to eco- and international reserves. rate payments on part of its debt. nomic incentives, econometric evidence Option 3: The direct incorporation of Against this background, Citicorp de- that does not allow for the impact of im- quantitative restrictions is the main cided in May 1987 to add $3 billion to its port controls cannot be used reliably to as- method of recovering structural (no- loan loss reserves - and many other sess the effect ofa devaluation on the trade tional) demand parameters and assess- money center banks, in the United States balance. ing, for example, the impact of removing .and abroad, followed suit. Such provision- import restrictions. Unfortunately, a ing - putting aside reserves in low-earn- "Measured income elasticities in develop- good indicator ofquantitative restrictions ing but risk-free assets to cover the possi- ing countries are generally higher than 1 is not usually available and, even if it bility of default on loans - reduces both -- and relative prices, although mostly exists, interpreting its behavior may be 'risk exposure and short-term earnings. inelastic, significantly affect demand for difficult. No matter what the banks say other- imports. When a lack of foreign exchange This paper is a product of the Trade wise, one implication of provisioning is or, more generally, a restrictive trade Policy Division, Country Economics De- that the banks expect less than full repay- regime effectively constrains import partment. Please contact Karla Cabana, ment of these debts. Banks with large flows, the measured impact of price and room N10-037, extension 37946. provisions will lean more toward debt activity variables becomes less pro- relief than toward the injection of new nounced. To recover structural elastici- money to debtor nations. The alternative ties in such a case, one can develop a 123. Export Supply, Capacity, and to debt relief may be general default - direct modeling of quantitative restric- Relative Prices given the deteriorating economies in tions (which is arduous) or use the experi- debtor countries, the gloomy global out- ence of a structurally similar country Riccardo Faini look, and the diminished expectation of (which is quicker). In general, a less new monies. restrictive trade regime is associated A model applied to data on Turkey and Provisioning may be seen as the com- with greater responsiveness to economic Morocco suggests that prices and capacity mercial banks' first step toward extricat- incentives. have more influence on export supply than ing themselves from a certain kind of in- Econometric evidence that does not domestic demand does. Can a case be vestment in developing countries. A gen- allow for the impact of import controls made for placing less emphasis on con- eral feeling in the banking community is cannotbeusedreliablytoassess the effect tractionary macroeconomic policies to that the multilateral agencies must take a of a devaluation on the trade balance. achieve sustainable external balance? stronger role than they have in resolving Indeed, devaluation combined with trade the debt problem- not that they lend vast liberalization (a common feature of many In the neoclassical approach to specifying sums of money but that they assume ste- adjustment programs ) will have a more an export supply equation, relative prices wardship of the debt crisis, adopting a pronouncedeffecton import demand than andcapacity are assumedto play acrucial clearly thought out strategy, and making available evidence would suggest. role in domestic firms' decisions to supply more constructive use of conditionality. The authors compare three ap- exports. One proposed instrument for this is proaches to modeling and estimating In the Keynesian approach, the will- aninternational bankruptcycourt (the In- import demand--which is arduous when ingness of domestic firms to supply for- ternational Debt Restructuring Agency). trade controls are pervasive: eign markets is considered to be largely a It would bring together creditors, the Option 1: Trade import equations function of domestic demand pressure. debtor country, and the multilateral agen- work well when import controls are rela- Keynesian analyses do not allow for the cies to work out an appropriate debt relief tively stable over time, butit is difficult to impact of relative prices. agreement, conditional on adjustment determine if this is the case. Without a Faini blends the two approaches in measures undertaken by the debtor coun- priori information, and short of using all the model he has applied to Turkey and try. misspecification tests, one could perhaps Morocco - countries chosen because of This paper is a product of the Debt rely on a comparison between estimated the shifts they have both undergone in and International Finance Division, In- elasticity and the "norm" computed in their trade incentive structure, and de- ternational Economics Department. this study. If the difference between the spite the dearth of data on export supply Please contact Ida Holloman-Williams, two values is deemed too high, consider: behavior in developing countries. room S7-035, extension 33729. Option 2: This takes into account the In Faini's model, a firm is assumed to impact of foreign exchange availability. If choose, first, the level of productive capac- it seems clear that the country has foreign ity and, then, one period later, to deter- exchange constraints, the traditional mine production and allocation between specifications should be bypassed, but in- foreign and domestic markets on the 50 Policy, Research, and External Affairs Working Paper Series basis of realized prices, demand condi- Simulations on all three models also Economics Division, Country Economics tions, and installed capacity. produced the same conclusion about pol- Department. Please contact Ann Bhalla, Faini's conclusion: Both prices and icy: thatthe global economyis most likely room N10-059, extension 37699. capacity are significant determinants of to improve in 1989/90 and stabilize in the export supply. If further studies confirm 1990s through a combination of fiscal that relative prices have a significant contraction and monetary easing in the 126. Educating Managers for influence (and domestic demand pressure United States combined with fiscal ex- Business and Government: A a weak influence) on export supply - an pansion in Japan. Review of International Experience argument can probably be made for plac- This paper is a product of the Eco- ing less emphasis on contractionary nomic Analysis and Prospects Division, Samuel Paul, John C. Ickis, macroeconomic policies as a means of International Economics Department. and Jacob Levitsky achieving a sustainable external balance. Please contact Karen Adams, room S7- Evidence to support such a conclusion is 216, extension 33738. What kind oftraining is most appropriate insufficient, but further research is war- for corporate executives who must under- ranted. stand world trends and their counterparts This paper is a product of the Trade 125. The Effects of Financial inothercountries? forowners ofsmallen- Policy Division, Country Economics De- Liberalization in Thailand, terprises? forpublicadministrators? And partment. Please contact Karla Cabana, Indonesia, and the Philippines: how effective is the training in the United- room N10-037, extension 37946. A Quantitative Evaluation States and elsewhere? Christophe Chamley and Qaizar Hussain How does the Harvard MBA stack up 124. International Macroeconomic against executives trained in other ways? Adjustment, 1987-1992: A World Removaloffinancialregulationswassuc- How do US business schools compare Model Approach cessful and had a powerful impact on the with training institutions in Japan and level offinancial assests in Thailand and India? Which training approaches are Robert E. King and Helena Tang Indonesia but failed in the Philippines most useful for: because taxes imposed on financial insti- Entrepreneurs and owner-managers Three global econometric models pro- tutions interacted with high inflation of small enterprises? duced the same conclusions: that the rates. Traditionally, management educa- global economy is most likely to improve tion has been geared toward training through fiscal expansion in Japan com- In the early 1980s, interest rate ceilings executives for large-scale enterprises. bined with fiscal contraction and mone- and other regulations affecting financial But in the 1980s, small and medium-size tary easing in the United States. Thesame assets were lifted in Thailand, Indonesia, enterprises have also become important models forecast a slowdown in 1988 and and the Philippines. (for different reasons) in both developed low growth in 1989/90 followed by US Did financial liberalization work and developing countries. And any new recovery in 1991-1992. equally well in all three countries? The training programs for entrepreneurs and topic is important because the heavy bur- owner-managers of small enterprises In forecasting key economic indicators for den many countries put on financial insti- have shifted from an emphasis on conven- the major industrial countries, the tutions falls mainly on the holders of fi- tional management skills to one on en- Bank's Economic Analysis and Prospects nancial assets. trepreneurship and enterprise develop- Division (IECAP) does not rely on a com- The answer is that liberalization of ment. pletely linked global macroeconomic interest rates significantly increased the Corporate managers model. real return on financial assets in Thai- In-company programs may meet Would IECAPforecastsbeconsistent land and Indonesia, because all interest many management training needs, but with forecasts produced by linked mod- and credit constraints were removed. managers who must understand world els? Similar reform failed in the Philippines, trends and interact with counterparts in To find out, researchers introduced where taxes on the financial sector inter- other cultures may also need degree pro- Bank assumptions about exchange rates acted with high rates of inflation. grams that build general analytical and and commodity prices into three global As the quantitative evaluation in communications skills. models - under the auspices of the this paper shows, the efficiency gains in Students in both business schools OECD, Project Link, and Wharton Econo- Thailand and Indonesia were small com- and executive programs need more un- metrics (The WEFA Group). pared with GDP but large compared with derstanding of the international environ- Differences existed between the the levels oftransfers (explicit orimplicit) ment, more knowledge about export mar- IECAP forecasts and the model results - induced by policies of regulation. keting, and more ability to analyze and and between the model forecasts (using The chief lesson to be drawn from improve operations and productivity, Bank assumptions). these experiences - particularly in the motivate employees, and make practical But given Bank assumptions, the Philippines - is that reallocating re- use of information systems in competi- three models agreed on the medium-term sources by manipulating the financial tion. forecast: a small slowdown in 1988, low system may be less efficient than other Public administrators growth in 1989 and/or 1990, and recovery fiscal policies. The role of public administrators is in the United States in 1991 and 1992. This paper is a product of the Public shifting away from regulation toward Policy, Research, and External Affairs Working Paper Series 51 partnership with business and support of profitable investment opportunities. enough for them to initiate and sustain a more autonomous private sector. The Generally, a policy of export promo- the change process. They must strike a higher civil servant's role has shifted from tion is best if the level of debt and interest balance between stabilization and adjust- caretaker or administrator to policy advi- rates are low and the terms of trade are ment. On the expenditure side, this in- sor and decisionmaker. high. cludes a much better understanding of The new roles of the public adminis- As these variables deteriorate - as a and attention to compositional changes trator are reflected in senior executive Korea becomes a Peru - the optimal followedby reorientation of e expenditure programs designed to develop general strategy becomes import substitution. In program. On the revenue side, it entails managers who can move easily from one those circumstances, it is in the creditor's comprehensive tax reform designed to agency to another. Even university train- interests to grant some debt relief in ex- reduce distortions, to increase buoyancy, ing places less emphasis on law and change for a higher export effort. and to ensure equity. administration and more on disciplines This paper is a product of the Debt This paper is a product of the Public relevant to policy analysis. and International Finance Division, In- Economics Division, Country Economics Many problems associated with pre- ternational Economics Department. Department. Please contact Ann Bhalla, entry university degree programs and in- Please contactIshac Diwan, room S8-027, room N10-059, extension 37699. service government training programs extension 33910. are overcome by autonomous manage- ment institutes, organized privately or 129. Women in Development: with government sponsorship. 128. Public Finance Defining the Issues This paper is a product of the Public 18 Public Finag Sector Management and Private Sector in Adjustment Programslier Development Division, Country Econom- Ajay Chhibber and Javad Khalilzadeh-Shirazi ics Department. Please contact Changing many apparently gender-neu- Ernestina Madrona, room N9-057, exten- Countries undergoing adjustment have tral public policies will make women a sion 37496. increasingly found it difficult to sustain more productive part of the economy - cuts in public sector deficits to match cuts and allow them a more equitable share of in external financing, thus exacerbating its benefits - in some not-so-obvious 127. Linking Development, Trade, inflation and financial disequilibrium. ways. and Debt Strategies In Highly Moreover, fiscal contraction has often Indebted Countries been short-term oriented. Fundamental Women can be viewed as an underused fiscal reform involving a medium-term resource (affecting efficiency) or as a dis- Ishac Diwan perspective has been rare. Given the cen- advantaged target group (getting an in- tral importance offiscal issues in adjust- equitable share of health, education, As world interest rates and the level of ment programs, however, greater focus on material advantages, status, and leisure external debt rise and terms of trade de- them is essential if such programs are to time). Within the household, they are cline, a policy of import substitution be- succeed. burdened not only with the physical gins to make sense for a highly indebted demands associated with reproduction country. At that point, it is in the creditor's This paper, prepared in part as a back- but also with obligations that are not com- interests to grant some debt relief in ex- ground studyfor the Bank's Report on Ad- mensurate with their rights. At the socie- change for a higher export effort. justment Lending, reviews the experi- tal level, they are discriminated against ence with public finance issues under ad- in their access to public services and jobs, Despite their productive inefficiencies, justment programs. This experience and they lack role models for economic export promotion andimport substitution shows that fiscal changes are often trig- advancement. policies can improve welfare in a highly gered by budget and balance of payment Much public policy affects men and indebted country. crises. As a result, short-term considera- women differently, in ways that are not After all, the ultimate penalty facing tions have dominated the policy meas- immediately apparent. defaulting countries is exclusion from ures introduced. Traditional stabiliza- A study in rural Tanzania, for ex- international trade markets. Export pro- tion policies usually emphasize measures ample, revealed that job discrimination motion can increase available foreign fi- aimed atreducingaggregate demand. On against women lessened as education in- nancing, and import substitution can the fiscal side, this has implied cut-backs creased. A 36-year-old man with secon- reduce the debt service. in public expenditures. There is, how- dary education had a three in four chance Choosing between export promotion ever, growing recognition of the need for of nonfarm wage employment; a woman and import substitution is a matter of de- more growth-oriented adjustment pro- of the same age and education had half termining whether itis more profitable to grams, which entail a more comprehen- the chance. A woman who had completed increase the credit ceiling to borrow more sive and durable approach to fiscal reform primary education had only a quarter the - or to reduce the credit ceiling below and therefore require a medium-term chance of a man of the same age and inherited debt so there is less to repay. perspective. education. With partial primary educa- Important determinants in this Countries committed to fundamen- tion or less she had only one-fifth the choice are the stock of inherited foreign tal reform offiscal and other key policy ar- chance. The policy implication: general debt, the level of world interest rates, the eas should be able to avail themselves of expansion of the education system may terms of trade, and the availability of external financial support that lasts long reduce the aggregate incidence of dis- 52 Policy, Research, and External Affairs Working Paper Series crimination if it enables women to con- 130. Maternal Education and the raising the productivity of women's labor tinue their schooling. Vicious Cycle of High Fertility and (better access to credit, extension, and However, other factors are at work, Malnutrition: An Analytic Survey markets) and through relaxing the con- too. For example, women are less likely to straints on women's welfare (giving them get the many public sector jobs available Matthew Lockwood and Paul Collier more schooling, which will give them in rural areas because they are poorly access to better jobs, more money, and placed to lobby for patronage. To break the vicious cycle ofpoor nutrition more control over it, as well as enable Self-employed women are also at a and high fertility - reinforced by themtotakebettercareoftheirchildren). disadvantage. The credit market is in- women's low status - maternal and child This paper is a product of the Women trinsically male-biased. Lacking the health policy, including family planning, in Development Division, Population and autonomy to build up creditratings, should be integrated into public policy Human Resources Department. Please women must rely on savings - and, as and linked to education. contact Johanna Klous, room S9-123, ex- managers of the household, they have a tension 33745. greater need than men for liquid assets. Evidence is increasing that one-dimen- Public support of savings institutions to sional policies, such as family planning reach small-scale farmers or entrepre- and supplemental feeding programs, 131. Implementing Direct neurs tends to improve women's lot. have little chance on their own of achiev- Consumption Taxes in Developing Some public services tend to be gen- ing the desired objectives - that what is Countries der-biased. To the extent that certain called for is a maternal and child health jobs tend to be done by women, public policy, including family planning, inte- Ceorge R. Zodrow and Charles E. McLure Jr. policy can easily be targeted to benefit grated into public policy and linked to women. Rural water, fuel, and health education. This paper argues that replacing an in- services tend to benefit women more than While family planning is probably come tax with a direct tax on individual men. Pricing firewood substitutes, for more cost-effective in reducing fertility consumption may be a feasible policy op- example, affects women disproportion- than programs for child mortality or in- tion for a developing country. Such a tax ately because women spend a lot of time creasing education, family planning pro- should include (1) a flat-rate "consump- gathering firewood. Piped water in effect grams are often more effective when child tion-based" business tax that allows im- increases women's time for other produc- mortality rates are lower and levels of mediate expensing ofall business-related tiveactivities(orevenforleisure)because education are higher. In the long term, nonfinancial purchases, and (2) an indi- they traditionally spend much time fetch- the most cost-effective approach toreduc- vidual tax with progressive marginal ing water. Education and extension serv- ing fertility is probably to integrate fam- rates on a base of all wages and pension ices (as currently administered) tend to ily planning with efforts to improve ma- receipts plus gifts and inheritances re- benefit men more than women. ternal-childhealth and education. Onthe ceived. It could be supplemented by an Food subsidies directly benefit net other hand, if the aim is increasing in- individual wealth tax. purchasers of food (namely, urban house- come per capita, educational policies holds, for which the population is dispro- dominate family planning measures, This report examines the possibility of portionately male). Indirectly, some of despite large cost differentials. using a direct tax on consumption as a re- the subsidy may accrue to sellers, who, at Similarly, where the aim of public placement for an existing income tax least in Africa, are disproportionately health provision is to reduce mortality within the context of a developing coun- women. Income taxes tend to fall more and improve nutrition, there is a strong try. The structural differences between heavily on males, and expenditure taxes consensus that integration and coordina- income and consumption taxes are de- on females. Generalized sales taxes tend tion of maternal-child health services, scribed, and some simple examples are to be biased against women but male and especially with educational and literacy used to illustrate the basic differences in female spending patterns are different, so policy, is essential and cost-effective. Im- the taxation of businesses and individu- sales taxes can be gender-targeted. proving women's ability to work and earn als under the two approaches. A variety By increasing entry-level wages rela- outside the home improves their eco- of critical structural features of a direct tive to wages at senior levels, minimum nomic position and power (and probably consumption tax are addressed, includ- wage laws tend to favor women. To the expenditures on children) - although if ing (1) the rationale for including a busi- extent that minimum wages are falling, their nutritional status is already mar- ness tax in a consumption-based tax sys- the wage structure is becoming less favor- ginal, working harder to produce more tem, (2) the treatment of debt at the busi- able to women. may be a mixed blessing. We must ask: ness level, (3) the differences between This paperis a productofthe Women how much extra income do they bring to "cash flow" and "tax prepayment" treat- in Development Division, Population and the household, and to what extent do they ment at the individual level, and (4) alter- Human Resources Department. Please maintain control over the income they native means of taxing gifts and bequests contact Johanna Klous, room S9-123, ex- earn? Also, if mothers and children enjoy at the individual level. tension 33745 more income and autonomy through The report includes a brief survey of mothers' employment outside the home, the extensive literature on the choice be- but suffer from the conditions of the work tween income and consumption as the itself, or from lack of adequate childcare basis for a system of direct taxation. This alternatives, public policy could alleviate survey compares the relative merits of these difficulties - for example, through the two approaches in terms of the stan- Policy, Research, and External Affairs Working Paper Series 53 dard criteria of simplicity, equity, eco- performing component of the debt only, 133. Lewis Through a Looking nomic neutrality and efficiency, and con- andlet the performingcomponent grow at Glass: Public Sector Employment, sistency with economic growth. The dis- a rate equal to the economy's expected Rent-Seeking, and Economic cussion focuses onissues that are particu- growth rate. Meanwhile, the nonper- Growth larly relevant in a developing country forming asset is automatically capital- context, and argues (primarily on sim- ized at the riskless rate. When the actual Alan Gelb, John B. Knight, plicity grounds) that a consumption tax growth rate of the economy is above (be- and Richard H. Sabot may well be preferable to an income tax as low) its expected level, the performing the form of direct taxation in a developing part of the debt is scaled up (down). When What Adam Smith wrote in 1776 is still country. this "maximum repayment"rescheduling broadly true: "Great nations are never im- After a detailed discussion of the strategy is undertaken, the equilibrium poverished by private, though they some- choice between cash flow and tax prepay- market value of the debt is equal to V*. times are by public, prodigality and mis- ment treatment at the individual level Proposition 3: When the debt-to- conduct." under a direct consumption tax, the GDP ratio is above the threshold h*, the analysis concludes that for simplicity debt can be written down to h* GDP Governments in developing countries reasons the individual tax prepayment without impairing the lender's return. If should and do provide valuable goods and approach is the more appropriate one in the write-off is repeated each time the services, but resources are wasted when the developing country context. The re- econ omy declines, and iftherescheduling public revenues support unproductive port then describes the structure and im- is undertaken according to Proposition 2, employees (at the expense of productive plementation of such a direct consump- the lenders capture the"maximum repay- workers). tion tax. The discussion includes an ex- ment" while the market price of the debt The dynamic cost of such surplus amination of international and transi- is stabilized at a constant equilibrium labor in the public sector is potentially tional issues, and also comments on the price below par. much more important than the static so- desirability and feasibility of supplemen- (Implication: Observing a discount cial cost normally attributed to urban un- tary wealth taxes and taxation on a pre- on the debt does not automatically war- employment. Fiscal resources are needed sumptive basis. rant a write-off. The discount implies the to support that unproductive "sink," This paper is a product of the Public possibility of default, but lenders should thereby diverting resources from produc- Economics Division, Country Economics not write the debt off until the possibility tive investment. Department. Please contact Ann Bhalla, materializes. But the service of the debt The accumulation, in little more than room N10-059, extension 37699. should always be scaled down by its a decade, of even a small part of the total market value rather than kept in line labor force in an unproductive sink can with its face value.) sap the economy of its dynamism, elimi- 132. Is the Discount on the Proposition 4: When the lenders re- nating improvements in living standards Secondary Market a Case for LDC schedule the debt on a period-by-period for all but the few who obtain rent-yield- Debt Relief? basis, they induce the country to follow a ing jobs. growth pattern that exactly mimics the Moreover, creating sheltered em- Daniel Cohen post-default path. The lenders capture ployment tends tobe self-perpetuating. It each period the penalty they could impose creates and consolidates vested interests A discount in the secondary market is a on the defaulting country. As a result, that seek to perpetuate the pro tectedjobs. case for debt service relief but not neces- they getmore on aperiod-by-periodbasis, In the inverse of the Lewis model, the sarilyfora write-off The author derives a but less on average than under the "maxi- extent of surplus labor increases, rather "maximum repayment"rescheduling pro- mum repayment" schedule.Under such a than diminishes, over time. gram, which trades off higher current ("time consistent")rescheduling strategy, This paper is a product of the Finan- investment for lower current debt service. a write-off and multiyear rescheduling cial Policyand Systems Division, Country may prove beneficial, but the gains fall Economics Department. Please contact Proposition 1: The "maximum repay- short of the strategy defined in Proposi- Annette Hodges, room N9-021, extension ment" program the lenders would like to tion 2. 37672. monitor involve a fixed investment rate How relevant is the idea of "debt that is smaller than the socially optimal overhang"(accordingtowhichthemarket rate and larger than the post-default rate. value of the debt may depend negatively 134. International Trade It involves a transfer of resources from upon its fact value)? Empirical evidence In Financial Services the debtor that is a fixed fraction of GDP presented here indicates that, at a 75 - a fraction that is smaller than the cost percent confidence level, 9 of 33 countries Silvia B. Sagari of default. studied may suffer from a debt overhang Proposition 2: When the debt-to- problem. Ata90 percentconfidence level, Country A is richly endowed with highly GDP ratio is above a floor value (h*), the only 4 of them may be affected by it. trained bankers and managers, Country lenders can capture the "maximum re- This paper is a product of the Debt B with capital, and Country C with arable payment" value (V*) by fictitiously split- and International Finance Division, In- land. Which country is at a comparative ting the debt into performingand nonper- ternational Economics Department. advantage in providing financial services forming components. Each period, they Please contact Maggie Luna, room S7- to consumers in other countries? should ask the borrower to service the 035, extension 33729. 54 Policy, Research, and External Affairs Working Paper Series Theissue oftrade in services is the subject Commodity-linked bonds have received growth of nontariff protection. Proce- of increasing interest. Evidence of this is considerable attention recently as a way dures for liberalizing nontariff barriers its inclusion in the Uruguay Round of to tailor a developing country's debt re- must be established in multilateral trade GATT negotiations. As a contribution to payments to its ability to pay. Acommod- negotiations like the Uruguay Round. the analysis of the issue, in this paper the ity bond makes repayments subject to These barriers limit the developing influence of a country's resource endow- fluctuations in the price of the underlying countries' ability to expand their export ments on its net trade in financial serv- commodity. opportunities - particularly in agricul- ices is analyzed. Previously, formulas for pricing ture and such labor-intensive products as A modified version of the Heckscher- these bonds were based on the standard textiles, clothing, and footwear. As a Ohlin model is developed, which allows continuous-time option-pricing method. result, they are unable to achieve eco- for technological differences across coun- Solution of the derived differential equa- nomic growth and deal effectively with tries. This version is then used to explore tion was difficult even when assumptions their debt burden. which productive resources constitute were simplified. This paper is a product of the Inter- sources of comparative advantage in the Binomial option pricing offers a sim- national Trade Division, International provision of financial services. What is pler, moreintuitive, andmoreflexiblefor- Economics Department. Please contact the impact of the availability of skilled mula for pricing commodity-linked bonds Jean Epps, room S8-037, extension labor, physical capital, or other produc- when there is risk both of default and of 33710. tive resources on trade in financial serv- changes in commodity prices. ices? Binomial probability distribution The conclusion? Skilled labor is a trees are used to develop the pricing for- 138. Fiscal Adjustment and Deficit source of comparative advantage in fi- mula. Extensions to the model -includ- Financing during the Debt Crisis nancial services. Conversely, relatively ing the pricing of secondary market debt larger endowments of arable land and - are easily incorporated. The technique William R. Easterly capital would have a negative impact on can also be used to derive, among other trade in those services and can therefore things, the implied performance risk of Highly indebted countries are probably be identified as sources of comparative secondary market debt. better off raising conventional taxes and disadvantage. Land resources tend to be This paper is a product of the Inter- cutting current spending - rather than diverted to agricultural use; capital tends national Commodity Markets Division, raising taxes on financial intermediation to be diverted to manufacturing. Evi- International Economics Department. and cutting public investment. But shift- dence on the effects of unskilled labor Please contact Julie Raulin, room S7-069, ing policies may require the breathing endowments is inconclusive. extension 33715. space only new external financing or debt Future research should focus on the relief would provide. implications of restricting trade in finan- cial services. If financial services are con- 137. Trends In Nontariff Barriers To study the adjustment to the debt crisis, sidered as "inputs" in the production of of Developed Countries: 1966-1986 the author compared the experience of goods and services, might barriers to seven "crisis" debtor countries (Argen- trade in financial services result in ineffi- Sam Laird and Alexander Yeats tina, Brazil, Chile, Mexico, Morocco, Yu- cient allocation of productive resources, goslavia, and the Philippines) with those distorted consumption patterns, and sig- The near doubling ofnontariffbarriers in of five "noncrisis" debtor countries (Co- nificant welfare losses? the developed countries has limited the de- lombia, Indonesia, Korea, Turkey, and This paper is a product of the Finan- veloping countries' ability to increase Thailand). cial Policy and Sytems Division, Country exports -particularly in agriculture and In response to a sharp reduction in Economics Department. Please contact such labor-intensive products as textiles, external capital flows, the crisis countries Wilai Pitayatonakarn, room N9-003, ex- clothing, and footwear - and deal effec- rescheduled their debt during 1982-87. tension 37666. tively with their debt burdens. The noncrisis group avoided debt re- scheduling during that period and main- In the major developed countries, 25 per- tained access to external capital. 135. PPR Working Papers Catalog cent of imports were affected by nontariff Most of the noncrisis countries fol- of Numbers 1 to 400 barriers in 1966. Twenty years later that lowed an approach of modest domestic fi- number had nearly doubled, to 48 per- nancing at market interest rates. This cent. was less costly for private investment be- 136. Pricing Commodity Bonds Some nontariff barriers affecting cause financial savings grew rapidly. Using Binomial Option Pricing fuels were liberalized, but new trade re- In the crisis countries, public invest- strictions were introduced on imports of ment was the locus of fiscal adjustment. Raghuram Rajan agricultural products, textiles, clothing, Most of the crisis countries took the ap- ferrous metals, and nonelectric machin- proach of increased domestic financing Binomial option pricing offers an easy, ery. Nontariff barriers grew faster in the through taxes on financial intermedia- flexible, comprehensive method for pric- European Community than in the United tion - through reserve requirements, ing commodity-linked bonds when there is States or Japan. high inflation, and interest rate controls. risk both of default and of changes in Existing GATT arrangements have In the short run, this tax precipitated commodity prices. lowered tariffs but have not stemmed the capital flight and financial disinterme- Policy Research, and External Affairs Working Paper Series 55 diation. case, production incentives need to be re- evaluation capacity have largely failed. The crisis countries would probably formed; in the second, incentives are pro- In the United States, educational have been better off raising conventional vided to savings and investment; in the evaluation has become an integral part of taxes and cutting current spending third, the choice of alternative invest- education ma- nagement. Large-scale rather than raising taxes on financial ments is the relevant consideration. One research studies have given way to stu- intermediation and cutting public invest- may, then, classify policy instruments for dent achievement testing and localized ment. adjustment into three categories, accord- evaluations that provide decisionmakers Small increases in rates or coverage ingto whether they affectresource alloca- with information useful in improving the of broad-based taxes (such as income or tion, savings and investment, and the quality of schools. consumption) are probably less distor- choice of investment. These results were achieved through tionary for the same amount of additional Policy instruments that can be em- federal policy and funding support for revenue than taxes on financial interme- ployed to improve the use of existing re- evaluation. Standards, requirements, diation. Conventional broad-based taxes sources include exchange rate and trade and financial incentives for evaluation penalize mainly consumption. The tax on policy as well as government regulations were tied to federal financing for school financial intermediation falls more on in- and measures relating to state enter- improvement programs. Institutional ca- vestment and may cause more severe prises. In turn, measures that may be pacity was developed at state, district, damage in the long run. taken to increase savings and investment and school levels. In a situation that called for quick ac- comprise reforming tax regulations, es- Similar investment strategies can be tion, the behavior of the crisis countries tablishing realistic interest rates, in- used in developing countries. However, was understandable. It takes more time creasing public savings, developing fi- the strategies should be incremental, to raise conventional taxes than to tax nancial intermediation, and providingin- first putting systems in place at relatively financial balances, and it takesmore time vestment incentives. Finally, measures low levels of technical sophistication, (because it is harder) to cut current that affect the allocation of investment then raising the technical level as institu- spending than to cut public investment. among particular uses pertain to private tional capacity is developed. Staff train- Shifting to sounder policies in the investment, public investment, or to par- ing and development, including the social crisis countries may require the breath- ticular sectors. science and education faculties of univer- ing space only new external financing or This paper is a product ofthe Office of sities, is essential to developing sustain- relief from debt service would provide. the Vice President, Development Eco- able capacity. This paper is a product of the Macro- nomics. Please contact Norma Campbell, This paper is a product of the Educa- economic Adjustment and Growth Divi- room S9-047, extension 33769. tion and Employment Division, Popula- sion, Country Economics Department. tion and Human Resources Department. Please contact Raquel Luz, room N11- Please contact Cynthia Cristobal, room 057, extension 39059. 140. Building Educational S6-001, extension 33640. Evaluation Capacity in Developing Countries 139. A Conceptual Framework for 141. Payroll Taxes for Financing Adjustment Policies John Middleton, James Terry, Training in Developing Countries and Deborah Bloch Bela Balassa John Whalley and Adrian Ziderman Education monitoring, testing, and evalu- The principal objective of stabilization ation systems are urgently needed in de- Whether a developing country finances policies under the auspices of the Interna- veloping countries. Lessons from the training through payroll taxes may de- tional Monetary Fund is to improve the American experience suggest that invest- pend on the country's stage of develop- balance of payments. In turn, increasing ment plans should tie evaluation stan- ment. therateofgrowthofoutput may beconsid- dards, requirements, and funding to pro- ered the principal objective ofadjustment gram support for policy and institutional In most developing countries, the major policies under World Bank auspices. changes at the national, intermediate and programs of vocational training and skill school levels of education systems. development are financed from general The principal objective of stabilization government revenues. Increasingly, policies under the auspices of the Interna- Relatively few developing countries have however, earmarked payroll taxes have tional Monetary Fund is to improve the established a sustainable capacity for been introduced to finance training. balance of payments. In turn, increasing educational monitoring and evaluation. The authors summarize interna- the rate of growth of output may be con- As a result, the efforts of governments tional experience with payroll taxes, the sidered the principal objective of adjust- and assistance agencies to improve edu- two major types of which reflect different ment policies under World Bank aus- cation have been hampered by lack of in- objectives. Under the traditional, so- pices. formation on outcomes and costs. called Latin American model, revenues The growth objective may be pursued World Bank experience with educa- are earmarked to finance training pro- by improving the efficiency of using exist- tional evaluation has been disappointing, vided by the state or a national training ing resources, adding to available re- emphasizing monitoring of project inputs authority. Under the levy-grant (or re- sources, and ensuring the efficient use of with little attention to outcomes and bate) scheme, payroll tax rebates are of- these additions to resources. In the first costs. Efforts to develop a sustained fered to enterprises to set up or broaden 56 Policy, Research, and External Affairs Working Paper Series in-service training programs data shows vocational schooling to be Decentralization policies are most Whether payroll taxes are a more more cost-effective than general aca- successfully implemented if: desirable source of financing than other demic education. In particular, voca- * There is a tradition of self-reliance alternatives probably depends upon the tional school completers who work in oc- in local communities. stage of a country's development. cupations related to their course of study * Local governments or communi- Few lower-income countries finance earn about 10 percent more a year than ties have their own sources of tax reve- training through payroll levies. They their counterparts who either attended nues and voluntary contributions. may have only limited access to such secondary schools or who attended voca- * The pressure for decentralization broadly-based taxes as value-added taxes tional schools but were employed in occu- originates in the community rather than and tend to rely instead on trade taxes pations unrelated to their course of study. with ministry planners. and specific excises (say, on drink, to- Studies that show vocational school- * All important affected political bacco, and gasoline). In countries where ing to be cost-ineffective compared with groups, especially teachers, are involved the government's financing options are academic schools tend to concentrate on in and informed about the development of limited, payroll taxes may be attractive earnings, without taking into account decentralization plans. but administratively infeasible. such variables as the relevance of the type * Administrative capacity at the Most countries using the payroll tax of occupation to the vocational studies local level either exists or is provided approach are situated in the lower- pursued. Future evaluation studies through training. middle income range. In this range, should pay more attention not onlyto that This paper is a product of the Educa- value-added taxes may be equally justifi- variable but to issues of curriculum (in- tion and Employment Division, Popula- able economically but two things make cluding the type and scope of vocational tion and Human Resources Department. the payroll tax approach more attractive: studies). Please contact Cynthia Cristobal, room the ability to target payroll taxes using This paper is a product of the Educa- S6-001, extension 33640. differential tax rates by sector, and the tion and Employment Division, Popula- rationale of the reverse social security tion and Human Resources Department. scheme (that is, with workers receiving Please contact Cynthia Cristobal, room 144. Product Differentiation and benefits when they are young and essen- S6-001, extension 33640. Foreign Trade In CGE Models of tially paying taxes later to cover the train- Small Economies ing costs of workers who follow them.) As a country develops, other financ- 143. Decentralization In Education: Jaime de Melo and Sherman Robinson ing alternatives should become realistic An Economic Perspective - for instance, government guarantees In a simple, one-sector analytical model, for worker loans, or tuition-paid pro- Donald R. Winkler the authors show that applying the same grams (with partial recovery of costs assumption aboutproduct differentiation through user fees and a student loan Some decisionmaking (about educational to imports as to exports gives rise to a well- program). finance and teacher recruitment) should behaved, price-taking economy and nor- This paper is a product of the Educa- be handled at the local level and some mally shaped offer curves. tion and Employment Division, Popula- (about school organization and curricu- tion and Human Resources Department. lum) at the regional level. Problems of In recent years, two classes ofcomputable Please contact Cynthia Cristobal, room equity can be addressed through a system general equilibrium (CGE) trade models S6-001, extension 33640. of central government grants. have been used to investigate external sector policies: single-country and multi- Evaluating decentralization in terms of country trade models. 142. Vocational Secondary three economic criteria - social effi- The single-countrymodelshavebeen Schooling In Israel: A Study of ciency, technical efficiency, and equity - used to analyze such external sector is- Labor Market Outcomes the author argues that some decision- sues as the impact of restrictions on for- making (about finance and teacher re- eign trade or the impact of changes in net Adrian Ziderman cruitment) should be provided for at the foreign transfers or world prices on the local level, and some (about school organi- equilibrium of the real exchange rate. Most economists consider vocational edu- zation and curriculum) at the regional The multicountry models are typically cation to be socially inefficient. Israelmay level. concerned with resource allocation and prove them wrong -particularly for stu- A system of central government the welfare implications of tariff reduc- dents whose occupations are related to grants should be used to correct problems tions. their course of study. ofequityandinefficiencyinherentinade- The authors examine the treatment centralized system. ofexports and imports - and different as- Israel is afittingplace to compare the out- Little is known about the economic sumptions about export demand and comes of academic and vocational school- and educational consequences of decen- import supply behavior - in recent ing. More than half the Israeli secondary tralization, despiteawide variety ofcoun- single-country CGE models of small school pupils attend vocational schools or try experiences. The effects of decentrali- economies. They present a simple, one- vocational streams in comprehensive zation are difficult to isolate, so scholars sector analytical model that captures the schools. have focused instead on issues ofimplem- major features of the multisector counter- A study based on 1983 Israeli census entation. part used in applied models. Policy, Research, and External Affairs Working Paper Series 57 They show that applying the same 25 cents in welfare. Each dollar raised of the money supply is only partial. All assumption about product differentiation through the excise tax on petroleum prod- these conditions existed during Chile's to imports as to exports gives rise to a ucts would come at a loss of only one cent experiment with exchange rate-based well-behaved, price-taking economy and in welfare disinflation between 1978 and 1981. normally shaped offer curves. Not only would an import tariff on Simulating what might have been They illustrate the one-sector model crude oil cause much dislocation (an esti- (using an econometric model), the au- with a numerical example which shows - mated 153,000 workers would have to thors study how exchange rate-based dis- using different trade substitution elas- relocate), but it would pose trade policy inflation affects expenditure switching ticities - the implications of the choice of problems. and reduction when wages are partially weights used as a proxy for the domestic A combination of excise taxes, subsi- indexed in some segments of the labor price index in computations of real ex- dies, and import tariffs would be the least market. change rate indices. costly way (in terms of welfare) to raise An alternative policy restricting The model also shows the role of for- $20 billion in government revenues. capitalinflowstoalowerlevel would have eign trade elasticities in the popular Aus- Taxingboth sectors minimizes distortion- led to a proportionately larger decline in tralian model - with traded and non- induced resource movements. The wel- absorption than in income - and the traded goods. Trade substitution elastici- fare cost of raising $20 billion is least decline in absorption would have fallen ties on the import side play a crucial role when domestic petroleum production is disproportionately more on consumption in determining the direction of change in subsidized by the combination of an im- than on investment. the real exchange rate during terms-of- port tariff and a small subsidy to counter- The authors also show the extent to trade perturbations. act the distortion resulting from the tax which a more flexible rule on wage index- This paper, forthcoming in the Jour- on oil and gas, an input of the petroleum ing would have offset the adverse impact nal ofInternational Economics, is a prod- sector. of lower capital flows on protected sector uct of the Trade Policy Division, Country The optimal tax structure would employment. Economics Department. Please contact involve a tariff and a small subsidy on This paper, forthcoming in the Jour- Karla Cabana, room N10-037, extension petroleum products to counteract the nal ofDevelopment Economics, is a prod- 37946. distortion induced by a tax on oil - the uct of the Trade Policy Division, Country most important input for petroleum prod- Economics Department. Please contact ucts. Karla Cabana, room N10-037, extension 145. Revenue-Raising Taxes: This paper is a product of the Trade 37946. General Equilibrium Evaluation of Policy Division, Country Economics De- Alternative Taxation In U.S. partment. Please contact Karla Cabana, Petroleum Industries room N10-037, extension 37946. 147. The Private Sector's Response to Financial Jaime de Melo, Julie Stanton, and David Tarr Liberalization In Turkey: 1980-82 146. Exchange Rate-Based Should the United States increase energy Disinflation, Wage Rigidity, and Izak Atiyas tariffs and taxes to help reduce the federal Capital Inflows: Tradeoffs for deficit? And if so, what combination of Chile,1977-81 The private sector's response to the short- tariffs and taxes makes the most sense? lived episode ofliberalization in Turkey in Timothy Condon, Vittorio Corbo, 1980-82 did not live up to expectations. Should the United States increase taxes and Jaime de Melo and tariffs in the energy sector to reduce Financial liberalization was carried out its federal deficit? Chile's exchange rate-based stabilization in a period when the nonfinancial corpo- The authors used a twelve-sector program might have produced better re- rate sector was in financial distress due to general equilibrium model to estimate sults ifcapital inflows had been kept lower reduced profitability. The consequent the fiscal effects, and the effects on wel- and if wage indexing had been more flex- emergence of substantial nonperforming fare and employment, of ible. loans in the banking sector, especially * A 25 percent import tax on im- among smaller banks, created fierce com- ported crude oil. Real exchange rate appreciation usually petition for financial resources. The re- * A 15 percent excise tax on petro- accompanies stabilization programs sult wasarapidexpansion of deposits and leum products. based on the exchange rate. One thing high real interestrates. Instead offorcing * A combination of the two. that causes the real exchange rate to ap- insolvent borrowers into bankruptcy, The excise tax would be the most ef- preciate is the capital inflows that follow banks refinanced nonperforming loans as ficient instrument for raising revenues. liberalization of the capital account and a way to prolong their own survival, and The 25 percent import tariff would the financial market. real credit to the private sector increased raise $7.3 billion in government reve- Capital inflows cause the exchange dramatically. Furthermore, the market nues, while the 15 percent excise tax on rate to appreciate in part because of the mechanism turned out to be ill-equipped petroleum products would raise $35 bil- resulting increase in expenditures. This to induce the exit of insolvent banks and lion in government revenues. appreciation is exacerbated if there is thereby increase the efficiency of allocat- Moreover, each dollar raised through some price rigidity - as, for instance, ing loanable funds. a tariff on imports would come at a loss of when wages are indexed - and if control An analysis of firm-level data reveals 58 Policy, Research, and External Affairs Working Paper Series that nonfinancial corporations were sub- quota system were suspended in 1990. imports cannot be satisfied from avail- ject to both an earnings shock (increases But prices would recover in the second able foreign exchange. At the same time, in costs relative to sales income) and an half of the decade as production and ex- given the limitations of raising fuel and interest rate shock. Although the debt-to- ports declined in lagged response to the raw material exports, which presently asset ratios of profitable firms did not very low prices of the first half. dominate Soviet foreign trade, it would be change, those of firms under distress ac- For 1990-2000 most producing coun- necessary to increase the exports of tually increased, despite higher costs of tries would be better off in total real manufactured goods, where quality pro- borrowing. export revenues with the export quota vides a constraint. To upgrade quality, The Turkish experience suggests system. But the extent of the benefits there is need for foreign machinery, the that financial liberalization may not pro- vary considerably from one country to an- purchase of which would require external duce desired results when it occurs in a other. Low-cost countries - such as borrowing and joint ventures. It would period of major macroeconomic realign- Costa Rica, Indonesia, the Philippines, further be necessary to decentralize deci- ments that adversely affect the profitabil- and Papua New Guinea - could more sionmaking on foreign trade in enlarging ity of the corporate sector, especially than compensate for the lower world the scope of firms that can directly trade when it is implemented without an ade- prices under the without-quota situation abroad. quate regulatory framework. by large increases in exports. High-cost The decentralization of decisionmak- This paper is a product of the Finan- countries - such as C6te d'Ivoire, El ing in foreign trade should be accompa- cial Policy and Systems Division, Country Salvador, Ethiopia, and India - would nied by decentralization in the domestic Economics Department. Please contact suffer both from the lower prices and economy, to be complemented by the in- Wilai Pitayatonakarn, room N9-003, ex- lower export quantities without the ex- troduction of the profitmotive and compe- tension 37666. port quota scheme. The two largest pro- tition. In fact, rational prices, decentrali- ducers - Brazil and Columbia - would zation, profit maximization, incentives to also benefit from the extension of the managers, and competition are interde- 148. Impact of the International quota scheme. pendent, and they will have tobe pursued Coffee Agreement's Export Quota This paper is a product of the Inter- simultaneouslyfor efficient resource allo- System on the World's Coffee national Commodity Markets Division, cation. Mfiarket Inter-national Economics Department. This paperis a product ofthe Officeof Please contact Dawn Gustafson, room S7- the Vice President, Development Eco- Takamasa Akiyama and 044, extension 33714. nomics. Please contact Norma Campbell, Parayotis N. Varangis room S9-047, extension 33769. The new global coffee model shows which 149. Reflections on Perestroyka producing countries have gained and and the Foreign Economic Ties of 150. Improving the Currency which have lost from the operation of the the USSR Composition of External Debt: In"ernational Coffee Agreement - and Applications in Indonesia and what would happen iftheAgreement were Bela Balassa Turkey discontinued. The exploitation ofthe Soviet Union's for- Ken Kroner and Stijn Claessens Ex-post simulations of the global coffee eign trade potential would necessitate -nodel over the recent period of operation adopting a realistic exchange rate and in- The debt service ratio of many developing of the International Coffee Agreement's creasing the foreign exchange retention countriesshotupwhenthedollarfell. The export quota system, 1981-86, show the quotas for direct and indirect exporters. It paper shows how developing countries following. The quota system had a stabi- would also require reforms of domestic can alter the currency composition oftheir hizing effect on world coffee prices in the policies. external debt to minimize their vulnera- 1981-85 period. In 1986, when coffee bility to fluctuations in international ex- prices increased sharply due to the The first prerequisite is the establish- change rates. drought in Brazil and the export quotas ment of rational prices. This objective were suspended, prices would have been may be pursued by adopting world mar- Changes in exchange rates affect both the 24 percent higher in the absence of the ket prices for raw materials and fuels, structure and level ofa country's external quotas over the 1981-85 period. But the having the exporters of manufactured debt. Much of Indonesia's debt was de- quotas have reduced export revenues (in goods receive the prices they obtain nominated in yen, for example, so the real terms), except for such large produc- abroad, setting domestic prices ofimports depreciation of the dollar since 1985 has ers as Brazil and Columbia. These coun- at world market prices plus the tariff, and increased the level of Indonesia's debt tries gained from the scheme because establishing market clearing prices for and reduced the dollar-denominated por- they face very small or even zero marginal manufactured goods that are produced tion of that debt. export revenues from increased exports, and sold domestically. Indonesia's debt service increased due to their large market shares. Eventually, world market prices from 10 percent in 1980 to 37 percent in In projections of the coffee market, would be brought to bear on domestic 1986, largely because of the depreciation with and without the export quota sys- prices in conjunction with the liberaliza- of the U.S. dollar and the fallin oil prices. tem, prices would be substantially lower tion of imports, but this will be a long Other countries had similar experiences. during the first half of the 1990s if the process since the pent-up demand for Developed countries can hedge Policy, Research, and External Affairs Working Paper Series 59 against exchange rate and commodity nontariff measures for gauging the pro- needs. It is suggested that procedures be price changes by purchasing currency tective effects of such measures and in established to phase out export subsidies futures or other hedging instruments, but part in the reliance on formal measures of in the case of advanced developing coun- most developing countries do not have protection in the United States as against tries as well as in cases when an industry access to futures markets. They can, the use of informal measures in Japan. of a developing country is internationally however, reduce their exposure by match- More generally, one may explain the competitive. ing the currency composition of their results obtained by reference to the open- This paperis aproduct ofthe Office of external debt with the currency composi- ness ofthe U.S. market that has generally the Vice President, Development Eco- tion of the cash flows with which they been more hospitable to imports from de- nomics. Please contact Norma Campbell, service their debt. velopingcountries than have the markets room S9-047, extension 33769. Using advanced econometric tech- of'other industrial countries, particularly niques, the authors analyze what the Japan. This has been the case even for currency exposures might have been in clothing and textiles, where developing 153. An Analysis of Debt - Indonesia and Turkey - and suggest countries have in large part gotten Reduction Schemes initiated by borrowing portfolios that might be effec- around the restrictions by introducing Debtor Countries tive in hedging these countries' terms of new fibers and upgrading products. trade against exchange rate fluctuations. This paperis a product ofthe Office of Ishac Diwan and Stijn Claessens The results are promisingfor Indone- the Vice President, Development Eco- sia, where the optimal currency portfolios nomics. Please contact Norma Campbell, Don't evaluate a debt-reduction scheme might have resulted in a significant re- room S9-047, extension 33769. using present-value calculations alone. duction in risk. The results are less Look also for efficiency gains that allow satisfying for Turkey - although they do both debtor and creditor to gain. indicate possible research directions. 152. Subsidies and Countervailing This paper is a product of the Debt Measures: Economic In evaluating the benefits of a voluntary and International Finance Division, In- Considerations debt-reduction scheme, look for efficiency ternational Economics Department. gains that allow both debtor and creditor Please contact Leah Chavarria, room S7- Bela Balassa to gain. In particular, certain debt reduc- 033, extension 33730. tion operations can: The present rules on export subsidies and * Increase the incentives for growth domestic subsidies should be revised to in highly indebted countries. 151. U.S. Trade Policy Towards conform better to economic principles and * Allocate risk more efficiently be- Developing Countries to limit distortions in international trade. tween debtor and creditors. * Signal the credibility of a country's Bela Balassa To begin with, the illustrative list of ex- willingness to "adjust" its economy to port subsidies should be made definitive, regain creditworthiness. The U.S. market has generally been more with appropriate revisions. These revi- * Strengthen the creditors' coali- hospitable to imports from developing sions would eliminate the dual pricing of tion. countries than have the markets of other inputs and remove requirements of the Market-based debt conversion is industrial countries. physical incorporation of inputs for the more likely to improve the debtor nation's exemption and remission ofindirect taxes welfare when: The United States has often been criti- and import charges. Also, the exception * The opportunity cost of foreign ex- cized for protectionist measures taken made for primary products in regard to change is low relative to world interest against developing country products. the prohibition of export subsidies should rates. Yet, average agricultural protection has be eliminated. * There is a great probability of de- remained practically nil in the United Only measures which are specific to fault (rescheduling) with a deadweight - States over time while rising in the Euro- an enterprise or industry should be con- loss to the creditor - and when the cost pean Common Market and, even more, sidered domestic subsidies. At the same and uncertainties of reschedulings are Japan. It further appears that manufac- time, it would be desirable to strengthen high and borne largely by the debtor. tured imports from developing countries existing rules on domestic subsidies. This * Private rather than public debt is have increased much more rapidly, and could be accomplished by prohibiting swapped for equity investments. reached higher levels, in the United domestic subsidies that exceed a certain * The country has no other way of States than in the European Common percentage of output value as well as signaling its commitment and willing- Market and, in particular, Japan. domestic subsidies provided in cases ness to adjust The U.S.-Japan comparisons for where exports account for a large propor- * The country hasan extreme case of manufactured goods do not conform to the tion of output. debt overhang. data on the extentof nontariffbarriers, as Developing countries receive prefer- This paper is a product of the Debt measured by the share of imports from ential treatment in the application of and International Finance Division, In- the developing countries which are sub- GATTrules on export subsidies. They are ternational Economics Department. ject to such barriers. The solution to the exhorted, however, to reduce or eliminate Please contact Leah Chavarria, room S7- puzzle lies in part in the inadequacies of export subsidies which are inconsistent 033, extension 33730. data on the share of imports subject to with their competitive or development 60 Policy, Research, and External Affairs Working Paper Series 154. Forecasting, Uncertainty, 155. Measuring Adult Mortality in mortality rates with reasonable reliabil- and Public Project Appraisal Developing Countries: A Review ity from simple data on the proportions of and Assessment of Methods surviving relatives reported by survey Jock R. Anderson respondents. More research is needed to Ian Timaeus and Wendy Graham determine whether indices of mortality A measure ofthe probability ofcommodity by cause can be similarly inferred from price forecasts is not necessary for most In countries where full death registration general proportionate measures of death project analysis, but it does give users a is a distant goal, the best way to collect from particular causes. Single-round realistic view of the forecast's precision - data on adult mortality is probably to surveys asking about family survivors and imposes a useful discipline on the combine sample community-based health have not always worked well, but they forecaster. reporting systems and single-round sur- often yield good estimates of adult mor- veys in which respondents are asked about tality at relatively low cost, are efficientin Concerned about the most appropriate the survival ofvarious relatives - includ- sample size, and based on straightfor- form of commodity price forecast to give ing parents, first spouses, and siblings. ward questions about the respondents'- project analysts, the author reviewed the lifetime experience. literature on decisionmaking under con- Reliable information about adult mortal- The method's main limitation is that ditions of uncertainty. ity -ideally, by age and cause for popu- it provides rather broad, nonspecific. He concluded (in a 1983 report, pub- lationsubgroups-isimportantforpopu- measures of mortality - but these are lished here in revised form) that the ex- lation and health care planning and as an adequate for allocation of resources, pected mean forecast is usually the rele- indicator of changes in human welfare. In which is likely to be affected only by large vant price parameter to use in analyzing most developing countries, data collec- differences. (Methods to elicit more spe- public projects under conditions of uncer- tion methods in the civil registration cific information are still in the experi- tainty. system and health services are woefully mental stage.) He further concluded that: inadquate and methods for adjusting Certain questions need further in- * Public project decisions should not them apply only at the national level. vestigation: be influenced by the expected variance In the many developing countries * Can additional informationimpor- around the expected mean price. where deaths are not fully registered, the tant for health planning be gathered in * Ideally, commodity price forecasts best way to collect data on adult mortality the context of surveys designed to meas- should be conditional forecasts - that is, is probably to combine sample commu- ure levels, trends, and differentials in conditional on forecasts of other vari- nity-based health reporting systems and adult mortality? ables, such as income and inflation. This single-round surveys in which respon- * Can the indirect questions used in requires forecasters of these variables to dents are asked about the survival of single-round surveys be used to investi- be explicit about the precision of their various relatives, including parents, first gate causes of death, on the one hand, and forecasts, spouses, and siblings. some of the social and economic conse- The author describes a general proce- The authors argue that a few reliable quences of adult deaths on the other? dure for determining approximate mag- indicators that cover the whole popula- * Can the measurement of adult nitudes ofrisk adjustment expressed as a tion are not onlymore affordable butmore mortality be integrated with efforts to proportion of expected project return. useful for health planning than a mass of improve our understanding of ill health in The factors used in this approximation information of doubtful accuracy and the surviving adult population? are (a) relative risk aversion, (b) relative completeness. This paper is a product of the Popula- size of project, (c) relative project risk, (d) One should not make inferences tion, Health, and Nutrition Division, the correlation of project return with about adult mortality by extrapolating Population and Human Resources De- national income, and (e) relative risk of from information on child deaths. Only partment. Copies are available free from national income. genuine measures of adult mortality are the World Bank, 1818 H Street NW, Since this report's publication in useful for planning. Several approaches Washington DC 20433. Please contact 1983, the International Commodity Mar- - active sample registration systems, Sonia Ainsworth, room S6-065, extension kets Division has regularly published multi-round demographic surveys, senti- 31091 (58 pages with figures). simple probability distributions for its nel site reporting, and demographic sur- minerals, metals, and coal price forecasts. veillance systems - have been fairly It also provides probabilities for its other successful but expensive. Questions put 156. Credit Cooperatives In Israeli price forecasts on request. tohouseholdheads aboutrecent deathsin Agriculture This paper is a product of the Inter- the household seldom yield useful data national Commodity Markets Division, and should not be used in their present Yoav Kislev, Zvi Lerman, and Pinhas Zusman International Economics Department. form. Please contact Audrey Kitson-Walters, Demographic research shows that Many businesses suffered with the intro- room S7-053, extension 33712. age patterns ofmortality are similarin all duction of anti-inflationary policies in populations, so it is possible to estimate 1985. Only in agriculture did a whole Policy, Research, and External Affairs Working Paper Series 61 sector - cooperatives - collapse finan- 157. A Policy Model for Tunisia growth in base money. cially. The reasons for this failure lie in with Real and Financial Flows This paper is a product of the Public the character and operating mode of Is- Economics Division, Country Economics raeli cooperative credit. Martha de Melo, Marc Leduc, and Department. Please contact Ann Bhalla, Setareh Razmara room N10-059, extension 37699. In the last two to three decades, mos- havim and kibbutzim developed inten- Country economists and developing coun- sively, adopted new technologies, reacted try decisionmakers can use this model to 158. Labor Redundancy quickly to changes in market conditions, analyze fiscal, debt, and incomes policies In the Transport Sector and established a network of farm serv- - and to derive implications for the ex- ices owned and operated by farmers and change rate and for the availability of Alice Galenson their representatives. credit to the private sector. The extended Financial cooperation helped make model generates a complete flow of funds Efforts to make the transport sector more this intensive development possible and for each time period, along with projec- efficient and financially viable almost al- was effective when appropriate condi- tions of national accounts in current and ways have serious implications for labor. tions prevailed. But in its strength lay constant prices. Elements of the extended What issues are involved and how should dangers. model can be suppressed, changed, or fur- the Bank address them? Cooperation in credit - together ther extended, making it a flexible tool for with a government policy of easy money country economic analysis. The issue of what to do with excess labor and broad public support - also caused is critical to the success ofany endeavor to overexpansion and overinvestment. This model was developed to provide a improve the transport sector - whether Warnings from within the government macroeconomic framework for Tunisia's that be improving railway financial indi- about overcapacity were overruled by structural adjustment program and a cators, upgradingporttechnology, ration- political decisionmakers eager to show flexible tool for further country economic alizing urban bus operations, or privatiz- progress, however shortsighted. Debt analysis. As currently specified, it is de- ing road maintenance. grew to crisis proportions. signed to analyze fiscal, debt, and in- Failure to reduce overstaffing leads When macroeconomic conditions comes policies, while deriving implica- to excessive wage bills. This exacerbates changed and the expansion of credit tions for the exchange rate and for the budget deficits and the losses of parasta- slowed down, the sector found itself availability of credit to the private sector. tal enterprises, which leads to cuts in trapped in financial impossibilities. Now Several policy experiments are carried investment or in the purchase of materi- cooperation ties farmers and organiza- out to illustrate this focus, and sugges- als designed to reduce costs - further tions together and intensifies the dimen- tions are offered for variations in model limiting labor productivity. sions of the crisis. closure and detail. Moreover, because transport em- The authors recommend: The core model is a one-sector com- ploys so many people, labor redundancy * Minimizing the extension of agri- putable general equilibrium model that in the sector affects not only the agencies cultural credit under preferential terms assumes imperfect substitution in pro- or enterprises concerned but the public - and reducing subsidies. duction for export and domestic use - sector as a whole. * Continued (but limited) govern- and imperfect substitution in expendi- This paper offers no blueprint for ment commitment to aid farmers in fi- ture on imports and domestically pro- action, but categorizes the principal nancial distress caused by environmental duced goods. It is based on a social ac- causes of redundancy, reviews the meas- fluctuations or temporarily depressed counting matrix and distinguishes gov- ures used to reduce overstaffing, and markets but not by other factors. ernment budgetary receipts and expendi- discusses the issues that have to be ad- * Government participation in the tures from such flows in the rest of the dressed. The report is organized around creation of institutional structures (e.g., economy. A link with the Bank's country the following important questions, dis- the revival of concentrated credit) to con- debt model is provided by assuming a cussion of which highlights the need for troloverborrowingbyfarmersandfarmer fixed dollar resource gap for the projected research and for a method of evaluating associations. years. the success of redundancy schemes. * Changes in cooperative laws and The extended model generates - for * Is technical redundancy at the en- regulations that improve control over the each time period - a complete flow of terprise level equivalent toredundancyin cooperatives' financial integrity and funds, along with projections of national a broader economic sense? strengthen the credit cooperatives' gov- accounts in current and constant prices. * Is a direct, but perhaps costly, so- ernance structure. It distinguishes seignorage, or the growth lution - such as layoffs or forced retire- This paperis a product ofthe Agricul- in real money demand, from the inflation ment- preferable to attrition as a means tural Policies Division, Agriculture and tax and can be used to define the growth of reducing the labor force? Rural Development Department. Please in base money consistent with a target * Is the solution chosen responsive contact Cicely Spooner, room N8-039, ex- price level or, alternatively, an en- to the causes of the problem? tension 30464. dogenous price level consistent with * Once the immediate problem is re- 62 Policy, Research, and External Affairs Working Paper Series solved, are additional steps needed to BTUs. In Europe the trend has been to The focus is on operating efficiency, prevent a recurrence? negotiate gas import prices downward to not financial returns, and on motivating * When falling demand for labor is about $2.25 per million BTUs to make gas management by excluding factors beyond inevitable, what changes are necessary to competitive. (For comparison, the price of the control of managers. facilitate management response? Canadian gas at the U.S. border is about Even managers critical of the system * If a short- or medium-term solu- $2.00 per million BTUs. (including some who did not receive bo- tion is not possible, what are the implica- As for global trends in gas trades, nuses) cite the targeting and bonus sys- tions for choice of technology and organi- new pricing terms (such as flexible take- tem as a powerful incentive to improve zation of the labor force? or-pay arrangements) and contractual ar- efficiency. This paper is a product of the Trans- rangements (such as open access, or com- To strengthen the system, the author port Division, Infrastructure and Urban mon carrier, transportation systems) suggests: Development Department. Please con- that emerge in one country may soon be * Adjusting standard profits to ex- tact Wendy Wright, room S10-051, exten- copied in others. With a take-or-pay pro- clude items that distort results (such as sion 33744. vision, a purchaser must pay for a con- nonoperating income and depreciation) tracted volume (or fraction) of gas even if and that take administered prices into ac- it cannot take the gas. Under a common count. 159. Current International Gas carrier agreement, a pipeline company * Rewarding managers who reduce Trades and Prices provides transportation only, without losses as well as those who increase prof- buying and reselling the gas in its own its. Kay McKeough name or discriminating among buyers * Allocating bonuses more selec- and sellers. The common carrier concept tively - on the basis of individual per- Unlike oil, natural gas is not widely mar- has already taken hold in the United formance. This requires developing ade- keted internationally, so uniform interna- States. It is now becoming an issue in quate personnel evalua-tion systems. tional gas prices do not exist, and news in Europe, where the gas monopolies have * Increasing competition and mana- the trade press is sporadic. This survey of always rebuffed it. gerial autonomy (particularly decisions prices and trades should prove useful to This paper, a product of the Energy on personnel and credit) to cut costs and developing countries in understanding Development Division, Industry and increase efficiency. the price competition for natural gas and Energy Department, has also appeared * Studying the impact of policy and the trends in international agreements. as an Industry and Energy Department regulatory decisions on IPEs - for ex- Working Paper. Please contact Mary ample, the costs of social objectives, price Certain trends stand out in this survey of Fernandez, room S2-147, extension controls, and delays caused by central de- Western European and North American 33637. cisionmaking. gas markets and Japanese-Asian, Middle The paper concludes with sugges- Eastern-African, and Latin American gas tions of ways to simplify and adapt the trades. 160. Evaluating the Performance system for use in other countries. Prices for natural gas are usually of Public Enterprises In Pakistan This paper is a product of the Public locally based - depending on the costs of Sector Management and Private Sector exploration, development, and transmis- Mary M. Shirley Development Division, Country Econom- sion, and prevailing prices locally. The ics Department. Please contact Rose price in most international contracts is Even managers critical ofPakistan's new Malcolm, room N9-055, extension 37495. changed periodically, however, based on performance evalua-tion system consider an escalator or price adjustment clause its targeting and bonus system a powerful linked to prices for crude oil or oil prod- incentive to improve efficiency. 161. Commodity-Indexed Debt in ucts in the consumer country. So gas International Lending prices worldwide tend to fall within a In 1983 Pakistan initiated a performance prescribed range - $2.00 to $3.75 per evaluation, or "signaling," system for Timothy Besley and Andrew Powell million BTUs. industrial public enterprises (IPEs). The International gas prices fell less than system, which has been applied to most of Initially commodity-contingent debt con- expected in the 1985-86 oil crash -espe- Pakistan's IPEs and is administered by a tracts appear to work best when agroup of ciallyin Japan-because contract prices special unit outside the civil service, in- creditors have control over the total were linked to artificially high official volves: amount lent, rather than when a single prices of crude oil rather than to spot oil * Selecting performance evaluation lender acts in isolation. Should a multi- prices, which betterreflect the market. In criteria. national institution take the lead in devel- the future, LNG and pipeline gas export * Assigning criterion values. oping a market for them? prices are more likely to be linked to * Negotiating achievement targets actual or spot prices than to official oil for the enterprise. Superficially, commodity-indexed bonds prices. * Evaluating results. resemble a combination of a debt and a The price of LNG imports has * Providing bonuses based on the contractin futures. They are particularly dropped in Japan. Japan now pays an evaluation (up to three months salary for useful in a country dependent on a single average CIF price of $3.60 per million A grade). commodity for which prices are volatile. Policy, Research, and External Affairs Working Paper Series 63 These financial instruments - components - tight fiscal policy and shouldhaveplayedamoreactiveroleand which explicitly introduce risk manage- monetary restraint - with less conven- the authorities should have pursued a ment considerations into the credit mar- tional wage and price controls. policy of untying devaluations from past ket -involve a tradeoff between gains in TheAustral plan failed to bringinfla- inflation. risk-sharing and a deterioration in incen- tion down on a sustained basis, but it This paper is a product of the Macro- tives (or an increased likelihood of de- provided useful lessons about the design economic Adjustment and Growth Divi- fault). of heterodox stabilization programs, the sion, Country Economics Department. The precise costs and benefits ofcom- difficulties of sustaining this type of ef- Please contact Raquel Luz, room N11- modity-contingent contracts in interna- fort, and the consequences of failure. 059, extension 39059. tional lending depend on the model em- Lesson 1, contends the author: ployed. Commodity indexing seems to Sophistication is no substitute for work best when: addressing fundamental imbalances. 163. How infrastructure and * The borrower is heavily concen- Sustained curbing of inflation requires a Financial Institutions Affect trated in a commodity or set of commodi- long-term effort. Income policies can help Agricultural Output and investment ties for which prices are so volatile that bring inflation down quickly, but must be In India income fluctuates greatly. accompanied by sustained monetary and * A small, well-informed, coordi- fiscal efforts. Tight money cannot be Hans P. Binswanger, Shahidur R. Khandker, nated set of creditors have control over sustained in the presence of a large fiscal and Mark R. Rosenzweig the total amount lent (a good argument imbalance. for a public body taking the lead in devel- Fiscal reform and a restructuring of Prices matter- but so do banks, markets, oping a market for this type of contract). public sector enterprises were impera- and infrastructure. * Information is fully available tive, but were not undertaken. about how borrowed funds are used and Lesson 2: How do the decisions offarmers, financial thus whether conditionality is meaning- To be effective, price controls must be institutions, and government agencies ful. used cautiously and only temporarily. interact and affect agricultural invest- * The borrower has no control of the They should gradually be removed when ment and output in a region - and to index used in the contingent contract. authorities see that the underlying iner- what extent are these "actors" influenced * There is a low "beta" between re- tial forces have been subdued, by a region's location and agroclimatic turns on the commodity and returns from The authorities did not think endowments (for example, rainfall or the the rest of the lender's portfolio. through how to liberalize prices - when, soil's moisture-holding capacity). Many of the arguments made for a how, and under what condition to remove This paper is an attempt to quantify commodity-dependentborrowermayalso price controls - without bringing back the relationships of key factors, using be made for countries subject to other inflation. district-level time-series data from India. risks - for example, a country that has The chief advantage of controls is Agricultural opportunities in a dis- borrowed largely in dollars andis thereby also their chief drawback. They can trict are seen as the joint outcome of the exposed to high currency risks. quickly reduce inflation, leading authori- agroclimatic endowments of the district This paper is a product of the Inter- ties to underestimate serious underlying and new technology that becomes avail- national Commodity Markets. Division, imbalances. The repeated use of controls able to it. Better agroclimatic opportuni- International Economics Department. works against stabilization: anticipating ties improve output (relation 1), but also Please contact Julie Raulin, room S7-069, freezes, firms set high prices. Anticipat- increase the economic return for a private extension 33715 ing re-imposition of controls, firms accel- farm investment - say, in a tractor (rela- erate price increases. Controls should be tion 2). Greater private profit in a well- removed gradually, when supplies gener- endowed region induces farmers to press 162. Inflation in Argentina: Stop ally are in excess, and tight fiscal and for more investment in infrastructure and Go Since the Austral Plan monetary policies should remain in place (relation 3). Financial institutions find it during "flexibilization." This was not more profitable to locate where there is Miguel A. Kiguel done in Argentina. more demand for capital and more repay- In the Austral plan, the removal of ment capacity (relation 4) and where good Why did the Austral plan fail to curb controls coincided with a flexibilizationin infrastructure reduces their costs (rela- inflation on a sustained basis? Sophisti- the management of the main anchors of tion 5). Private agricultural investment cation in the design ofa stabilization pro- the system. Gradual decontrol of private and use of input is more profitable the gram is no substitute for addressing fun- prices followed by a sequenced adjust- better the agricultural opportunities damental imbalances, contends the au- ment in wages, public sector prices, and (relation 2), the better the infrastructure thor - and price controls, improperly the exchange rate would have had a bet- (relation 6), the cheaper the cost of finan- used, can make the problem worse. ter chance of success, the author argues. cial services (relation 7), and the more The removal of controls left the econ- favorable governments price and interest The Austral plan, launched in 1985, was omy with no nominal anchors - no nomi- policies (relation 8). Exactly the same Argentina's most recent stabilization nal variable to anchor the rate of infla- factors affect the output supply (relations strategy for reducing high inflation. A tion. Given necessary adjustments in 9, 10, 11). Traditional approaches to pro- heterodox program, it combined orthodox prices and the exchange rate, money duction function estimate the direct im- 64 Policy, Research, and External Affairs Working Paper Series pact of capital stocks (investment) and try financial systems will have to attract 165. Shifting Patterns of Compara- input use on output (relation 12), ignoring more household savings with new types of tive Advantage: Manufactured Ex- many of the factors discussed here. instruments and adequate returns ports of Developing Countries After comparing data on these fac- tors, the authors conclude that: Areview offlowoffunds dataforl7 devel- Alexander J. Yeats * Agroclimatic factors continue to opingcountriesrevealsthatmostyearsin govern the rate at which districts can take most countries: Labor-intensive goods are the developing advantage of new agricultural opportuni- * The household sector is a net countries'strongest export items --and the ties, and govern public, bank, and private lender, lending on average 7 percent of United States is the chief import market investment decisions. GNP - and more in countries that are for these goods. What's more, the indus- * The availability ofbanks (credit) is more open and have higher income. The trial countries can expect increasing com- more important than the real interest household sector typically saves more petition in the 1990s in clothing, footwear, rate as a factor in aggregate crop output than twice what it needs to finance its leather products, wood manufactures, and farmers'demand for fertilizer. Rapid accumulation of real assets, lending the and some primary metal manufactures. - bank expansion in an area increased fer- rest to other sectors. tilizer demand by about 23 percent, rates * The business sector is a net bor- Labor-intensive goods are the strongest of investment in pumps 41 percent, in rower, borrowing on average 7 percent of export items for developing countries - milk animals 46 percent, and in draft GNP. About halfofreal capital formation and the United States is the developing animals about 38 percent. Despite their by business is externally financed. countries' biggest export market. impact on investment and fertilizer use, * The government sector is some- In 1965 the National Bureau of Eco- the impact of banks on output appears to times a net lender but more often a net nomic Research predicted that develop- be fairly small (nearly 3 percent). borrower. ing countries would specialize in the * Unsurprisingly, commercial Intersectoral flows in developing manufacture and export of labor-inten- banks prefer to locate in well-watered countries are achieved mostly through sive goods - and prepared a list of those areas where the risk of drought or flood is the banking system. The restofthe finan- goods. relatively low. Bank expansion is facili- cial system is typically relatively under- A study of actual exports for 1965- tated by government investments in developed. Thus savings are channeled 1986 revealed that with few exceptions, roads and regulated markets, which from the household to the business sector export performance of those labor-inten- improve farmers' liquidity and reduce muchmorebymeans ofbank deposits and sive goods was superior in developing banks' and farmers' transaction costs. loans than through issue of equities. countries - which increased their mar- * In the 1970s, expansion of regu- The foreign sector cannot be relied ket shares for those items despite gener- lated markets contributed 4 percent to upon as a passive or residual provider of ally declining shares of world trade. growth of agricultural output and 17 funds to the domestic economy. A short- The United States absorbed nearly percent to demand for fertilizers. Expan- fall in foreign financing or an increase in 55 percent of labor-intensive products in sion of electrification increased output 2 government borrowing typically force the 1986 ($70.2 billion, compared with only percent in a decade by increasing invest- business sector to reduce its investment. $34.4 billion in the EC). And more than ment levels for pumps and fertilizer. A Households andthe government typically 40 percent of total U.S. imports of labor- primary education added a large 8 per- do little to absorb foreign financing intensive goods came from developing cent to crop output over the decade, pri- shocks by adjusting their net lending. countries (compared with only 12 percent marily by increasing fertilizer demand The vulnerability of the business in the EC). nearly 30 percent. sector to the availability of foreign funds Many of the products the National This paper is a product ofthe Agricul- points up the need for the financial sector Bureau identified as labor-intensive ture Operations Division, Latin America in developing countries to find more ways remain so, and therefore remain suitable and Caribbean Country Department II. to attract domestic savings to finance for production and export by developing Please contact Josefina Arevalo, room 17- worthwhile investment projects. This countries. 100, extension 30745 will require that savers are ensured afair Clothing, footwear, leather products, share of the returns on investment proj- wood manufactures, and some primary ects - which means realistic interest metal manufactures became relatively 164. Intersectoral Financial Flows rates for savers and the development of more labor-intensive - so producers in in Developing Countries financial instruments that allow savers industrial countries can expect increased to share in high-risk high-yield projects. competition from the developing coun- Patrick Honohan and Izak Atiyas This paper, a background paper for tries in these products in the 1990s. the 1989 World Development Report, is a This paper is a product of the Inter- The business sector in developing coun- product of the Financial Policy and Sys- national Trade Division, International tries relies on external funding for about tems Division, Country Economics De- Economics Department. Please contact halfofits investment. Ifthe availability of partment. Please contact Wilai Pitayato- Jean Epps, room S8-035, extension investable funds is to be freed from its nakarn, room N9-003, extension 37666. 33710. dependence on the vagaries ofthe interna- tional capital markets, developing coun- Policy, Research, and External Affairs Working Paper Series 65 166. Achieving and Sustaining 167. Do Price Increases for Staple Typically, three or four years must Universal Primary Education: Foods Help or Hurt the Rural pass before a price increase for rice stops International Experience Relevant Poor? having a negative effect on the welfare of to India the poor. Martin Ravallion This paper is a product of the Agricul- Nat J. Colletta and Margaret Sutton tural Policies Division, Agriculture and In the short run the rural rich in Bangla- Rural Development Department. Please Funding, local accountability, good desh are likely to gain, and the rural poor contact Maggie Zee-Wu, room J2-084, teacher training, and upgrading poorer to lose, from an increase in the relative extension 37589. schools are all important. But promoting price of food staples in a food producing female enrollment may also require more economy. But in the long run the welfare organized day care - to free young girls ofa typical poor household will be neutral 168. Technological Change from from child care duties. to such price increases (after allowing for Inside: A review of Breakthroughs! wage adjustments), and the poorest To achieve its goal of full enrollment of households will benefit somewhat. Ashoka Mody children aged 6 to 11 by 1990, and chil- dren aged 6 to 14 by 1995, India must The effect on the poor of changes in the The reviewer gives high marks to Break- increase its enrollment from less than 80 price of staple foods is a central issue in throughs!, a book describing the way indi- percent to more than 100 percent in 10 debates on development policy. viduals conceived and developed new years. Sustaininguniversal primary edu- One argument is that while low food products and services, and then set about cation alsomeans reducingthehigh drop- prices clearly benefit urban groups, the bringing them to market. out rate (over 50 percent by grade 5) to rural population that depends primarily near zero for eight grades. on food agriculture is likely to be worse Remember life before Post-its? You To reach its targets, India must: off. High food prices maybenefit the rural probably used scotch tape (made by 3M) * Back up policy with funding - in poor by raising rural wages, even when to paste your note where you wanted it. particular directing central government the poor are net demanders of food. What about putting the paste on the funds to areas and states with insufficient The counterargument is that the paper? If you were working at 3M, say, resources to improve facilities, quality of rural poor are net demanders of food. In would it occur to you? instruction, and local language resources. rural South Asia, for example, they do not In Breakthroughs!, the authors de- * Encourage local accountability of produce enough food for their own con- tail the development of Post-it Note Pads teachers and administrators to communi- sumption, typically supplementing their and other products and services that have ties. Encouraging good local school man- own farm incomes with earnings from come to be regarded as indispensable agement (coordinated with state and agricultural labor. Under conditions of (how did we ever do without them?) These central management) as well as commu- partial equilibrium, they cannot benefit products now seem ordinary. In many nity participation promises the best ad- from high prices. cases the technology was readily avail- ministrative oversight of schools. There is little agreement about how able. But what counts, the book says, is * Improve quality in the poorer responsive agricultural wages are to food the concept, and even then, the route to schools and states to increase participa- prices, so the author has examined the commercial success requires consider- tion and retention rates in the primary effects of changes in food prices under in- able ingenuity and corporate support. schools. This requires well-trainedteach- duced wage responses for rural Bangla- Who were these innovators and what ers - motivated both by better pay and desh based on an econometric model ofag- problems did they have to tackle before in-service training (which the introduc- ricultural wage determination, the market applauded their break- tion of educational technology will facili- The results: through? tate). Partial equilibrium analysis sug- The book presents case studies of 12 * Make curricula and exams rele- gests that the rural rich are likely to gain, products and services; five consumer vant to local students (emphasizing basic and the rural poor to lose, from an in- durables (cars, VCRs, Walkmans, micro- knowledge and reasoning skills over aca- crease in the relative price of food staples. wave ovens, and Nike athletic shoes); demic knowledge). Steady-state equilibrium analysis three services (Federal Express, Chem * Make a special effort to provide or- suggests a different result: that the rural Lawn, and Nautilus); two health care ganized day care to release young girls rich will probably gain from such a price items (Cat Scans and Tagamet); an inter- from their child-care responsibilities. increase, but in the long run the welfare of mediate product (polyethylene); and the This paper is a product of the Popula- a typical poor household is more likely to Post-it Note Pads. tion, Human Resources, Urban and Wa- be neutral to changes in the price of rice. While the authors applaud the tenac- ter Operations Division, Asia Country The long-term effect on welfare will ity and vision of the individual, they give Department IV. Please contact Mary vary among the poor, however. In the some of the credit to the firms'marketing Philiph, room D1-015, extension 75366. long run, welfare in the poorest house- and manufacturing expertise. Ironically, holds would seem to improve more from the reviewer says, there isn't much con- such a price increase than would welfare cern for economic principles. Amana offi- in households that are less poor. cials priced the microwave oven at $499 66 Policy, Research, and External Affairs Working Paper Series because they concluded that "It's about typical reform program calls for a reduc- Hence a worker with transferable skills the same size as an air conditioner. It tion in government control, and tries to who changes employer can expect to suf- weighs about the same. It should sell for broaden the range of options for finance. fer a cut in wages for a transition period the same." Called for are increasesin, and ultimately while his level of productivity is being This paper is a product of the Indus- liberalization of, interest rates, as is a evaluated and recognized. Such a worker try Development Division, Industry and reduction in the scope and severity of re- has no incentive to move as long as the Energy Department. Please contact strictions on bank lending and financial present value of the loss in earnings dur- Wendy Young, room S4-101, extension innovation generally. A reduced burden ing the probationary period is greater 33618. of taxation, implicit and explicit, of the than the present value ofthe loss incurred financial system is often required. in remaining with the training firm at a Many needed financial sector re- wage below the market-level for his skill. 169. Financial Sector Reforms in forms are of an institutional nature re- In such cases this constraint on worker Adjustment Programs quiring the acquisition of scarce skills. mobility will make it feasible for firms to For instance, development finance insti- assume a share in investment in the Alan Gelb and Patrick Honohan tutions may need to reconsider their fun- general-skills training of their workers- damental objectives and their entire a result that qualifies the traditional Reform programs call for more prudential method of operating. These changes take theory of on-the-job training as developed supervision of financial institutions but time tobecome effective, andit is not clear by Becker. fewer restrictions on interest rates, the that the typical quick-disbursing policy- This result may have some impor- direction of credit, and financial innova- based operation is the ideal medium for tant implications for policy in countering tion generally. The planning of financial effecting them. the deleterious effects of such market reform must bepredicatedon an appropri- Experience has shown the impor- imperfections as minimum wage legisla- ate macroeconomic framework, without tance ofthe links between financial sector tion and a restricted capital market, on which reform efforts can result in costly policies and performance and the macro- the supply of trained labor with general failure. economic situation. Without an adequate skills. It also suggests that training cer- degree ofmacroeconomic stability, finan- tification, in facilitating interfirm mobil- The recent upsurge ofconcern with finan- cial sector reforms can fail, with serious ity, discourages on-the-job training by cial sector policy issues in developing consequences. Therefore the planning of firms. countries arises primarily from three a financial sector reform must be predi- This paper is a product of the Educa- characteristics of their financial sys- cated on an appropriate macro-policy tion and Employment Division, Popula- tems: framework. tion and Human Resources Department. * Many of the financial institutions This paper is a product of the Finan- Please contact Cynthia Cristobal, room in developing countries are extremely un- cial Policyand Systems Division, Country S6-001, extension 33640. sound. Economics Department. Please contact * There is often excessive control Maria Raggambi, room N9-031, exten- over interest rates and the direction of sion 37657. 171. The Cost-Effectiveness of credit, amounting to repression of the National Training Systems in financial systems. Developing Countries * The domination by banks of the fi- 170. General Training Under nancial system in many countries has led Asymmetric Information Christopher Dougherty toaneed for institution-building to enrich the range of services that the financial Eliakim Katz and Adrian Ziderman Schools shouldbe responsiblefor teaching sector can provide. basic skills and the theoretical aspects of The typical financial sector reform Firms are unlikely to provide their em- vocational training, and employers package involves policy changes to in- ployees with general training that makes should be responsible for the practical end crease the power of centralized decision- them more desirable to competing firms. - with on-the-job training supplemented making in some areas and to reduce it in They are more likely to provide such train- in some cases by training at training cen- others. ing ifit is difficult for other firms to meas- ters. Institutionalized pre-employment For prudential regulation and super- ure the value of the training, training for entry-level jobs is less cost- vision, reforms seek strengthened infor- effective-despite wishful thinking that it mation systems, stronger and more de- One widely accepted conclusion in the hu- provides an easy solution to theproblem of tailed regulations, and closer credit su- man capital literature on training is that mass youth unemployment. pervision. At the level of the intermediar- firms will finance only firm-specific train- ies, reforms seek improved procedures, ingbecause it is non-transferable to other Which is better: school-based training some of which (credit policies, loan re- firms. Firms will notbe willing to finance (vocation education), center-based train- view, and management information sys- training in general (transferable) skills. ing, or on-the-job training (such as ap- tems) are natural complements to im- In this paper it is argued that a re- prenticeship schemes)? Controversy provements at the central level. cruiting firm will possess only limited about choice of training mode has been But insofar as the relative cost and knowledge of the training level in general aggravated by three factors: availability of credit are concerned, the skills acquired by workers in other firms. * Failure to recognize that voca- Policy, Research, and External Affairs Working Paper Series 67 tional-technical training covers a broad 172. The Effects of Peru's Push to educational attainment because of the spectrum, from ap-plied science educa- Improve Education great disparity between urban and rural tion to job-readiness training. Advocates areas in availability of secondary schools. and critics of a particular training mode Elizabeth M. King and Rosemary T. Bellew * The availability of material school who find themselves arguing at cross pur- inputs, such as textbooks and desks at the poses often have different points of this Peru's effort to expand public education primary level, had a large positive effect spectrum in mind. from the mid-1950s to the 1960s has nar- on final school levels. * Insufficient appreciation of the rowed the educational gap between rural This paper is a product of the Educa- training that is, or could be, provided - and urban residents, males and females tion and Employment Division, Popula- for example, by the private sector in the - but male urban students are still likely tion and Human Resources Department. form of in-service training (apprenticed to advance furthest in school. At the pri- Please contact Cynthia Cristobal, room or otherwise) and training provided by mary level, student achievement isgreatly S6-001, extension 33640. proprietary schools, suppliers of equip- improved by such material inputs as ment, and other sources. desks and textbooks. * A tendency by planners to overes- 173. Hospital Management timate greatly the need for extended pre- From the mid-1950s to the 1960s, the gov- Staffing and Training Issues employment training for entry-level jobs. ernment of Peru undertook a major ex- This bias is reinforced by wishful think- pansion of public education, increasing Julio Frenk, Enrique Ruelas, and ing that training can provide an easy the number of schools, requiring primary Avedis Donabedian solution to the problem of mass youth un- schools that offered an incomplete cycle to employment. add grades, and increasing school inputs Hospitals dominate health care, so mak- Drawing on a comprehensive survey (principally teachers and textbooks). ing hospitals more efficient is crucial to of international experiences and issues, The authors examine the effects of better health care delivery. The authors the author concludes that: Peru's educational policies, and the ef- suggest an agenda for research. * Under favorable conditions (in- fects of family background and commu- cluding adequate financing), any training nity characteristics on the schooling lev- Hospitals dominate health care in most system can be effective. Considering the els of a sample of adults. Data on males parts of the world and for a variety of time and money it takes to execute radical and females were analyzed separately by reasons are likely to continue being a key change, it makes more sense to improve birth cohort, using a sample of 5,644 factor in the overall performance of the the performance of existing training sys- females and 5,241 males aged 20 to 59. health care system. Any efforts to im- tems than to try replacing them. The The authors found that: prove this performance must therefore design of a training system is not so im- * The government's policy to expand give greater hospital efficiency the high- portant as its ability to evolve in light of the schools played a major role in raising est priority. experience. education levels and narrowing the gap After discussing key issues of mana- * Planners should consider dividing between rural and urban residents, and gerial, clinical, and production efficiency, responsibility between schools, employ- males and females. Frenk, Ruelas, and Donabedian suggest ers, and training centers. Schools should * The impact of parents' years of an agenda for research, which would in- be responsible for basic skills and the schooling and occupations on the educa- clude two types of research: theoretical end of the vocational training tional levels of their children lessened * Observational studies that docu- spectrum, and employers should be re- over time as the supply of schools ex- ment levels of hospital performance and sponsible for the practical end -after the panded throughout the country - an correlate them with organizational de- individual has entered the labor force. indicator that the link between socioeco- sign and environmental variables. It is * Ideally, for some occupations, em- nomic background and access to schools especially important to devise and test ployer-trained trainees should attend had weakened. sensitive, specific indicators of manage- trainingcenters (which may ormaynotbe * The relative effect of parents' edu- rial, clinical, and service production effi- schools) part-time to add to their theoreti- cation differed for sons' and daughters' ciency. cal knowledge - both during initial on- schooling. Fathers' education had twice * Comparative intervention studies the-job training and later in their work- as great an effect on sons' schooling as that would introduce planned change in ing life, as the need arises. mothers' education; for daughters, both hospitals and assess the consequences - * Full-time institutionalized train- parents'education had equivalent, strong using control groups as well as cost-bene- ing aimed at bringing the trainee to job positive effects. fit and cost-effectiveness analyses. readiness is likely to be less cost-effective * Primary schools expanded rapidly The mostly highly recommended for a number of reasons - and in many evenin rural areas, sorural residence did subjects for research, in order of priority, countries would place an intolerable bur- not adversely affect the primary school- are: den on public funds. ingofmales. Urban orrural residence did * Good descriptive studies of the This paper is a product of the Educa- matter greatly for females, however, hospital system and the main aspects of tion and Employment Division, Popula- suggesting less desire by rural parents to organization design - to chart, for ex- tion and Human Resources Department. invest in the schooling of their daughters. ample, the formal and informal relations Please contact Cynthia Cristobal, room * Urban residence at the age of 13re- among managers and clinicians, the fre- S6-001, extension 33640. mained an important determinant of quency of different arrangements for 68 Policy, Research, and External Affairs Working Paper Series internal communication, types of depart- that may capture more realistic features. ries are usually nonexistent). mentalization, and management sys- One extension is to consider real * Household consumption of non- tems. wage rigidity and unemployment. If capi- food goods, school fees, and so on. * The systematic design, testing, tal in the short run is sector-specific, the Weaver considers variations is the and study of explicit quality monitoring net effect of a small tariff remains am- model to establish their implications. and assurance systems. Such studies biguous - because an increase in the These variations include differential should include the analysis of interac- domestic price of imported inputs will buying and selling prices, fixed subsis- tions between managers and clinicians, cause a fall in employment and thus a tence consumption constraints, partici- especially as they constrain clinical au- decrease in real income. pation in wage market labor, smuggling tonomy and decision making. Another extension is to consider in response to goverment price control, * Studies to determine which social, domestic production of the imported in- and parallel markets with penalties for personal, organizational, and educa- termediate goods. Such production is smuggling. tional factors accountfor managerial skill likely to be an important factor in me- This paper is a product of the Inter- and success in managing a hospital - to dium- and high-income countries, but national Commodity Markets Division, get the information needed for the re- much less so in very poor countries. The International Economics Department. cruitment and training of successful hos- income effect of the tariff will still be Please contact Aban Daruwala, room S7- pital managers. negative, though less so. 040, extension 33716. * Studies of the structure and dy- This paper is a product of the Trade namics of medical labor markets, to im- Policy Division, Country Economics De- prove understanding of why there is an partment. Please contact Maria Ameal, 176. Credit Rationing,Tenancy, oversupply of doctors in so many different room N10-035, extension 37947(15 pages Productivity, and the Dynamics of countries, with tables). Inequality This paper is a product of the Health and Nutrition Division, Population and Avishay Braverman and Joseph E. Stiglitz Human Resources Department. Please 175. An Integrated Model of contact Sonia Ainsworth, room S6-065, Perennial and Annual Crop When credit to farmers is rationed, extension 31091 (37 pages with charts). Production for Sub-Saharan changes in technology may lead to a long- Countries term increase in sharecropping and then to reduced productivity. The development 174. Trade Restrictions with Robert D. Weaver of effective rural financial institutions imported Intermediate Inputs: would reduce the likelihood ofthese nega- When Does the Trade Balance This microeconomic model of household tive effects. Improve? choice reflects the fact that crop produc- tion in Sub-Saharan Africa is dominated Why, when given the same resources, Ram6n L6pez and Dani Rodrik by smallholders who allocate household might productivity be lower on farms labor across annual and perennial crops operated through sharecropping than on When imports are predominantly inter- and, insomecases, to wage labor markets. owner-run farms, even though sharecrop- mediate inputs - as they are in most ping is an efficient institution in econo- developing countries - import restric- Crop production in Sub-Saharan Africa is mies in which land is unequally distrib- tions act as a supply shock to the economy dominated by smallholders who allocate uted? The reason is that sharecropping, and therefore cannot always be relied onto household labor across annual andperen- much less wage contracts, cannot over- improve the trade balance. nial crops and, in some cases, to wage come the divergence of interests between labor markets. those who till the land and those who own The author's model demonstrates that Weaver has developed a microecon- it. Only land redistribution can do that. when imports are predominantly inter- omic model of household choice which is Braverman and Stiglitz present mediate inputs - as they are in most consistent with observed characteristics notes toward a general equilibrium the- developing countries - import restric- of Sub-Saharan agricultural systems in ory of land tenancy that suggests how tions cannot always be relied upon to im- terms of: changes in technology and in publicly prove the trade balance. Such restric- * Integrated production of annual provided infrastructure can affect the tions act as a supply shock to the econ- and perennial crops (since households equilibrium distribution of land in coun- omy. often produce both annuals and perenni- tries where credit to farmers is rationed. Unless nontraded goods are inten- als). This interaction has been ignored in They argue that the prevalence of sive users of imported intermediates, the past models. share tenancy is directly related to ine- general-equilibrium consequence of im- * Price uncertainty in markets that quality in the distribution of wealth - port restrictions is a large enough reduc- may be affected by government interven- and of landholding in particular. But tion in export supplies to swamp the di- tion. inequality should be viewed as an en- rect effect ofthe restrictions. Theresultis * The potential for off-farm employ- dogenous variable, affected by decisions a deterioration in the trade balance. ment. of both large landholders and peasants One can check the robustness of the * Household consumption of crops about (1) techniques and (2) forms in author's model results with extensions produced on the farm (on-farm invento- which to hold their wealth. These deci- sions and their consequences are affected Policy, Research, and External Affairs Working Paper Series 69 in turn by changes in technology and in The motive for adopting a company the rural infrastructure. tax depends in part on the type of per- The tax holiday - an incentive fre- When credit to farmers is rationed, sonal tax that is desired and the degree to quently used in developing countries to changes in technology can increase the which a country may wish to withhold encourage capital investments - offers inequality in landholdings - with a long- income from foreigners. But the question benefits for short-term investments but term increase in share tenancy. This in arises in policy debate about whether a could in fact penalize long-term capital turn might reduce productivity, at least particular tax base can be effectively investments. partially offsetting the initial improve- implemented, taking into account admin- For some countries with high infla- ments. istrative weaknesses and requirements tion rates and relatively fast writeoffs for Braverman and Stiglitz suggest that - as well as other (especially interna- depreciable capital, the effective tax rate the development of effective rural finan- tional) considerations. on long-term investments is higher dur- cial institutions would reduce the likeli- In a closed economy - especially one ing the tax holiday than after. hood of these negative effects on equality that relies on a personal consumption tax For one thing, the tax law may re- and productivity. They caution though - the cash-flow tax seems a simple, effi- quire assets to be depreciated during the that past attempts in creating such insti- cient form of company taxation, adminis- holiday. If so, the value of tax deprecia- tutions largely failed because of a lack of tratively straightforward and neutral tion writeoffs - which is not indexed for accountability and of enforcement proce- with regard to investment decisions. The inflation - may be lower than the true dures. more complicated equity-income tax is economic cost of depreciation. This paper, a product of the Agricul- harder to defend in a closed economy. For another, the tax benefit of nomi- tural Policies Division, Agriculture and Few countries have had experience nal interest deductions associated with Rural Development Department, is forth- with cash-flow taxes, however, so it is debt financing ofcapital are of no value to coming in Pranab Bardhan, ed., The impossible to predict what administra- the firm during the holiday - whereas Economic Theory of Agrarian Institu- tive and other practical difficulties such a after the holiday they may be quite bene- tions, Oxford University Press. Please tax will pose ficial. contact Cicely Spooner, room N8-039, ex- In a country with a large foreign- After estimating the effective tax tension 30464. owned sector, the equity-income tax may rates on capital for holiday and post-holi- be the best form of tax for withholding day investments, the author concludes income from foreigners. Thisis particu- that for some countries the effective tax 177. Cash Flow or Income?: The larly true if the tax is credited against rate on long-term capital is highter dur- Choice of Base for Company foreign taxes and so, in certain circum- ing the holiday than after. Taxation stances, has little effect on investment. This paper is a product of the Public Otherwise, the tax is distortionary. Economics Division, Country Economics Jack M. Mintz and Jesus Seade A case can be made for the cash flow Department. Please contact Ann Bhalla, tax in an open economy as well. Some- room N10-059, extension 37699. Cash flow and equity income are two alter- times - for example, with petroleum and native bases for company taxation. Before mining royalties, which are meant to be a country implements a cash-flow tax, it taxes on resource "rent" - taxes are not 179. Public Sector Pricing in a must first sort out problems arising from credited at all against foreign taxes. The Fiscal Context administrative complexities - particu- cash flow tax has the virtue of being larly tax evasion-from international tax neutral, while continuing to withhold Christopher Heady coordination and competition, and from rents accruing to foreigners. (A value- the problems of transition. added tax on a destination basis does not If administered prices are to generate do so, since the tax is paid only by resi- revenues, they should deviate from mar- Cash flow and equity income are two al- dents.) ginal cost and should be determined on ternative bases advocated for company This paper is a product of the Public the basis of their economy-wide effects, taxation. Recent literature has stressed Economics Division, Country Economics without regard to financial targets. It is the merits of the cash-flow tax because of Department. Please contact Ann Bhalla, better to raise prices above marginal cost its simplicity and its neutral impact on room N10-059, extension 37699 (45 through taxes than by raising the price capital and financing decisions. But cash pages). received by the enterprise. flow taxation merits a closer look in terms of: Administered prices should deviate from * Administrative complexity. 178. Tax Holidays and Investment marginal cost if they are to be used as in- * International tax coordination struments to generate revenue. and competition. Jack M. Mintz The analysis is based on the Bank's * Transition problems. two-step approach to public sector pric- International issues and administra- The tax holiday - designed to encourage ing: first calculating marginal cost, and tive complexities - particularly tax eva- capital investments - actually penalizes then adjusting it to account for other fac- sion - present problems that must be long-term investments in some countries tors. The aim is to show how those adjust- sorted out before a country decides to with high inflation rates and relatively mentsshouldbemadetoaccountforfiscal implement a cash-flow tax. fast writeoffs for depreciable capital. concerns. Such adjustments are not 70 Policy, Research, and External Affairs Working Paper Series widely used at present. als as major inputs. reducing protection is likely to involve re- The appropriate basis for pricing in The traditional model explains metal form of both trade tariffs and domestic the first step, the author contends, is a consumption in terms only of output and taxation. Greater reliance on efficiently weighted average of short and long-term the prices of metal and its substitutes. It designed user charges will alsohelp make marginal costs. is inadequate to address the issue of a country more competitive internation- Deviations from marginal cost in the structural change because it ignores ally second step are shown to depend on their other important factors of production, * Correct priorities should be set for revenue-raising, distortionary, and dis- such as energy, which have experienced public expenditures - whether they are tributional effects. dramatic changes. rising or falling - to ensure that they are Imposing financial constraints may With the extended model, the null supportive of trade and of tradable goods be an inefficient method of achieving fis- hypothesis ofno structural change cannot production. cal objectives. It is better to decide prices be rejected for most metals. With the This paperis aproduct ofthe Office of on the basis of their economy-wide effects conventional model, the null hypothesis the Vice President, Development Eco- without regard to financial targets - and of no structural change is strongly re- nomics. Please contact Maureen Colinet, then, if necessary, to impose financial jected. room S9-029, extension 33490 (28 pages targets that are consistent with those Results with the extended model with tables). prices. show that the downturn can be explained The author argues that it is better to mostly by changes in the input variables, raise prices above marginal cost through particularly such nonmetal inputs as 182. Latin America's Experience taxes thanbyraising the price receivedby capital and energy, which are much more with Export Subsidies the enterprise. important cost items than metals and Metering problems prevent direct ob- have undergone drastic changes over the Julio Nogu6s servation of the use of publicly produced period. goods - a problem that particularly af- This paper is a product of the Inter- The failure of export subsidies, particu- fects road user chargers. The author national Commodity Markets Division, larly in Argentina, should remind us to discusses how to set charges in the face of International Economics Department. distinguish what is possible from what is metering difficulties, stressing the need Please contact Sarah Lipscomb, room S7- likely. In Latin America the money would to set uniform charges and to make indi- 062, extension 33718 (25 pages with be better spent on infrastructure, health, rect charges on inputs. charts and tables). and education. This paper is a product of the Public Economics Division, Country Economics Twenty years ago, it was believed that Department. Please contact Ann Bhalla, 181. Public Finance, Trade, export subsidies would produce more di- room N10-059, extension 37699 (55 and Development: What Have We versification and better export perform- pages). Learned? ance. This has not happened. Why? In most cases, export subsidies were Johannes F. Linn and Deborah L. Wetzel not supported by more open import poli- 180. Structural Changes In Metals cies - so subsidies reduced only margin- Consumption Failure to consider explicitly the many ally the anti-export bias of Latin Ameri- intricate relations between trade and can countries. Unstable real exchange Boum-Jong Choe public finance policies will often lead to rates have also hurt exports. inconsistent and unsustainable policies, Export subsidies appear to have An extended model of metals demand thus hindering a country's trade and improved exports in Brazil, which also suggests that the downturn in the inten- development prospects. liberalized imports, significantly stabi- sity ofmetals consumption during the last lized real exchange rates, and promoted 15 years can be explained largely by The interdependence of trade and public other policies conducive to export growth. changes in input variables, including finance policy are important considera- Yet Mexico, after reducing import barri- capital and energy, rather than by tions in designing macroeconomic policy, ers, also enjoyed improved exports - - changes in the structure ofdemand. public revenue policy, and public expen- with minimum export subsidies, and with diture policy. For example: apparently lower social costs than Brazil For 15 years the metals market has been * A competitive real exchange rate, experienced. characterized by slow growth - in some improved trade performance, and trade Export subsidies have failed in other cases, even decline - in consumption. liberalization are all built on the base of Latin American countries - and particu- To test the proposition that struc- sound fiscal management. Trade policies larly hurt development in Argentina, tural changes in demand were the main and trade liberalization may, however, where fraud, corruption and rent-seeking cause of the slowdown, the author - have a negative effect on fiscal balances, have been rampant. drawing on U.S. data-used an extended which must be considered and compen- Participants in the current Uruguay metals demand model that recognizes sated for. Round of international negotiations seem energy, labor, capital, and other materi- * Improving competitiveness and to be seeking two different goals on subsi- Policy, Research, and External Affairs Working Paper Series 71 dies and countervailing measures of adjustment. decline, therebyincreasing their liquidity (CVMs). Supporters of subsidies want to To resume sustainable growth, the and demand, and reducing the real inter- make it more difficult to introduce CVMs; Mexican authorities adopted a new strat- est rate. countervailers want more stringent rules egy whereby private investment and * The improved macromanagement on subsidies. Both subsidies and CVMs exports rather than import substitution will make relative prices less volatile, will are viewed as good policies by their users. and public sector investment would lead reduce uncertainties, risks, and adjust- But empirical evidence does not support growth. However, in the past, investment ment costs, and will increase the short- these policies, and export subsidies and responded extremely slowly to changes in term investment response. CVMs entail other costs to the societies the incentive system. This behavior may This paper is a product of the Trade, using them. reflect high adjustment costs, uncertain- Finance, and Industry Division, Latin The failure of export subsidies, par- ties, risks, and credibility problems in- America and the Caribbean Country ticularly in Argentina, should remind us ducedby past macroeconomic instability. Department II. Please contact Lerick of the importance of distinguishing what Also, distortions in the factor and goods Spear, room 18-127, extension 30081 (32 is possible from what is likely, contends markets may have impaired the mobility pages with charts and tables). the author. The likelihood of subsidies of resources. Consequently, structural improving exports is low, when they are reform began with the 1985 trade reform, applied in a context ofhigh import protec- and was strengthened by the privatiza- 184. Women and Forestry: tion and unstable real exchange rates. tion of public enterprises, economic de- Operational Issues Finally, export subsidies compete regulation, and tax and financial sector with other government programs and - reforms. Augusta Molnar and Gdtz Schreiber especially considering their failure rate Further trade liberalization may be - should be dismantled in this period needed-removal oftheremainingquan- Involving women in forestryprojects often when the welfare of Latin Americans has titative restrictions, particularly on im- makes the difference between achieving or declined dramatically. The money would portsofused capital goods-toencourage not achieving project objectives. More- be better spent on infrastructure, health, investment, both directly (through the over, involving women need not be costly and education projects. price effect) and indirectly (as an instru- and almost always produces a higher re- This paper is a product of the Inter- ment to promote trade and capacity utili- turn on project investment. national Trade Division, International zation). Economics Department. Please contact To the extent that trade liberaliza- Women are major actors in forestry Salome Torrijos, room S8-033, extension tion is not accompanied by policies that throughout the developing world. 33709 (38 pages with tables). facilitatereal exchangerate depreciation, Women and children are the primary investment wouldbe affected in two ways collectors of fuel and fodder for home - first, profitability in the tradeables consumption and for sale to urban mar- 183. Private Investment In Mexico: sector would be reduced in the short run, kets. This alone gives women amajor role An Empirical Analysis increasing adjustment costs and impair- in the management and consevation of ingresource mobilization. Second, expec- renewable forest resources. When con- Alberta R. Musalem tations of real depreciation will build up vinced of the utility and practicality of a as economic agents anticipate that the forest improvement or management In 1985, Mexico shifted to a growth strat- long-run equilibrium level of the real scheme, women can be a powerful lobby to egy based on private investment and ex- exchange rate consistent with import lib- persuade their entire household or com- ports rather than on import substitution eralization is higher. As a result, desta- munity to invest the resources necessary and public sector investment. The policy bilizing capital outflows may increase to make the scheme work. Involving implications of this study are that to in- real interest rates and reduce confidence women in forestry projects often makes crease investment, Mexico should follow in the government's ability to sustain the difference between achieving or not policies aimed at reducing investment trade policies. achieving project objectives, particularly adjustment costs and increasing factor As stabilization efforts continue, for the long-term sustainaility of inter- mobility and credibility in the program of expectations of inflation will be reduced, ventions. structural reforms rather than at subsi- increasing the demand for money and Under a project in Senegal, in some dizing investment, therefore the real interest rate. As the villages both women and men were con- government continuesits policyofrelying sulted about their species preferences. Mexico's past growth strategy-based on less on the inflationary tax, however, Women favored a mix of forage and shade import substitution and public sector favorable developments may follow: species to go with the income-producing investment - proved unsustainable in * Financial deepening will reduce species most favored by men. Tree sur- the face ofthefinancial crisis and the drop intermediation costs and spreads, in- vival was much higher in these villages, in oil prices. Moreover, with strong link- crease access to financial services, and because the women responsible for water- ages between public and private invest- stimulate investment. ing the trees (given the gender-specific ment, cutbacks in one forced cutbacks in * The unanticipated risk of capital division of labor) were more diligent than the other. Theresultwasamagnifiedcost losses on holding domestic assets will the women who had no influence on the 72 Policy, Research, and External Affairs Working Paper Series choice of species. disregards smuggling andcustomsfraud. ment may therefore have an incentive to Because of their traditional reliance When either form of illegal trade is fac- renege on the export subsidy component on forestry resources, women are often tored in, this equivalence is broken, and of the package. the chief repositories of knowledge about- the real exchange rate may actually appre- Finally, a parity change (devalu- the use and management of trees and ciate in response to an increase in the ation) or a UTCS scheme could be used to other forest plants. They also make up uniform trade tax rate. When illegal trade alleviate transitional unemployment due much of the labor force in forest indus- takes the form of customs fraud, the rate to sticky nominal wages in the short run. tries: nurseries, plantation establish- for exportables will depreciate, but the The author suggests examining the ment, logging, and wood processing. Nor rate for importables will appreciate. tradeoffs between the direct contraction- are they exclusively subsistence-ori- ary effects of the two policies and their ex- ented: their agroforestry preferences The author of this paper analyzes the pansionary effect through the tradeables include commercial fruits and (pole-gen- macroeconomics ofuniform trade taxes- product wage. erating) cash-crop trees as well as fuel uniform tariff-cum-subsidies, or UTCSs This paper is a product of the Macro- and fodder species. - by comparing UTCS policies as an economic Adjustment and Growth Divi- This paper provides operational alternative to devaluation of the ex- sion, Country Economics Department. guidelines - intended to be taken on change rate. Please contact Aludia Oropesa, room mission for guidance during field work: The model he sets up establishes a N11-035, extension 39075 (47 pages with *What information to get and issues basic equivalence between UTCS charts). to address during project preparation, schemes and devaluation of the commer- preappraisal, and appraisal - as well as cial rate in a dual exchange rate system. during project supervision, monitoring, This equivalence disappears when smug- 186. The Uruguay Negotiations on and evaluation. gling and customs fraud are incorporated Subsidies and Countervailing * How to analyze project costs and into the model. Measures: Past and Future benefits with women in mind. In the flexible price, full employment Constraints * How to design specific forestry in- world of the model, a UTCS scheme can terventions. change the real exchange rate if either Patrick A. Messerlin Designing interventions in the for- smuggling or customs fraud is going on. estry sector with gender in mind is likely What is striking, however, is that when Countervailing actions are likely to be a to change the scope and economic poten- smuggling is factored in, using a UTCS to poor instrument for limiting subsidies for tial of investments. Where women's raise the relative domestic price of traded thesamereason that antidumpingactions groups have taken an active role, the goods may backfire and actually appreci- are likely to be a successful way to support choice ofspecieshasbeenbroaderandhas ate the real exchange rate. If customs cartelization. To strengthen disciplines led to a greater diversity of products for fraud is factored in, the real exchange on countervailing measures would be sale or home use. Attention to the nutri- rate will appreciate for importables but meaningless without narrowing the defi- tional potential of forests can improve will depreciate for exportables. nition of dumping and strengthening dis- diets and thereby increase the long-term The author suggests further exten- ciplines on antidumping procedures. enterprises -both wood and nonwood - sions to his model for a reasonably full can be developed to place equal emphasis understanding of the macroeconomics of The Uruguay Round Negotiating Groups on women's roles in marketing and pro- UTCS schemes. First, he would incorpo- on countervailing and antidumping pro- duction, increasing employment and in- rate distortionary means of government cedures share many common issues. This come. finance into the analysis of illegal trade. is not accidental, contends the author, but This paper is a product of the Women One of the primary results of a UTCS mirrors the way import-competing firms in Development Division, Population and scheme, when there is illegal trade, is to have become the driving force of anti- Human Resources Department. Please transfer income from the public to the dumping and countervailing procedures contact Mila Villar, room S9-127, exten- private sector. This revenue shock is set up under the Tokyo Round. sion 33752. likely to add to the welfare burden of the The cases initiated since 1980 by the UTCS scheme, when the government United States and the European Commu- cannot levy lump-sum taxes. nityillustrate what Tumlirhas called the 185. Uniform Trade Taxes, Second, he would add investment to "tempting accommodation" in lawmak- Devaluation, and the Real the model and investigate the relation- ing: ill-defined (economically and politi- Exchange Rate: A Theoretical ship between investment response, the cally ambiguous) laws producing "do- Analysis real exchange rate, and fiscal revenues something" regulations with unexpected under a UTCS when the government goes long-term effects. The result in this case Stephen A. O'Connell not have lump-sum taxes. The tariff is a fundamental imbalance in the use of component of a UTCS satisfies the gov- the antidumping and subsidy codes. U.S. Theoretically, uniform trade taxes (uni- ernment's relative price and revenue ob- and EC firms have increasingly used form tariff-cum-subsidies) are equivalent jectives simultaneously, but the export countervailing and antidumping proce- in effect to devaluations ofthe commercial subsidy component brings out a conflict dures as a protectionist tool against the rate in a dual exchange system - if one between the two objectives. The govern- same few industries. Policy, Research, and External Affairs Working Paper Series 73 Countervailing actions are likely to This kind offlexibility allows a country to higher in Europe and Latin America than be a poor instrument for limiting subsi- remain competitive in world markets in Asia and Africa - largely because dies for economic reasons inherent in the when a shock to profits lowers its value- workers there are protectedmorebyregu- profit-maximizing behavior of the com- added output price. lations. plaining firms - not necessarily because In many countries, wages are in- The distortionary growth of labor of poorly designed provisions in the code. dexed to consumer prices, thus protecting costs because ofincreasing nonwage costs Economic forces impose limits on what the real income of workers in the short is not common in the less developed coun- can be expected from a subsidy code. For run. Some industrial countries link tries (LDCs), however. The author of this the same reason, antidumping actions wages more closely to the value-added paper found that international differ- are likelytobeasuccessful wayto support output price. In Japan, for example, ences in labor costs are attributable cartelization. bonus schemes link wages to profits. The largely to differences in labor productiv- For many economists, first-best poli- value-added output price is built from ity and capital-labor ratios. cies rely on self-disciplines on subsidies. data on wages and profits, so the bonus He also found that labor costs de- This goal is politically difficult to achieve. scheme links wages implicitly to the cined significantly in almost all LDCs in The price paid to get wider support for value-added output price. the 1980s, and that the impact of declin- stricter disciplines on subsidies seems to Estimates ofthe elasticity ofwagesin ing labor costs on manufacturing employ- be to tolerate countervailing procedures terms of the value-added output price are ment was statistically significant - and and impose strong disciplines on their high, significant, and of a theoretically bodes well for the growth of nontradi- use. plausible magnitude in three industrial tional exports. However, to strengthen disciplines countries that perform well in world This decline was not accomplished on countervailing measures would be markets: Japan, Germany, and Switzer- through deregulation of the labor market meaningless without narrowing the cur- land. This suggests that developing coun- - the ratio of nonwage costs to labor rently pervasive definition of dumping tries with outward-oriented development earnings remained persistently signifi- and strengthening disciplines on anti- strategies should promote this kind of cant - but mainly through macroecon- dumping procedures. This is related to wage flexibility. omic factors, particularly inflation and the fact that U.S. and EC firms have The output price elasticity of wages nominal devaluations. increasingly used antidumping proce- also appears to be high in two industrial The opportunity cost of labor was dures as a substitute for countervailing countries that produce primary products: distorted more by nonwage costs in the actions. Canada and Australia (although esti- poorest LDCs, where the small size of the The author underlines the impor- mates for these countries are lower in formal sector contrasts with the rela- tance of disciplines in antidumping proce- quality). This may reflect the difficulty of tively high degree of worker protection. dures by noting the links between anti- passing wage increases on to higher The countries that do better in manufac- dumping, safeguard procedures, and the commodity prices. Wage flexibility may turing exports seem to have both rela- Multifibre Arrangement. be particularly important for developing tively few labor market regulations and, This paper is a product of the Inter- countries exporting primary products. in the long run, rising labor costs. national Trade Division, International This paper is a product of the Inter- Adjustment programs that favor Economics Department, Please contact national Economic Analysis and Pros- export promotion and higher labor mobil- Salome Torrijos, room S8-033, extension pects Division, International Economics ity should probably also favor reducing 33709 (35 pages with charts and tables). Department, Please contact Joseph Is- government intervention that increases rael, room S7-218, extension 31285 (27 labor costs. Nonwage costs do not seem to pages with tables). be the most distortionary labor market 187. Linking Wages to Changing factor in LDCs, however. Job security Output Prices: An Empirical Study laws and regulations - by reducing of 13 Industrial Countries 188. International Differences In worker mobility between labor and agri- Wage and Nonwage Labor Costs culture - permit manufacturing labor Menahem Prywes costs to increase. This presents a major Luis A. Riveros difficulty in carrying out industrial ad- In many countries, wages are indexed to justment based on opening up the econ- consumer prices, protecting the real in- Labor costs declined significantly in most omy and realigning the exchange rate. come of workers in the short run. To developing countries in the 1980s. The International differences in labor protect employment against external impact of declining labor costs on manu- costlevels are important, especially when shocks that lower profits, developing facturing employment was statistically one compares LDC and industrial econo- countries with outward-oriented develop- significant - and bodes well for the mies. But differences between labor cost ment strategies should consider linking growth of nontraditional exports. levels in terms ofpercapita output are not wages to the value-added output price. so large. This suggests the importance of The ratio of nonwage labor costs (for so- different capital-labor ratios. A shock that lowers profits depresses em- cial security, pensions, vacation days, This paper is a product of the Macro- ployment less when wages are flexible in severance compensation, and the like) to economic Adjustment and Growth Divi- terms of the value-added output price. direct wage costs is proportionately sion, Country Economics Department, 74 Policy, Research, and External Affairs Working Paper Series Please contact Raquel Luz, room N11- the U.S. income tax. In addition, it would on performance: AL recipients appear to 057, extension 39059 (56 pages with bedifficulttoprovideabordertaxadjust- do better than the control group. The tables). ment for a cash flow tax. control group is small, however, so the The paper concludes by proposing results are not statistically robust. that the tax base be defined in terms of fi- The intensity of Bank-Fund involve- 189. The Treatment of Companies nancial income with certain specified ad- ment contributes significantly to better Under Cash Flow Taxes: Some justments, such as depreciation and ex- performanceformostindicators-except Administrative, Transitional, traordinary items. The proposal is in that intensity of Bank-Fund lending cor- and International Issues some depth, including a simplified sys- relates negatively (and significantly) tem of tax depreciation. with the share of investment in GDP. Emil M. Sunley This paper is a product of the Public Gven the positive correlation of lending Economics Division, Country Economics intensity with GDP growth and import Cash flow taxes eliminate many of the Department. Please contact Ann Bhalla, growth, it would appear that Bank-Fund problems of the corporate income tax, but room N10-059, extension 37699 (42 lending improves economic performance they have significant administrative, pages). mostly by relieving the foreign exchange transitional, and international problems, constraint and allowing for the purchase especially for developing countries. of crucial foreign intermediate goods. 190. Macro Performance Under Adjustment lending was intended to The author begins his discussion of the Adjustment Lending elicit a supply response: for a given ex- cash flow tax by outlining the major ad- penditure-switching policy, the trade ministrative and compliance issues. Riccardo Faini, Jaime de Melo, balance was expected to improve more. There are problems with the tax because Abdel Senhadji-Semlali, and Julie Stanton Alternatively, AL recipients were ex- of the numerous possibilities for gaming pected to achieve a given improvement in the system (particularly if financial flows Bank-Fund adjustment lending appar- trade balance (controlled for changes in are left out of the tax base), the appropri- ently improves economic performance terms of trade) at less cost than non- ate treatment of employee benefits and mostly by relieving the foreign exchange recipients in terms of forgone growth. business entertainment, and the treat- constraint and allowing for the purchase Correlations for a group of 30 countries mentofmoney-losingcompanies. Inaddi- of crucial foreign intermediate goods. that received their fist Bank adjustment tion, the cash flow tax has the same prob- loan by 1984 show that AL recipients lem as the corporate income taxin dealing The authors of this paper used simple sta- experienced higher average growth and with companies that do not use above- tistical methods to measure the effect of improved their trade balance more than board accounting procedures. adjustment lending (AL) on economic per- non-recipients. The tradeoff between The paper goes onto discussthe prob- formance. Using eight economic indica- growth and improvement in external lems involved in the transition from a tors, they relied on traditional "before- balance, however, was the same for both corporate income tax to a cash flow tax. after" comparisons of AL recipients and a groups. First, carryover problems arise because control group of 63 countries. This paper is a product of the Public income deferred under the income tax How have countries under adjust- Economics Divsion, Country Economics may never be taxed under the cash flow ment lending performed? AL countries Department. Please contact Maria tax and income previously taxed by the improved their external position, gener- Ameal, room N10-035, extension 37947 income tax may be taxed a second time. ating enough ofatradebalance surplus to (35 pages with charts and tables). Second, changes in asset prices arise service their external debt. Fiscal (and because changes in the tax law affect inflation) indicators deteriorated, how- expected after-tax cash flows, causing ever, a sign that macroeconomic imbal- 191. Openness, Outward either windfall gains orlosses. There are ances remained. Finally, growth rates Orientation, Trade Liberalization, ways around these problems but they fell, reflecting deteriorating terms of and Economic Performance In cause further ones. Sunleyoutlines these trade and the difficulties of reducing ab- Developing Countries secondary problems and possible solu- sorption to the required degree. tions to them but concludes that there is On nine economic indicators, AL Sebastian Edwards no easy way to orchestrate a totally recipients fared better overall than the smooth transition. non-recipients - although improvement The paper provides a critical review ofthe The international aspects of impos- varied between 53 and 63 percent, de- existing empirical literature that deals ing a cash flow tax are most troublesome. pending on the classification. Some im- with the relationship between trade orien- After a summary of the major interna- provements were mild, some statistically tation and economic performance. Using tional income tax rules, Sunley discusses insignificant. Improvements are a model that avoids the shortcomings of how the cash flow tax treats inbound stronger for a group of 12 AL recipients most current measures of trade orienta- investment, outbound investment, and that received 3 or more adjustment loans. tion, the author finds strong support for exports and imports. It is likely that a Results appear stronger when the the hypothesis that, other things being cash flow tax imposed by a developing analysts control for the potentially nega- equal, countries with a less distorted ex- country would not be creditable against tive effects of the external environment ternal sector grow faster than countries Policy, Research, and External Affairs Working Paper Series 75 with a more distorted external sector. ries of economic growth and assesses the inflation and plan for a slower adjust- their usefulness for analyzing the rela- ment program, one that is more accept- Amajor shortcoming of the current policy tionship between trade orientation and able socially. The design and pace of a debate is its increasingly dichotomized, growth in the developing countries. Us- successful adjustment program hinge on ideological tone. In the last fewyears, not ing a growth model that relates trade the correct diagnosis and management of only have positions become more rigid, orientation to the ability to absorb tech- inflation. but there is also increasing confusion nology from the rest of the world, he tests This empirical study of Zimbabwe is about the meaningofkeyconcepts such as the model using an index of trade orienta- the first in a series that will include stud- liberalization and outward orientation. tion that is (1) objective, (2) allows for a ies on Ghana, Cote d'Ivoire, and Malawi. The author detects three main shortcom- continuum of regime, and (3) comparable The study addresses the impact of gov- ings in the current debate: across countries. ernment policies on inflation and price * By thinking in dichotomies, we The results - using cross-country changes. The authors characterize the have lost the notion of trade regimes as data - strongly support the hypothesis situation in terms of the three main existing along a continuum. that, other things being equal, countries transmission mechanisms for inflation: * We no longer understand "liberali- with a less distorted external sector grow the fiscal-monetary process; direct cost- zation" as a process that can operate at faster than countries with a more dis- push factors; and real factors. different intensities. torted external sector. All of these are important in Zirn- * A number of writers confuse "liber- This paper is a product of the Trade babwe, but there are often conflicts. Low alization" with "laissez faire," with the re- Policy Division, Country Economics De- food or utility prices keep prices down but sult that people sometimes advocate partment, Please contact Maria Ameal, lead to higher subsidies and hence to what seem to be contradictory positions room N10-035, extension 37947 (60 pages higher deficits, the financing of which can (e.g., favoring openness and an outward with charts and tables). increase inflation. Similarly, exchange orientation at the same time as opposing rate devaluation is often viewed as infla- liberalization). tionary, but insufficient exchange rate To rescue the policy debate trade 192. Inflation, Price Controls, and adjustment can lead to both parallel regimes can be thought of as existing Fiscal Adjustment In Zimbabwe markets and a tight import constraint, along a continuum, with the terms resulting in lower growth of output. * Outward and inward orientation Ajay Chhibber, Joaquin Cottani, The authors conclude that one must denoting whether policy emphasis is on Reza Firuzabadi, and Michael Walton always go beyond a simple monetary ac- the domestic market or international count of the inflation process even ifinfla- trade. Inflation always has a monetary dimen- tion always has a monetary dimension. * Trade and closed describing the de- sion, but managing inflation is not a Other significant factors are manage- gree of an economy's openness. At one simple question of monetary manage- ment of the indexation process (including (the closed) end of the spectrum would be ment. Other factors to contend with are policies on wage and price controls), the import substitution (deliberate discrimi- the indexation process (including policies level and financial composition of fiscal nation against imports that compete with on wage and price controls), the level offi- deficits, and supply conditions. domestically produced goods). At the nancial composition offiscal deficits, and This paper is a product of the Public other end would be export promotion. In supply conditions. How these interact has Economics Division, Country Economics the middle would be an open economy - crucial implications for policy design, as Department, Please contact Ann Bhalla, one with a neutral trade regime, in which shown in this paper on Zimbabwe. room N10-059, extension 37699 (74 pages trade represents a large share of GDP. A with charts and tables). liberal regime would fall between open Adjustment programs typically include economy and export promotion. not only fiscal reform but also price liber- * Liberalization being defined as a alization, devaluation, and trade policy 193. Voluntary and Involuntary process that makes greater use of the reform - including reduced subsidies. Lending: A Test of Major price system, makes the trade regime Authorities implementing such programs Hypotheses more transparent, and brings domestic commonly fear the potential inflationary prices closer to world prices. The vague- effects of a combination of devaluation, Peter Nunnenkamp ness of this definition disappears as soon reduced subsidies, and price decontrol. as we provide information about the ini- Given this combination, a simplistic The reversal of net international capital tial trade regime and the intensity of the monetarist diagnosis ofinflation is insuf- flows since 1982 is attributable more to liberalization process. ficient. If inflation - even if only in the reduced inflows of new bank credits than Is there a relationship between how short run - can rise because of devalu- to higher debt service obligatiwons. Cred- liberalized a trade regime is (how close it ation or reduced subsidies, attempts to ible adjustment efforts would increase the is to laissez faire) and economic perform- control it completely may require fiscal creditors'willingness to lend new credits. ance? Is there an "optimal"trade regime? and monetary control so great as to cause If so, is that optimal regime independent recession. If cost-push factors arising The author of this paper assessed the of a country's specific characteristics? from the adjustment program generate empirical relevance of various conjec- The author discusses the new theo- inflation, it may be necessary to allow for tures about what determined whether 76 Policy, Research, and External Affairs Working Paper Series creditors would issue loans to developing pending debt-service payments they are Important distortions arise in the negoti- countries in the 1980s. He found that: able to pay. ating process because of the special posi- With the onset of the debt crisis, If debtors are given more incentive to tion and incentives of the money-center private creditors began to honor debtors meet debt obligations through more effi- banks and the recognizedreadiness of the who improved economic performance and cient economic policies, creditors will be official creditor community to contribute policies - providing higher capital flows more likely to share the credit risks trig- funds to avoid a breakdown of creditor- especially where investment ratios were gered by unfavorable developments in the debtor relations. higher. (The counterhypothesis that pol- world market, according to the author. As Meaningful debt reduction requires icy-induced improvements in the eco- the distribution of credit risks between an appropriate institutional setting to nomic performance of problem borrowers debtors and creditors improves, the capi- overcome collective action problems. In resulted in reduced net transfers must be tal outflow from developing countries will the domestic economy, bankruptcy law rejected.) be checked. provides the framework for organizing Private creditors were not prepared This paper, prepared for the confer- the collective interests of the creditors to compensate for unfavorable develop- ence "Dealing with the Debt Crisis," is a when a debtor is distressed. No such ments in the world market with addi- product of the Debt and International institutional framework yet exists in the tional lending. Small borrowers who did Finance Division, International Econom- international setting. Under current not benefit from involuntary lending had ics Department. Please contact Sheilah incentives, voluntary debt relief is bound great difficulty attracting further capital King-Watson, room S8-025, extension to mean no more than a continuing nib- inflows when they were hit by external 31047. bling away at the edges of the debt over- shocks. hang, without real relief for the debtor or Standard sovereign risk arguments real benefits for the creditors. dominate when net transfers are to be 194. Efficient Debt Reduction The author recommends "concerted explained. Creditors are not inclined to debt restructuring," based on below-mar- throw good money after bad, as some Jeffrey Sachs ket interest rates, rather than "volun- believed would happen. As default risks tary" debt reduction. With concerted re- increased, so did their reluctance to in- Debt reduction poses collective action lief, all banks would participate jointly on crease net transfers. In deciding whether problems that cannot be efficiently a fairly equal basis. The existing debt to continue lending, banks relied particu- handled in the framework of voluntary would be rescheduled at below-market larly on the effectiveness of trade sanc- market-based approaches. Instead we interest rates, with the rates based on tions. need concerted debt restructuring, based various indicators of ability to pay and Private creditors are reluctant to on below-market interest rates -perhaps decided in negotiations between the lend additional funds partly because linked with credit enhancement by offical debtor country and creditor banks. The most problem borrowers have not intro- creditors - to provide the most direct interest payments could be made more duced consistent, far-reaching economic mechanism for efficient, equitable shar- secure for the banks by various forms of policy reform. Borrowers who want tore- ing of losses. credit enhancement, including collater- establish their creditworthiness must in- alization, guarantees by the official credi- tensify their adjustment efforts. Credi- It is now widely acknowleged that under tor community, and escrow accounts in tors are unlikely to honor policy efforts to certain circumstances debt reduction can which export earnings are deposited for which the debtor country's commitment improve the welfare of both creditors and the purpose of future debt servicing. This is not credible, particularly ifit seems the debtors. Alarge debtoverhang can lead to approach would provide the most direct country will ultimately decide to default inefficiencies that worsen the debtor's mechanism for an efficient, equitable on its debt. Creditors are unlikely to be economic performance, thereby diminish- sharing of losses among the creditor responsive if they lack information or ing the creditor's expected returns. Lead- banks. suspect that borrowers will refuse to serv- ing banks and international financial This kind of interest-rate reduction ice external debt they are able to pay. institutions recognize this, but actual could be easily managed in the context of The author proposes creating an in- debt reduction has been remarkably lim- an international debt facility. Whatever ternationally binding legal system which, ited. Bolivia remains the sovereign the approach, meaningful debt reduction by reducing sovereign risks, would en- debtor that has been able to negotiate a will require the active participation of the courage private creditors to resume lend- fairly comprehensive debt reduction ar- international community. ing. One way to rule out sovereign risk rangement - and results have been This paper, prepared for the confer- would be to make transfer agreements favorable. ence "Dealing with the Debt Crisis," is a self-enforcing - by supplementing the Why has there been so little progress product of the Debt and International traditional credit contract with a third- in debt reduction? Finance Division, International Econom- party contract that is easily enforceable Debt reduction poses important col- ics Department. Please contact Sheilah within the creditor's domestic legal sys- lective action problems that cannot be King-Watson, room S8-025, extension tem. Under this third-party contract, the efficiently handled in the framework of 31047. debtor would be bound to pay a high "voluntary, market-based" approaches premium in the case of willful default. currently championed by the World Bank This would discourage debtors from sus- and the rest of the creditor community. Policy, Research, and External Affairs Working Paper Series 77 195. How Has the Debt Crisis swaps sponsored by private or public ment. These arguments tend to gloss over Affected Commercial Banks? agencies. Debt swaps are already being the increasing politicization of the prob- implemented bilaterally in small steps lem in debtor countries themselves. Harry Huizinga and through a variety of instruments, So far creditors have stayed one step including debt conversions andbuybacks. ahead of the debtors. Banks have Top commercial banks seemed to have This paper, prepared for the confer- trimmed their exposures and accumu- weathered the debt crisis. It remains to be ence "Dealing with the Debt Crisis," is a lated large provisions to reduce their seen whether their current strength and product of the Debt and International vulnerability to defaults; creditors have stability will help re-establish normal Finance Division, International Econom- increasingly recognized the pragmatism credit relationships between private ics Department. Please contact Sheilah of selective voluntary debt reduction; banks and the developing countries. King-Watson, room S8-025, extension industrial countries and multilateral 31047. agencies have stepped in with sizeable To what extent can commercial banks emergency loans and lending commit- absorb loan losses from the less-devel- ments to deal with isolated crises with oped countries (LDCs)? Some losses by 196. A Review of Alternative Debt individual debtors (most recently in private creditors are likely to be part of Strategies Mexico and Argentina). The interna- any resolution of the debt crisis, and such tional community has raised the stakes as losses are implicit in some of the many Eugene L. Versluysen needed but after seven years the debt proposals for dealing with the crisis. strategy has not yet moved beyond crisis Bank stock prices for U.S. commer- Seven years later, international debt management. cial banks already reflect a high discount strategy has not moved beyond crisis If Latin American debtors revive the on (and the low quality of) developing management. If conditions worsen, the idea of a "debtor cartel," or if social or country debt - so no major U.S. bank is political obstacles to formal, involuntary economic conditions worsen (with a world likely to fold if it gets a return on its LDC debt forgiveness may have to be removed. recession, for example), crisis manage- debt consistent with the prices of LDC ment may no longer suffice. A purely debt on the secondary market. The top This comprehensive review ofdebt strate- political decision may then be necessary banks in Canada, France, Japan, the gies includes recent debt proposals that to remove obstacles to formal, involun- United Kingdom, and West Germany are recommend alternatives to market-based tary debt forgiveness. The amount to be less heavily exposed to LDC debt than debt workouts. Proposals differ widely forgiven undersuch conditions could turn their U.S. counterparts-and thus corre- depending on whether they seek new out tobehigher than ifmore timely action spondingly less imperiled by the debt lending or broad-based debt relief and had been taken. crisis than the U.S. banks, forgiveness. Their common, explicit aim This paper, prepared for the confer- The relative safety of most of the top is to reduce the negative net resource ence "Dealing with the Debt Crisis," is a creditorbanksrenders their insistence on transfers to the creditors and to ease the product of the Debt and International full servicing of the LDC loans less urgent debt burden of the highly indebted coun- Finance Division, International Econom- and should in principle open the door to tries. ics Department. Please contact Ereney partial debt forgiveness. Italso,however, Commercial creditors and official Hadjigeorgalis, room S8-013, extension enables the banks to boycott the by now circles in industrial countries have so far 33729. routine schedulings and new money shunned the idea of interest concessions packages and at the same time to with- or debt forgiveness to highly indebted stand the accounting consequences of countries. Governments have a political 197. Differentiating Cyclical and such a move. problem using public funds ("taxpayers' Long-Term Income Elasticities of Some form of debt forgiveness may in money") to finance debt concessions and/ Import Demand practice lead to a quicker resumption of or to protect banks from country defaults, private capital flows to the LDCs and particularly in an environment ofbudget- Fernando Clavijo and Riccardo Faini increased investment in the developing ary austerity. Banks fear that large-scale countries. But such flows may never involuntary debt reduction would entail An import demand model that distin- again reach the avalanche proportions of substantial write-offs which - if they guishes between cyclical and long-term the 1970s, which resulted from the exceeded existing loss provisions and responses supports the claim that import unique coincidence of sluggish economic eroded capital-couldharm highlylever- demand in developing countries is more growth in the OECD, large OPEC sur- aged banks. There is also ideological responsive to short-term than to long-term pluses, and a number of regulatory resistance to the idea of resolving a fluctuations in income. changes in the creditor countries that "market" problem - debt recovery by directed bank lending overseas. private commercial banks - by non- How do imports react to cyclical and secu- It may take time, but through a market means. And both official and lar (long-term) factors? the evidence combination of self-interest and public market creditors point to the risk of moral suggests that cyclical income elasticities policy the current impasse in the debt hazard - that formal concessions would of import demand are generally higher crisis should be overcome. This may be "reward bad conduct," penalizing coun- than long-term elasticities - particu- done partly through large-scale debt tries that have persevered with adjust- larly for basic materials and semi-manu- 78 Policy, Research, and External Affairs Working Paper Series factured goods. At first glance, allowing the personal ously oppose such a change. Even in an Traditional models for import de- deduction on income tax to increase as the imperfect IDTD system, it may be strate- mand generally underestimate the cycli- taxpayer's income increases appears to gic-ally preferable to correct the aberra- calresponsein imports, and overestimate give larger tax breaks to the rich than to tions rather than eliminate the IDTDs the long-term response. This has impor- the poor. On closer examination, this and risk a tax revolt. tant implications for forecasting short- notion turns out to be false. As the au- One implication for comparative tax term import flows in developing coun- thors of this paper learned, each tax sys- research is that the tax schedule of a tries. For example, estimates of income tem with "income-dependent tax deduc- country that uses IDTDs should not be elasticity using a traditional import tions" (IDTDs) is fully equivalent to a compared directly with a conventional model developed by Pritchett and Bah- particular conventional progressive tax tax schedule in another country. Existing mani-Oskooee average 1.4 and 1.2 respec- system with standard deductions. cross-country work on tax deductions and tively. Consider a given conventional tax marginal tax rates generally fails to rec- Clavijo and Faini's model suggests a schedule that has standard deductions ognize that IDTDs invalidate a straight- cyclical elasticity averaging 2.6. Khan and progressive tax rates. Suppose that forward comparison. To make the two and Ross found for a sample of 14 indus- you add a new rule to this system that systems comparable, a transformation trial countries that cyclical income elas- provides an additional deduction equal to like the one suggested in the paper is ticity averaged about 40 percent higher - 10 percent of the taxpayer's income. This needed. than trend income elasticity. The au- single reform measure has the same ef- This paper is a product of thePublic thors' results suggest that the two elas- fect as a "liberalization" package consist- Economics Division, Country Economics ticities may differby an even largerfactor ing of (a) an increase of about 10 percent Department and the Country Operations for developing countries, in standard deductions, (b) an enlarge- Division, Western Africa Department. Relative prices generally are more ment of about 10 percent in all tax brack- Please contact Ann Bhalla, room N10- importantin determiningimport demand ets, and (c) a reduction ofabout 10 percent 059, extension 37699. in Latin America and Asian-Pacific coun- on all marginal tax rates. Thefullequiva- tries in Clavijo and Faini's sample, but lence of the two options may not be obvi- seem to have little effect in the African ous - it was not to the authors. 199. Private Sector Assessment: and (perhaps surprisingly) Mediterra- In other words, a tax system with A Pilot Exercise In Ghana nean countries. In countries for which IDTDsisnotless equitable thanaconven- both cyclical and long-term income elas- tional system with standard deductions. Samuel Paul ticities are significantly different from They are equivalent. The liberalization zero, relative price coefficients are also package in the example is typical in Reform of Ghana's macropolicies has significantly different than in countries 1980s' tax reforms yet equity has not helped to create a more favorable business for which income parameters are not sig- emerged as an issue. An equivalent tax environment anda "levelplayingfield"for nificantly different from zero. Including reform option consisting of an IDTD rule, the private sector. At this point, instead of the cyclical component in the model therefore, should not be a cause for con- furtherrefining its policies, Ghana should seems to improve not only the fit but also cern. Substituting an IDTD rule for a begin strengthening the institutions to the performance of the equation. liberalization package would leave the implement them, and improving the chan- This paper is a product of the Trade tax system effectively unchanged, al- nels of communication between govern- Policy Division, Country Economics De- though the two sets of tax rules appear to ment and the private sector. partment. Please contact Karla Cabana, be different. room N10-037, extension 37946. Should a country contemplating lib- This private sector assessment of Ghana eralization of the tax schedules simply - confined to Ghana's industry sector adopt an IDTD? The answer is not easy. because of limited data - concludes, 198. Equity In Unequal An IDTD is administratively simple, but among other things, that: Deductions: Implications of its logic is not immediately transparent. Reform of Ghana's macropolicy envi- Income Tax Rules in Ghana and It could be seen as inequitable, and it ronment has helped to create a more fa- Nigeria could be misused. The fixed percentage vorable business environment and a deduction could be relaxed, resulting in "level playing field"for the private sector. Chad Leechor and Robert Warner an unrestricted deduction. The IDTD Reforms have reduced entry barriers could also be confined to one category of (except in labor) and encouraged greater In many African countries, the size of a taxpayers, resulting in a true inequity - competition in the industry sector. Much taxpayer's personal deduction increases as with discrimination against the self- remains to be done, but important steps with his income. Does this rule give the employed in some countries. have been taken toward improving com- rich more of a tax break than the poor? Is These caveats do not necessarily munications and transport infrastruc- a standard (fixed) deduction needed to justify replacing an existing IDTD with ture. allow forprogressivity? The answers may an equivalent liberalization package. A Important institutional constraints surprise you. taxpaying public long accustomed to in- remain, however. At this juncture, in- come-determined allowances may vigor- stead of further refining its policies, Policy, Research, and External Affairs Working Paper Series 79 Ghana should establish a priority of ment. "outreach" programs especially help strengthening its institutions and its This paper is a product of the Public women, because women's mobility is capacity to support long-term private Sector Management and Private Sector particularly constrained by culture and sector investment and production. Insti- Development Division, Country Econom- the practical realities ofchildbearing and tutions to provide support services to the ics Department. Please contact childcare. private sector - including credit, tech- Ernestina Madrona, room N9-057, exten- * For similar reasons, extension or nology acquisition, investment promo- sion 37496. similar "outreach" activities can increase tion, adaptive research, training, and the productivity of women in home-based quality control - are weak in Ghana, and production, including agriculture and the the policies to strengthen them must be 200. Women and Development: provision and use of household water. thought through. Objectives, Frameworks, and * Extension or outreach programs In particular, Ghana needs new in- Policy Interventions can correct factor market distortions, stitutional mechanisms for mobilizing provide women with more equal access to resources andforimprovingthe availabil- T. Paul Schultz agricultural and household technologies, ity and allocation of credit. The current and expand the effective supply of credit credit squeeze has favored short-term Theprivate and social returns are high on where women produce for market. trading operations over long-term invest- investments to improve women's economic To give us more firm evidence than ment - and prospects for genuine long- productivity - particularly education. we have of how public policies affect term investment seem bleak. The lack of Where women receive less education than women's productivity or family consump- credit for new, small- and medium-scale men, efforts to redress that imbalance tion patterns, Schultz recommends pilot entrepreneurs is the single most "felt" deserve priority. Measures to open programs to: constraint on Ghana's private sector. women's access to information, technol- * Increase school enrollment and Incentives for private investment ogy, productive resources, and credit graduation rates for girls. have been strengthened but the invest- should also be tested far more extensively. * Assess the effect of equalizing ac- ment approval process must be speeded cess to agricultural extension services by up and prior laws and regulations must The contribution of women to an economy male and female farmers in Africa, South be revised and brought in line with the is in principle no different from that of East Asia, and Latin America. new code. The case for reducing the In- men. But in practice, the problems of * Explore alternative configurations vestment Code's bias toward capital-in- valuation, measurement, and policy in- of child and maternal health programs, tensive investments, for example, should ference are more complex - and the varying the mix of staff by level and gen- be reviewed. implications for policy and programs may der. The government must learn to com- be more controversial and culturally sen- * Evaluate program innovations in municate new policies and decisions fully sitive the delivery of credit, such as the Gra- topotential investors-whose confidence Reviewing and integrating several meen Bank in Bangladesh. in Ghana's stability and policies remains lines of economic research on how women All of these pilot programs should be a problem, partly because of inadequate affect economic and social development, designed to monitor the choices families dialogue between the private sector and Schultz concludes that: make that affect whether they produce the government. * Private returns to investment that healthy and educated sons and daugh- Donors should focus more on core enhance women's market productivity ters. support and on the long-term actions are high, notably in primary and secon- This paper is a product of the Women needed for institutions to grow and sur- dary education, especially in regions in Development Division, Population and vive. where women now receive less education Human Resources Department. Copies Several steps go into a full-scale pri- then men. are available free from the World Bank, vate sector assessment: * These investments shift the alloca- 1818 H Street NW, Washington DC * An overview of the nature and tion of women's time towardmarket work 20433. Please contact Johanna Klous, scope of the country's private sector. and away from home-based work. room S9-121, extension 33745. * A review of the policies, laws, and * These investments benefit the regulations affecting the sector(s) to be health and nutrition of the women's chil- assessed - and of the capacity of the dren and immediate family members. public institutions responsible for plan- * These investments reduce desired ning and implementing them. fertility and increase women's ability to * An assessment of the operating obtain and use family planning services legal system and practices that affect the more effectively. private sector (this was omitted for this * These investments make women assessment). more efficient managers of family re- * A review of the private sector's sources of land, fuelwood, water, and common service institutions and of its food. channels for dialogue with the govern- * Familyplanning andfamilyhealth Volume III Numbers 201 - 300 Policy, Research, and External Affairs Working Paper Series 83 201. How Much Fiscal 057, extension 39059 (42 pages with of financialization of savings flows (in Adjustment Is Enough? The Case tables). terms of both flow and stock) affect effi- of Colombia ciency and growth. The average growth difference be- William R. Easterly 202. Financial Policies, Growth, tween the 17 higher-growth countries and and Efficiency the 17 lower-growth countries was 3 per- Colombia's impressive fiscal adjustment cent. About half of one percentage point during 1985-87 was due to structural Alan H. Gelb of that difference might have been due to changes in fiscal policy-not to the coffee the differential of 6 percent in the real boom. Further reduction of the fiscal Severely repressive financial measures interest rates of the two groups. deficit is required to reduce interest rates typically result in slower growth and less The evidence supports the need for and inflation to more manageable levels. efficiency. Growth affects profitability and liberalized financial markets, Gelb con- thus interest rates -- but the reverse may cludes -- or at least supports an argu- Colombia's impressive fiscal adjustment also be true: interest rates and the degree ment against severe financial repression. during 1985-87 was due to structural of investment may affect efficiency and That is not to say that abrupt liber- changes in fiscal policy, concludes East- growth. The evidence supports the need alization is desirable or that certain in- erly-not simply to such fortuitous events for financial liberalization. terventions in financial markets may not as the coffee boom. be beneficial -- at least until measures to Losses of public financial institu- For a variety of reasons, most developing improve information, supervision, regu- tions were important in some other Latin countries intervene extensively in finan- lation, and macrostability have become American countries but there is no evi- cial markets. In the industrial countries, effective. dence that they were a major factorin Co- interest rates have been liberalized in This paper is a product of the Finan- lombia. The data suggest that the Banco the last two decades and restraints on cial Policy and Systems Division, Coun- de la Republica and other public financial competition between different types of try Economics Department. Please con- institutions suffered a small quasi-fiscal financial institutions have been relaxed, tact Maria Raggambi, room N9-031, ex- loss, but that that loss was not the domi- but many developing countries still set tension 37657 (34 pages with tables). nant factor in fiscal behavior. ceilings on interest rates and spreads Although impressive, the fiscal ad- and most allocate much (often between justment fell short of actually improving half and all) of formal credit to "priority" 203. Optimal Commodity Taxes the government's net financial position. uses. Under Rationing Total public debt as a percentage of GDP The impact of interest rate controls was roughly unchanged from its 1984 and other repressive financial policies on Nanak Kakwani and Ranjan Ray value at the end of 1987, even after cor- investment, efficiency, and growth has recting for the effect of currency devalu- been debated for some time. In this study, The results on a standard optimal com- ation on dollar-denominated instru- Alan Gelb reviews theories on both sides modity model change substantially when ments. Public development lending as a of the debate and investigates such rela- one or more commodities are rationed. percentage of GDPfell slightly during the tionships using a cross-section analysis The authors propose a more realistic same period. of 34 countries between 1965 and 1985. model of rationing that overcomes some Perhaps partlybecause ofpublic debt He divides this 21-year period into two restrictive features of earlier rationing behavior, real interest rates remained periods, breaking at the year 1973 to models. very high and inflation accelerated take into account the substantial change slightly. Improving on adjustment would in growth relationships evident in many How useful and relevant are the results probably require reducing interest rates countries from about that time. of standard optimal commodity tax mod- and inflation. Real (deposit) interest rates in de- els when one or more commodities are Easterly's model simulations sug- veloping countries were lower on aver- rationed? Kakwani and Ray investigated gest that to reduce interest rates to more age than world (dollar) levels, especially the implications of optimal commodity manageable levels would require contin- after 1973 - despite these countries' sup- taxation under rationing and reached ued reduction of the fiscal deficit, below posed status as capital-scarce. these conclusions: levels currently envisioned. To reduce Gelb finds a significant positive cor- * In a single-person economy, opti. inflation wouldrequire even tighter fiscal relation between growth rates and inter- mal policy dictates that the rationed policy. est rates as well as between efficiency commodity bears the entire tax. The The magnitudes of required deficit (the incremental output/capital ratio) and implication for developing countries us- reduction do not seem out of reach how- interest rates - but little relationship ing this model is that if the government ever, even allowing for uncertainty about between interest rates and investment has a fixed budget to subsidize certain the figures. Continued policy initiatives levels and no relationship between inter- commodities, optimal policy will be to would help Colombia confront the fiscal est rates and the current account. subsidize only the rationed commodities, challenges of the 1990s. These relationships partly reflect the such as food. This paper is a product of the Macro- influence of growth on profitability and * In a many-person economy (which economic Adjustment and Growth Divi- thus interest rates -- but there also ap- reflects reality), optimal policy will tax sion, Country Economics Department. pears to be a casual link in the other all nonrationed commodies at an infinite Please contact Raquel Luz, room N11. direction: interest rates and the degree rate if the rule is that taxes on all com- 84 Policy, Research, and External Affairs Working Paper Series modities are proportional to prices. most countries. Finally, the negative ef- ings seem obvious. Any adjustment pol- * The widely used linear expendi- fect of labor costs on exports is probably icy packages designed to curb inflation ture system cannot be used to find a linked to the severity with which labor and improve the balance of payments sensible optimal commodity tax struc- markets are regulated. should also be designed to encourage ture under rationing. In general, the conclusions under- growth - which is needed to encourage * The more a society is concerned score the impact on exports of domestic savings and thus investment. about inequality, the greater the tax economic policies - for example, pro- Overemphasis on maintaining posi- should be on nonrationed commodities. motinginvestment and productive capac- tive real interest rates may also do more Kakwani and Ray present an alter- ity and keeping factor markets free of harm than good, because the benefits native (more realistic) model of rationing significant distortions. from a small increase in savings (if any) that overcomes some of the restrictive This paper is a product of the Macro- or more efficient investment allocation features of the previous rationing model. economic Adjustment and Growth Divi- may be overshadowed by a decline in This paper is a product of the Wel- sion, Country Economics Department. investment activity. fare and Human Resources Division, Please contact Raquel Luz, room N11- Sector studies are essential to effec- Population and Human Resources De- 057, extension 39059 (44 pages with tive national savings mobilization and partment. Please contact Maria Felix, tables). the formulation of viable adjustment room S9-114, extension 33724(23 pages). programs. Institutions and other factors that affect the behavior of economic 205. What Determines National agents are not the same in all countries. 204. The Impact of Labor Costs on Saving? A Case Study of Korea This paper is a product of the Macro- Manufactured Exports in and the Philippines economic Adjustment and Growth Divi- Developing Countries: An sion, Country Economics Department. Econometric Analysis Sang-Woo Nam Please contact Raquel Luz, room N11- 057, extension 39059. Luis A. Riveros Adjustment policy packages that curb inflation and improve the balance of pay- Are labor costs a major factor in the ments but that retard growth may be self- 206. The Effects of Single-Sex performance of nontraditional exports defeating - as deteriorating growth Schooling on Student in developing countries? Yes. So are sharply reduces national saving and lim- Achievement and Attitudes in manufacturing capacity and the price its the investment needed for adjustment. Nigeria of imported inputs. For this analysis of national savings be- Riveros estimated export supply elastici- havior in Korea and the Philippines Valerie E. Lee and Marlaine E. Lockheed ties in 20 countries on four continents Asia's most heavily indebted countries using an empirical model in which manu- - Nam conducted dynamic simulations Single-sex schooling in Nigeria benefits factured exports are a function of the to determine how major variables inter- female, but not male, math students. More price of exports, the price of imported act across sectors. research is needed to find out why - and inputs, and labor costs relative to the Changes in growth performance, why adolescent females in Nigeria do as price of home goods. He completed the more than anything else, were respon- well as adolescent males on math achieve- export supply equation with a variable sible for the sharp drops in aggregate ment tests (unlike their American counter- identifying manufacturing capacity and savings in 1980-82 in Korea and in 1984- parts). a variable associated with the role of in- 85 in the Philippines. ternal absorption. In Korea particularly, per capita This study of Form Three (ninth-grade) After testing for simultaneity, Riv- income growth explained most of the students in Nigeria indicates that single- eros concluded that half of the countries changes in the national savings ratio sex schools improve girls' achievement in must be treated as large countries - during the last two decades. Savings in mathematics and engender less stere- thus estimating the export supply func- Korea are also significantly affected by otypic ideas about mathematics, even tion through two-stage least squares. He interest rate policy. Indeed, interest rate after extensive statistical adjustments for also explored other sources of endogene- reform in 1965 gave rise to increased family background and school character- ity of right-hand side variables - the savings. istics. But adolescent Nigerian males price of imported inputs, labor costs, and In the Philippines, by contrast, a experience lower achievement and hold a manufacturing capacity. He found that higher interest rate had a slightly nega- more stereotypic view of mathematics in many cases the estimates change sig- tive effect - because the positive effect under single-sex schooling, after similar nificantly as a result of this procedure. on household savings was more than off- statistical controls. Riveros also concludes that expan- set by the negative effect on corporate Many studies of the effects of single- sion of exports is attributable largely to and government savings. sex education have shown that girls bene- labor costs - defined as wage plus non- Tax policy is a potentially effective fit more than boys, but only two studies wage costs oflabor. The role of manufac- means of mobilizing savings but the ef- in developing countries (this one and a turing capacity and the price of imported fect seems to vary by country. study in Thailand) have found that boys' inputs is also statistically significant in The policy implications of these find- schools produce negative experiences. Policy, Research, and External Affairs Working Paper Series 85 Therefore, it should not be concluded from formal schooling are unlikely to get job 208. Effective Primary Level this study that single-sex schooling is training, revealing that training and for- Science Teaching In the more beneficial to students than coedu- mal education are complementary invest- Philippines cation; instead, it seems particularly ef- ments in Peru. fective for females. Marlaine E. Lockheed, Josefina Fonacier, and Why are there different responses? Data on job training offered to urban Leonard J. Bianchi In part, differences between the types of males in Peru since the 1960s support students attending single-sex and coedu- these findings: Frequent group work, frequent testing, cational schools may be responsible. Girls The heaviest enrollment is in job- and laboratory teaching improved the attending single-sex schools were more based training programs - on-the-job or achievement offifth-grade science students likely to have advantaged backgrounds, off-the-job programs offered by public in the Philippines. But what influenced with more professionally employed fa- sector institutions. The second heaviest a teacher's decision to adopt these prac- thers and more positive attitudes. They enrollment- contrary to common expec- tices? were younger and thus more likely to tations - is in "academes," the proto- have progressed through school with few typical proprietary (for-profit) training Early studies of educational achievement interruptions or repetitions. The girls in organizations. in developing countries emphasized the this sample (1,012 Form Three students The probability of receiving training effects of material inputs (such as text- in 40 government-owned schools, includ- is largely determined by educational at- books) over teaching practices and class- ing four girls' schools and 16 boys' schools) tainment. In general, workers with less- room organization. Lockheed, Fonacier, also represented a very select group of than-secondary education - more than and Bianchi examined how five teaching students, since female secondary school half of Peru's urban male labor force - practices affected the achievements of attendance was very low in Nigeria in do not receive job skills from institutional fifth-grade students in the Philippines - 1983 when the data were gathered. training programs. Only workers who and what affected teachers' decisions to Similar advantages for boys in boys' attain secondary schooling or higher are use effective teaching practices. schools were not observed. likely to get job training. So workers With school, teacher, and classroom Girls' schools also differed from co- with limited schooling also face limited characteristics held constant, achieve- educational and boys' schools in several training opportunities. ment was higher for students whose important ways. The schools were Training increases salaried workers' teachers used three teaching practices smaller, operated more days per year, wage rates. Job-based training increases that show promise for applications in had a lower student-teacher ratio, and wage rates more than 10 percent; train- developing countries because they are had more female teachers as role models. ing from postsecondary programs, 20 per- effective, low-cost, or cost-effective: It is also possible that the girls' schools cent; and training from "academes" seems * Frequent tests and quizzes. were boarding schools. to have no impact on wage rates. Post- * Small group instruction, includ- While these differences between stu- school training appears not to affect the ing peer tutoring. dents and schools were found to contrib- earnings or profits of self-employed work- * Teaching through laboratory work, ute to differences in student achievement, ers, after controlling for such factors as particularly for science. a statistically significant residual effect enterprise characteristics, formal school- Group work and testing were twice for single-sex schools remained after ad- ing, and the probabilityof having received as effective as laboratory work. Students justments were made, suggesting that training in school. whose teachers used group work in sci- other organizational or student back- [This report is the first evaluation of ence scored 40 percent of a standard de- ground factors may account for the ob- the patterns of participation in, and out- viation higher than students whose teach- served differences in effects. comes of, the postschool job training that ers did not. Frequent testing raised This paper is a product of the Educa- began in Peru in the 1960s. Conclusions achievement 25 percent of a standard tion and Employment Division, Popula- are based on analysis of data on a sample deviation. And laboratory use raised it tion and Human Resources Department. of 1,259 wage workers in the private sec- 15 percent. Please contact Cynthia Cristobal, S6-001, tor and 925 self-employed nonfarm work- Teacher's decisions about whether extension 33640. ers - all urban men between the ages of to test students frequently were unre- 15 and 65 - drawn from the Peruvian lated to their prior education or experi- Living Standards Survey. The study re- ence. Group work was used more often 207. Occupational Training Among sults suggest that investments in train- by younger teachers, suggesting that Peruvian Men: Does It Make a ing offer significant benefits in salaried recent teacher training may have em- Difference? employment in the private sector, but phasized group work to offset the diffi- because training costs were unavailable, culties of larger classrooms. Teachers Ana-Maria Arriagada the study is only a partial evaluation.] who used laboratories also read more This paper is a product of the Educa- about teaching and reported more fre- Postschool training offers significant tion and Employment Division, Popula- quent participation in in-service train- benefits for private sector wage employ- tion and Human Resources Department. ing. But in general teachers' decisions ees. Job-based and postsecondary train- Please contact Cynthia Cristobal, room about teaching practices were unrelated ing increase wages by 10 and 20 percent, S6-001, extension 33640. to their prior education or experience - respectively. But workers with limited suggesting that school-level management 86 Policy, Research, and External Affairs Working Paper Series may be more important in encouraging sive," in which labor legislation got more 210. Notes on Cash-Flow Taxation effective teaching than preservice educa- binding. Yet our growth went on and on tion and training. and on, apparently unperturbed ... it Roger H. Gordon (Using two-stage least squares re- doesn't look as if these micro distortions gression techniques, the authors analyzed were quite as important as people tried data from 419 classrooms that partici- to make them out to be. [On the other Cash-flow taxes have been advocated as pated in the IEA International Science hand, one kind of deregulation] has had efficient, equitable, and easy to admini- Study.] extremely serious negative consequences ster. In principle, at least, they do not This paper is a product of the Educa- for our growth performance: deregulated distort savings and investment decisions. tion and Employment Division, Popula- [foreign] exchange markets. But what are the practical implications tion and Human Resources Department. Flemming Larsen: Expansionary of the many versions of cash-flow taxa- Please contact Cynthia Cristobal, room fiscal policies perhaps were pursued a bit tion? S6-001, extension 33640. too long [after the war] with the result that wage expectations became unrealis- Under cash-flow taxation, a country can tic relative to underlying productivity tax the cash flow of domestic producers,' 209. Can the Industrial Countries growth, with the result that wage earn- domestic residents, or domestic citizens. Return to Rapid Growth? ers and unions in many countries essen- The implications are different in each tially forgot that they also had a kind of case. A Seminar Sponsored by responsibility for what happened to real The paper examines the positive and the International Economics Department wages and thereby demand for labor. normative effects of various versions of a Jean Baneth: Growth is like a bi- cash-flow tax, focusing on the effects of Most participants in this lively discus- cycle. If it slows down too much, it may such a tax in a small open economy. sion agreed that we are not likely to re- fall. And I personally believe that be- A country must decide, for example, sion aogrewthate wel er t lietre-t cause of both political and social re- whether investment in each type of asset in the medium run - unless some poicy straints, as you fall below or try to stay will be taxed based on its cash flow or yet to be defined emerges- and that this at 2.5 percent, the long-term outcome will instead be entirely tax exempt. The slowdown will particularly hurt develop- may in fact be much slower growth. economic implications differ, depending ing countries. There was a consensus Leslie Lipschitz: One of the prob- on whether the government decides or that something must be done to stabilize lems might well be that Americans un- the choice may be left to each taxpayer. exchange rates. derstand very little of the problems of In addition, cash flow rates may vary: Europe and are not persuasive in talking * As a result of a progressive rate In January 1988 the International Eco- about Europe, and I suspect vice versa - schedule. nomc AalyisandPropecs iviionof that sometime when one listens to this * According to the type of taxpayer. nomic Analysis and Prospects Division of debate, it sounds like a dialogue of the * Over time, depending on economic the International Economics Department deaf.codtns held a one-day round table seminar on defcoitns the prospects for economic growth in the Steve Marris: None of our models Substantial problems can result from industrial countries in the 1990s. Fol- take into account the interreaction be- each type of variation. lowing are highlights from the discus- tween price elasticities and income elas- Finally, inequities can arise during olits ho ticities. You know, what every other the transition to a cash-flow tax. Differ- nEven if, in an ideal country has learned is that if you com- ent inequities arise depending on what world, Japanese savings ought to be ex- bine an undervalued exchange rate with tax precedes the cash-flow tax. And a ported to Latin America, we are not in a recession, miracles happen. They hap- partial introduction of cash-flow taxation that ideal world: we are in the presence pened in Brazil; they happened in Mex- may open important arbitrage opportu- of major imbalances, whatever intertem- ico; they used to happen from time to nities. poral shifting might lead one to expect. time in France. There is every likelihood This paper is a product of the Public Is it, therefore, inevitable that the next that they could happen in the United Economics Division, Country Economics Is i, tereore invitble hatthenex SttesDepartment. Copies are available free few years (1989-91) will see a recession? States.Deatn.Coisrevilbefe Afe w i see a recession, will itbe coupled I suppose what we need is a crisis from the World Bank, 1818 H Street NW, And if wes e r willitbecoled serious enough [that we can] lock the Washington DC 20433. Please contact able to avoid one or the other of these two governments into a better managed ex- Ann Bhalla, room N10-061, extension possibilities? change rate system, but not so serious 37699 (22 pages). What would bring us to a higher that the whole thing breaks down and growth rate? The only thing that the there is nothing left to manage. Fund has to recommend is policies of This paper is a product of the Inter- 211. Coffee Pricing Policies in the deregulation. Frankly, I am far from national Economic Analysis and Pros- Dominican Republic convinced. For one thing, the 1950s and pects Division, International Economics the 1960s were almost certainly a period Department. Please contact Jackie Panos Varangis in which regulations increased, in which Queen, room S7-212, extension 33740 (55 teefes page dert taxes must be substantially re- the Welfare State became more "oppres- pgs.duced to encourage farmers to rehabili- Policy, Research, and External Affairs Working Paper Series 87 tate the Dominican Republic's coffee in- 212. How Private Investment able and specialized in the "wrong" sec- dustry. Reacts to Changing tors. The boom of 1980-81 is an example Macroeconomic Conditions: The of that. The currency devaluations of Coffee is an important crop for the Do- Case of Chile in the 1980s 1982-84 may have depressed investment's minican Republic, accounting on average profitability in the aggregate as the in- for 11 percent of total exports by value Andr6s Solimano crease in the reposition price of capital during 1982-84. But for the last 10 years tends to dominate - in the short run - or so, coffee yields have been low, and Private investment in Chile has been the increase in the market value of capi- production and exports stagnant. Yields rar ioestm t i C vlti i b tal installed in traded goods activities are poor because the trees are very old, latheecade an epirocale in following a real depreciation. These lat- poorly cared for, and planted too far apart. last decade. An empirical model of in- ter effects seem to have been more im- Ifcurrent policies for coffee continue, met ron t i s up m portant in subsequent stages of the ad- production and exports are likely to de- tigate the role of sharp cycles in economic justment process, once export and im- cline even further. The Dominican Re- activity, misalignments and realignments port-competing sectors start to respond public could have difficulty filling its ex- in key relative prices (including the real more forcefully to the incentives provided port quota under the International Cof- interest rate), changes in policy rules and by the exchange rate policy. fee Agreement (ICA). It could lose its external conditions in explaining the b This paper is a product of the Macro- export quota share and therefore its share havior ofprivate investment in Chile. economic Adjustment and Growth Divi- of the high-priced markets. sion, Country Economics Department. Varangis sees the high tax on coffee A model ofjoint determination of private Please contact Emily Khine, room N11- exports as the main disincentive to investment spending, aggregate invest- 055, extension 37462 (41 pages with fig- growth in coffee production. With a small ment profitability, and the level of GDP ures). econometric model of the Dominican cof- is estimated and simulated for Chile. fee sector, he simulated the impact of Some of the more important issues ad- export tax reductions under different dressed are: 213. Conditionality and Debt Relief assumptions about the operation of the * Sharp cycles in economic activity ICA export quota system. - the boom of 1980-81, the steep reces- Stijn Claessens and Ishac Diwan The model's results suggest that sion of 1982-83, and the recovery after- production will decline if present pricing ward. Private investment fell sharply in To restore growth in highly indebted coun- policies continue - and that the decline 1982-83 and it took around four years to tries, debt reduction alone is not as effi- will be much steeper if the ICA export recover. Those cycles increased the vola- cient as simultaneously providing liquid- quota agreement is not renewed in Sep- tility of aggregate demand discouraging ity, debt reduction, and possibly condi- tember 1989. investment. tionality. Indeed, many countries might Tax cuts seem to be crucial if the * The sharp swings in the real ex- not need debt reduction if liquidity and export quota system is not renewed. change rate and real interest rates in the conditionality were available. Without a quota and without tax cuts, last decade. In particular, real interest real producer prices could fall signifi- rates were abnormally high in the late Six years into the debt crisis, questions cantly - 15 to 20 percent over the fol- 1970s and early 1980s, returning to more about the relevance of policy measures to lowing three years. Under those circum- moderate levels afterwards. In turn, the alleviate the crisis still abound. Condi- stances, coffee farmers would probably real exchange rate appreciated signifi- tionality by international financial insti- lose interest in growing coffee. cantly in the early 1980s and then, after tutions and rescheduling by commercial The model suggests that if the ICA major devaluations, depreciated substan- creditors have been dismissed in favor of is continued, an export-tax cut of 52 per- tially. The implied increase in the vari- debt reduction as strategies for restoring cent would produce the desired produc- ance of profitability, again, has an ad- the creditworthiness of heavily indebted tion level (to meet projected quota and verse effect on investment. countries. nonquota export demand) by 2000. If the * High real interest rates. Counter- Claessens and Diwan argue that the ICA is discontinued, the export tax must factual simulations show that high real combination of conditionality and new be eliminated to achieve the same pro- interest rates were a binding factor re- private money - if properly interpreted duction level. straining private investment mainly in and correctly implemented - should not This paper is a product of the Inter- the late 1970s and also in 1981-82. be dismissed too lightly. They contend national Commodity Markets Division, * Real appreciation and deprecia- that liquidity (the availability of current International Economics Department. tion. The relationship between the level resources) in the debtor country is proba- Please contact Dawn Gustafson, room S7- of the real exchange rate and the level bly as important an incentive for a coun- 044, extension 33714 (41 pages with and profitability ofaggregate investment try to invest and adjust as having a small charts and tables). turns out to be complex. In fact, cur- enough debt stock outstanding. rency overvaluation increased the prof- Debt reduction alone, they argue, is itability of investment through a reduc- not as efficient as simultaneously provid- tion in the reposition price of capital - ing liquidity and debt reduction. Indeed, giving rise to an outburst of private in- many countries might not need debt re- vestment that is, in general, unsustain- duction if liquidity were available. 88 Policy, Research, and External Affairs Working Paper Series Conditionality produces efficiency There is little evidence of wage re- Their simulations suggest that a gains by reducing creditor concerns that sistance where wage indexation is not sharply contractionary stabilization pack- the debtor countries will "cheat" on their institutionalized, but this subject bears age has a major adverse impact on the promises to adjust and invest. This re- further investigation. Wage differences distribution of income. The resulting duced concern induces creditors to pro- have tended to widen in favor of expand- shifts in distribution are likely to make vide new loans and reduce the debtor's ing sectors, which suggests less than the package less sustainable, even though liquidity constraints. Increased invest- perfect labor mobility, income distribution becomes more equal ment produces efficiency gains that can Traditional methods of wage support when normal policies are resumed. then be distributed between debtors and - such as minimum wage policies and Contrast this with the model results creditors, reducing the need for debt re- nonwage cost regulations (including for the targeted expenditure cuts advo- lief. fringe benefits, medical insurance, and cated by critics of contractionary pack- The combination of new money and social security contributions) - have ages. These result in a more equal distri- conditionality will work if the debt stock generally become less important in the bution of income during adjustment, but is small enough and enough new money last two decades. Where effective mini- the distributional improvements of the is available. mum wage policies exist, they have the targeted package are mostly reversed in This paper, prepared for the confer- expected distortionary effects. the post-adjustment period. ence "Dealing with the Debt Crisis," is a Wage differences between the public The authors' simulations support the product of the Debt and International and private sectors - particularly in sub- view that stabilization packages that do Finance Division, International Econom- Saharan Africa - have continued to not have specific components targeted to ics Department. Please contact Sheilah widen, and the efficiency of the public the poor will redistribute income in a King-Watson, room S8-025, extension sector has declined as a result, way that, although transitory, is likely to 31047 (46 pages with charts). Job security regulations may be an permanently harm those below the pov- obstacle to structural adjustment pro- erty line - in terms of things like nutri- grams insofar as they hinder the release tion, health, and education. The sharp 214. Adjustment and the Labor of labor from contracting sectors. Regu- redistributive effects of stabilization pack- Market lations of this kind could become more ages that omit specific targeted policies commonplace as governments seek to to alleviate poverty are also likely to Peter R. Fallon and Luis A. Riveros offset the job-reducing effects of reces- endanger the sustainability of the ad- sion, but no clear international trend in justment package. How much have adjustment programs this direction has been discerned. This paper is a product of the Trade affected the functioning of the labor mar- This paper is a product of the Macro- Policy Division, Country Economics De- ket -and how much does the labor mar- economic Adjustment and Growth Divi- partment. Please contact Maria Ameal, ket hinder adjustment? Fallon and Riv- sion, Country Economics Department. room N10-035, extension 37947. eros report on recent experience in 23 Please contact Raquel Luz, room N11- countries. 057, extension 39059 (53 pages with tables). 216. Price and Quality Effects of How has the labor market responded to VERs - Revisited: A Case Study changes in macroeconomic conditions and of Korean Footwear Exports related government policies? (In par- 215. Adjustment and Income ticular, is the labor market a significant Distribution: A Counterfactual Jaime de Melo and L. Alan Winters obstacle to successful adjustment poli- Analysis cies?) And to what extent has govern- Voluntary export restraints on exports of ment intervention affected the microecon- FranVois Bourguignon, William H. Branson, Korean footwear resulted in significantly omic functioning of the labor market? and Jaime de Melo higher prices to the restricted markets Fallon and Riveros reviewed the re- and a mild downgrading - rather than cent experience of 23 developing coun- Ifcontractionary adjustment packages can the expected upgrading - in quality. tries to answer those two questions. Their survive three years of sharply deteriorat- conclusions: ing social indicators, income distribu- The application of index numbers to dis- Geographical immobility of unskilled tion will probably improve - but people aggregated Korean footwear exports dur- or clerical workers does not seem to hin- below the poverty line will probably suf- ing 1974-85 suggests that binding volun- der adjustment. Labor is increasingly fer irreparable damage in health, nutri- tary export restraints (VERs) led to sig- deployed in nontradables and import- tion, and education. nificant price increases but not to the competing sectors, however, and prob- upgrading of quality predicted in earlier lems of mobility between tradables and Bourguignon, Branson, and de Melo car- theoretical analyses. nontradables are reported. In addition, ried out model simulations to quantify Unlike most previous empirical stud- shortages of trained manpower are com- the effects of different stabilization pack- ies of VERs, the results de Melo and mon in most countries. Whether seg- ages on the distribution of income and Winters present in this paper were de- mentation of the urban labor market wealth. They did so for a representative rived from exporters'rather than import- causes problems is an issue that deserves economy subject to the interest rate and ers' data. Thus they provide a more di- further study. terms-of-trade shocks of the early 1980s. rect test of the reactions of exporting Policy, Research, and External Affairs Working Paper Series 89 countries subject to VERs. central government institutions and to mentation improved. Performance indi- Drawing their comparisons from systemic changes in public administra- cators need to be developed to measure multilateral indices (adjusted for changes tions. The paper reaches the following and/or evaluate progress. in product and country mix), the authors broad conclusions: This paper is a product of the Public found that the price of Korean footwear * Public sector management compo- Sector Management and Private Sector exports to the United States (and to a nents of SALs progressed unevenly and Development Division, Country Econom- lesser extent to the United Kingdom) rose outcomes varied with diverse political, ics Department. Please contact Betsy significantly in the years when VERs administrative and economic conditions. Mitchell, room N9-065, extension 37644 were binding (when quotas were filled). Accordingly, no uniform solutions to in- (36 pages with tables). VERs were associated less with qual- stitutional problems were prescribed by ity upgrading and if anything - for ex- SALs. Depending on circumstances, porters whose objective was foreign ex- SALs sometimes fostered the creation of 218. Public Finance, Trade, and change earnings rather than profit maxi- new institutions (often at the cost of pro- Development: The Chilean mization - were possibly associated with moting institutional proliferation) or the Experience quality downgrading. reorganization or even the elimination of The pattern of quality changes across old ones. Institutional change was often Vittorio Corbo markets seems not to have varied signifi- incremental and sometimes unsustain- cantly during the VER period, so adjust- able when Bank support was withdrawn. ment costs may have been enough to * Public sector management reforms Restructuring the public sector and eradi- prevent a change in product mix toward for which routinized methodologies and cating chronic public sector deficits helped restricted markets. systems were introduced and those that Chile lay the basis for microeconomic re- The empirical results, the authors could be linked to actionable steps were forms that removed distortions and put conclude, confirm that as a result of VER- more likely to be sustained over time. Chile in a sustainable growth path. But type restrictions on shoes, rents accrue * Short time horizons of SALs posed macroeconomic policy errors of the late to the exporting country (and some rents severe constraints on the effective im- 1970s delayed the growth effects of these to the importers, if importing is not a plementation of public sector manage- reforms. competitive activity) - but shoes do not ment reforms. These constraints must show the improved quality that automo- be weighed against the catalytic benefits What role did public finance and trade biles do under similar restrictions. SALs offer to spur action on institutional policies play in Chile's successful adjust- This paper is a product of the Trade measures, however. ment experience over the past 15 years? Policy Division, Country Economics De- * Public management reforms Vittorio Corbo draws these conclusions: partment. Please contact Maria Ameal, through SALs are more successful when * The reforms in its public finances room N8-073, extension 37947 (36 pages supported by specific technical assistance helped Chile to reduce both the large with tables). projects. Otherwise, reforms may be one- public deficit and the distortionary ef- shot events or may be subject to slippage fects of taxes and revenues, in this way or reversal. This is recommended de- creating basic preconditions for sustain- 217. Public Sector Management spite the poor performance record of much able growth.. Reducing the deficit re- Issues in Structural Adjustment of the technical assistance provided for quired strong actions to decrease expen- Lending institutional reforms in conjunction with ditures and increase revenues. Introduc- SALs. ing a value-added tax and adjusting the Barbara Nunberg * The haste of SAL schedules and tariffs of public utilities to reflect oppor- the lack of dynamism and focus of tradi- tunity costs helped reduce the deficit. Public sector management components or tional technical assistance argues for the Structural reform of the tax system structural adjustment loans (SALS) pro- creation of a new lending instrument for helped reduce the distortionary effects of gressed unevenly, and the outcomes var- public sector management reform which the tax regime. ied with different political, administra- would adopt a longer time horizon to en- * Eliminating the large public defi- tive, and economic conditions. Change sure adequate implementation, but would cit inherited from Allende's years was a was often incremental and sometimes un- contain conditionality specifically focused major contribution to the slow but steady sustainable. Reforms linked to specific, on institutional reforms to ensure action. reduction of inflation. The reduction of actionable steps were more successfully * Preparatory country economic and inflation in turn made the liberalization implemented. sector work is crucial to successful public of trade sustainable and supported the sector management reforms undertaken other microeconomic refrorms that helped This paper reviews the Bank's experi- through SALs. Such analysis should Chile to restore growth. ence in implementing public sector man- become a routine task in the design of * The recovery of the Chilean econ- agement reforms through structural ad- any institutional reform program in the omy suffered a setback in the late 1970s. justment lending. The study focuses on context of structural adjustment lend- This was a consequence of the second those institutional aspects of adjustment ing. stabilization attempt rather than of the that deal specifically with "macroman- * Monitoring and supervision of in- structural reforms underway. agement" issues related to improvements stitutional components of SALs needs to * The second stabilization attempt, in the management performance of core be systematized and the quality of docu- undertaken in 1978, when inflation was 90 Policy, Research, and External Affairs Working Paper Series down to 35 percent a year-similar to stitutions have proven to be inept and to isting informal (including sharecropper) the average for the 1960s-worked at lack accountability. credit markets. cross-purposes with the export-led Getting credit to small-scale farm- growth being generated by trade liber- Common features in success stories are ers has been difficult because of higher alization. tougher stands on default; strict auditing transaction costs per dollar lent for small * Indeed, using the exchange rate to and accounting procedures and financial loans; lack of collateral and the belief stabilize a widely indebted economy not control; and some form ofjoint responsi- that small agents are bigger risks than only created a short-term real apprecia- bility or liability by smallgroups offarm- large agents; and patronage and arbi- tion of the peso, but encouraged external ers, whereby default by one member can- trary decisions in favor of larger-scale borrowing at a time when restrictions on cels future loans to the whole group. farmers. capital inflows were being lifted and in- Organized credit groups have arisen ternational capital markets were very Subsidized formal credit to the agricul- to overcome these problems, but their liquid. tural sector has been advocated as more failure rate has been high. The key in- * The jump in expenditures that fol- efficient, equitable, and easier to imple- gredients for their success are a coherent lowed the fall in interest rates and in- ment than, say, land reform. But the system of incentives consistent with the crease in capital inflow caused the peso record on subsidized credit to farmers is informational structure, and strong en- to appreciate further. The result was an dismal. forcement procedures. Some form ofjoint - unsustainable current account deficit Until recently, it was argued that liability structure is desirable for group that ran close to 25 percent of GDP in imposing low ceilings on interest rates lending. Particular care needs tobe taken the first half of 1981. and allocating massive amounts of credit in the design of the group, regarding size * The appreciation squeezed to rural financial markets would yield and incentives. tradables just when exporters were mak- rural development and improve income This paper is a product of the Agri- ing inroads into world markets and when distribution. But 20 years of subsidized cultural Policies Division, Agriculture and firms in the import-competing sector had credit have only made matters worse. Rural Development Department. Please completed a major adjustment to trade Low interest ceilings effectively dis- contact Cicely Spooner, room N8-039, liberalization. Not surprisingly, firms tort the real cost ofinvestment and trans- extension 30464 (39 pages). in the tradable sectors suffered a squeeze fer income to large landowners (not the on profits. poor); 5 percent of borrowers receive 80 * Once the macroeconomic mistakes percent of the credit. The default rate is 220. Building Capability for Policy of the late 1970s and early 1980s were high - particularly among large land- Analysis corrected, Chile recovered its growth and owners - everywhere but in East Asia, reduced inflation. This was achieved de- partially because farmers see the loans Samuel Paul, David Steedman, spite unfavorable terms of trade and a as grants or welfare and enforcement is and Francis X. Sutton drastic reduction in the net transfer of lax. And creditors often exchange loans resources from the rest of the world. Non- for political favors. Demand for developing indigenous capa- traditional exports, in particular, con- Agricultural credit is intrinsically bility for policy analysis has grown in tributed greatly to the dramatic recov- difficult, because of the seasonal nature Asia and Latin America but remains weak ery-assisted by macroeconomic policies of the activity, the peak-load demands, and unstable in Africa. Strategies for that supported real devaluation, kept the convention of repayment once in har- developing such capability depend on inflation under control, and reduced the vest season, and the fact that bad luck strengths and attitudes ofgovernment and unemployment rate to below 6 percent. can strike many borrowers at once. private sectors. This paper is a product ofthe Macro- Common features in the success stories economic Adjustment and Growth Divi- recounted by Braverman and Guasch are After reviewing donor experience in build- sion, Country Economics Department. these: ing capability for policy analysis, Paul, Please contact Aludia Oropesa, room * Withholding of new loans until old Steedman, and Sutton conclude that: N11-035, extension 39075. loans are repaid. * Capability and demand for policy * Strict auditing and accounting pro- research and advice continue to be weak cedures and forceful enforcement of pen- and unstable in Africa, where there are 219. Rural Credit In Developing alties. few well-trained macroeconomists and Countries * Some form of joint responsibility where governments have a problem re- or liability by small groups of farmers, taining competent analysts. Avishay Braverman and J. Luis Guasch whereby default by one member cancels * Capability and demand for policy future loans to the whole group. analysis have grown in Asia and Latin The record on subsidized credit to farm- Policy reform should take account America. In some countries, a few econo- ers is dismal. It shows a significant fail- the institutional structure of the rural mists and related professionals have sig- ure either to achieve an increase of agri- economy - including the difficulty of nificantly improved economic policy for- cultural output cost-effectively or to im- assessingriskin rural borrowers orknow- mulation. prove rural income distribution and al- ing what they do with borrowed funds - * Autonomous (arm's length) centers leviate poverty. Many ofthe financial in- and recognition of the importance of ex- for policy analysis are increasingly influ- Policy, Research, and External Affairs Working Paper Series 91 ential in building policy capability in Asia firm's marginal return increases as un- wage rigidities - which have made it and Latin America, but less so in sub- certainty rises. In terms of the real ex- more difficult for the economy to recover Saharan Africa. Foreign assistance has change rate, the marginal profitability of from the fall in the price of its main provided critical support for these cen- capital is represented by a convex curve. export commodity, copper, in the mid- ters. The implication: increased uncertainty 1970s. Real wages did fall somewhat Success in building policy capability raises exports. It turns out that firms over the following decade, but insuffi- will depend upon the extent to which: that are risk-neutral are better off in- ciently so to promote economic diversifi- * Donors and recipient governments creasing investments because the cost of cation and recovery. The rigidities also undertake coordinated, long-term efforts being caught with too little capital is help to explain the failure of more recent to build that capability. greater than the cost ofbeing caught with stabilization efforts, including the IMF * Suitable incentives are provided too much. program of 1985-87. for professionals, particularly in semi- If one allows for risk aversion, how- This paper is a product of the Macro- autonomous centers. ever - and if aggregate activity is posi- economic Adjustment and Growth Divi- * Steps are taken to stimulate gov- tively correlated with innovations in the sion, Country Economics Department. ernment demand for policy analysis. real exchange rate (or terms of trade) - Please contact Raquel Luz, room N11- * Donors support a few rather than the relationship between exports and an 057, extension 39059 (40 pages with - too many institutions. uncertain real exchange rate can be nega- tables). Strategies for developing indigenous tive. This is true only if the degree of capabilities for policy analysis will vary risk aversion is large enough to offset the from country to country. In countries positive effect from Jensen's inequality 223. Overvalued and Undervalued where nongovernment clientele and and the convex curve of the profit func- Exchange Rates in an Equilibrium sources of support are limited but gov- tion in terms of prices. Optimizing Model ernment is interested, the initial focus Caballero and Corbo tested the quali- should be on strengthening government tative implications of a simple two-pe- Jose Saul Lizondo capability. Countries where there is riod model on several developing coun- demand for policy analysis in both the tries. Their results: uncertainty about For some problems it helps to think of government and private sector may be the real exchange rate showed a clear, overvalued or undervalued exchange rates ripe for arm's length centers for policy strongly negative effect on export per- as the result of unsustainable macroecon- analysis. If such centers are not appro- formance. omic policies - such as undertaxation or priate, private sector associations could Point estimates indicate that in- overspending in the public sector -rather help set up policy analysis units. In creases as small as five percentage points than the result of markets failing to clear countries where the private sector is in the annual standard deviation of the or economic agents failing to behave in weak, academic institutions with close real exchange rate can shrink the export an optimizing manner. links to government may help create some sector by 2.5 percent (Colombia) to 30 local capability. percent (Thailand and Turkey). The ef- Intertemporal equilibrium optimizing This paper is a product of the Public fects are substantially greater in the long models have recently become the stan- Sector Management and Private Sector run. dard framework for analyzing such Development Division, Country Econom- This paper is a product of the Macro- macroeconomic issues as terms of trade, ics Department. Please contact Ernestina economic Adjustment and Growth Divi- fiscal or trade policy, international trans- Madrona, room N9-061, extension 37496 sion, Country Economics Department. fers, supply shocks, and technological (149 pages). Please contact Aludia Oropesa, room N11- progress. 035, extension 39075 (24 pages with They have rarely been used to dis- tables). cuss overvalued and undervalued ex- 221. How Does Uncertainty About change rates - probably partly because the Real Exchange Rate Affect an equilibrium model is not usually con- Exports? 222. The Labor Market and sidered appropriate for examining a "dise- Economic Stabilization In Zambia quilibrium" situation. Ricardo J. Caballero and Vittorio Corbo For some kinds of problems, how- Christopher Colclough ever, it may be more reasonable to think Increased uncertainty about the real ex- of overvalued or undervalued exchange change rate depresses exports iffirms are Labor markets are assumed, in orthodox rates as the result of unsustainable sufficiently risk averse. If firms with a stabilization programs, to beflexible. The macroeconomic policies rather than the fixed capital stock are risk-neutral, such experience in Zambia proved this assump- result of markets failing to clear or eco- uncertainty increases exports. tion unfounded. nomic agents failing to behave in an opti- mizing manner. It may be useful to ex- Under what conditions does increased This paper examines trends in the Zam- amine the issue of undervalued or over- uncertainty about the real exchange rate bian labor market over the period since valued exchange rates in a framework depress exports? independence. It focuses particularly on that forces us explicitly to take into ac- For any given level of capital stock, a two phenomena - skill shortages and count the economic agents' maximizing 92 Policy, Research, and External Affairs Working Paper Series behavior and budget constraints over will, perhaps after some time, lead to in- 225. Targeting Assistance to the time. flation, exchange crises, external debt Poor Using Household Survey In the model Lizondo presents, sus- crises, and high real interest rates. Data tainable fiscal policies produce an equi- librium real exchange rates, and unsus- Excessive budget deficits can lead to in- Paul Glewwe and Oussama Kanaan tainable policies produce misaligned ex- flation, exchange crises, external debt change rates. When the exchange rate is crises, and high real interest rates - Household survey data from Cate d'Ivoire overvalued, maintaining present fiscal with implications for the real exchange are used to predict incomes based on ob- policies means the present value of life- rate, the trade account, and investment. servable household characteristics, such time public sector spending would be But the links are not automatic, for there as region of residence and characteristics higher than the present value of taxes. are choices in the sources of financing - of the household dwelling. These predic- Misaligned exchange rates imply and lags in the effects of money printing tions are then used to allocate money both intertemporal and intersectoral and borrowing on inflation and interest transfers to alleviate poverty. Whether shifts in the economy's pattern of expen- rates. one should distribute poverty-alleviating diture. An overvalued exchange rate, for Nor are moderate budget deficits to transfers using this method remains to be example, implies that an increase in pres- be avoided at all costs. Small deficits can seen. ent expenditures must be balanced by a be financed without creating excessive reduction in future expenditures - re- inflation, exchange crises, or an excess Reducing poverty is a major objective of flected in a worsening of the current ac- buildup of debt. If the real interest rate economic policies in both developed and count. exceeds the growth rate of GNP, no pri- developing countries. It is important that Whether the expenditure shifts from mary deficit larger than the maximum limited government resources be chan- the public to the private sector or the amount of seignorage revenue (the reve- neled to the poor, but it is not always reverse depends on how the misalign- nue from printing money) the govern- easy to identify the poor directly. ment was brought about and is to be ment can obtain is sustainable. Govern- Which households should be given compensated for. If it was brought about ments cannot use seignorage perma- transfers (such as money, food stamps, by increased public sector spending that nently to finance primary deficits over vouchers, and rations) when reliable in- is to be compensated for by higher future 2.5 percent of GNP without expecting in- formation on incomes is difficult to ob- taxes, the shift will be from the private to flation to accelerate - and even seig- tain? How much money (stamps, vouch- the public sector. If it was brought about norage of 2.5 percent of GNP would be ers, rations) should be given? The an- by lower taxes that are to be compen- sustainable only in a rapidly growing swers to these two questions depend on sated by lower future public sector spend- economy. the information available. ing, the shift will be from the public to Whether any particular path of fis- Glewwe and Kanaan present a the private sector. cal policyis sustainable has tobe checked simple method for targeting when income For Lizondo's model to be used to through projections of the debt-to-GNP is not observable but other characteris- obtain welfare conclusions about the use ratio. A given deficit is more likely to be tics that are correlated with income can of overvalued or undervalued exchange sustainable the higher the growth rate of be observed. Using simple regression rates, it would be necessary to assign output. techniques on comprehensive household some social value to public sector expen- Of course, the fact that a fiscal policy survey data taken from Cbte d'Ivoire, they diture. Other fruitful modifications of is sustainable does not mean that it is predict incomes based on observable the model would be to incorporate in- optimal. A fiscal deficit crowds out pri- household characteristics and distribute vestment activity as well as money -the vate investment - and it might well be transfers on the basis of those predic- latter of which would allow for discus- desirable to reduce the debt-to-GNP ra- tions. It appears that significant reduc- sion of the effects of monetary policy, tio to crowd private investment in. tions in poverty can be achieved using exchange rate arrangements, and nomi- Similarly, it is not optimal to collect this method. nal exchange rate policy. the maximum possible amount of reve- Some of the variables that most re- This paper is a product of the Macro- nue from seignorage, but rather a smaller liably predicted income level in Cbte economic Adjustment and Growth Divi- amount corresponding to a lower infla- d'Ivoire were: per capita floor area; sion, Country Economics Department. tion rate. whether the household was headed by a Please contact Raquel Luz, room N11- Theory and evidence both warn that member of the Voltaic ethnic group (which 057, extension 39059 (21 pages). large budget deficits pose real threats to is one of the poorest groups); the level of macroeconomic stability and therefore to educational attainment of the head of economic growth and development household; whether the household owned 224. The Economics of the This paper is a product of the Office a car, a bike, or a refrigerator. Government Budget Constraint of the Vice President, Development Eco- Several problems with this approach nomics. Please contact Stanley Fischer, are discussed. For example, the cost of Stanley Fischer room S9-035, extension 33774. gathering information may at times out- weigh the benefits. Also, basing trans- Large budget deficits pose real threats to fers on a policy that favors one group macroeconomic stability and therefore to over another might lead to public opposi- growth and development. Large deficits tion. Policy, Research, and External Affairs Working Paper Series 93 This paper is a product of the Wel- inflation more rapidly than traditional Institutional reforms in sector adjustment fare and Human Resources Division, programs, but led to overvalued real ex- operations (SECALs) are designed to deal Population and Human Resources De- change rates and the accumulation of with three types of issues: organizational partment. Please contact Brenda Rosa, foreign debt. Correcting these disequili- restructuring and strengthening; regula- room S9-137, extension 33751 (48 pages bria arising in the course of stabilization tory and procedural reforms; and the with tables). proved that those exchange rate-based building of sector policy and planning ca- stabilization programs did not eliminate pability. Paul learned in his review of 55 but only delayed the costs of stabiliza- of the 65 SECALs approved during fiscal 226. Inflation and the Costs tion. 1983-87 that: of Stabilization: Country Heterodox stabilization programs Of all the institutional reforms, or- Experiences, Conceptual Issues, significantly reduced inflation in the short ganizational restructurings, including and Policy Lessons run, without recession and even with divestiture, were the most difficult to (moderate) growth-but in Argentina and implement. In some cases, implementa- Andr6s Solimano Brazil these gains were temporary, and tion was delayed by the coordination prob- inflation accelerated dramatically in lems of the multiplicity of agencies in- The costs ofhyperinflation are almost un- 1987, 1988, and 1989. These results are volved, and in others, the impact of insti- bearable to any economic system. Never- explained by different factors like the tutional reforms was limited by the lack theless, stopping hyperinflation seems to difficulties in controlling aggregate de- of follow-up actions essential to their suc- be faster and less costly than stabilizing mand and the fiscal deficit, the behavior cess. chronic inflation. The history of stabili- of relative prices during stabilization, the The importance of careful diagnosis zation shows that fiscal restraint and net transfer abroad, the inertia of the of the sectoral institutional framework adequate external resources are key ele- economy's contract structure, and the cannot be overemphasized. The problem ments for successful stabilization. influence of the distributive conflict and is less severe in such sectors as agricul- the political cycle. Israel has succeeded ture, where past project and sector work A key issue in anti-inflationary poli- with a heterodox program, stabilizing has led to a better understanding of sec- cymaking is how to bring inflation down inflation more permanently by undertak- tor institutions. Attention to institutional permanently and at a low cost. Solimano ing fiscal adjustment and benefiting from diagnosis and design is especially impor- reviewed several anti-inflationary pro- a net resource transfer from abroad. tant in SECALs because of their quick rviewedseverale ati-nflpla aryed pr The intertemporal distribution ofthe disbursing nature and the limited time fi se to detrmnte tiab ty o aiye costs of stabilization that tilt toward the available for redesign. There is greater fisorcalef, tevaabili ftye o eingn end of the program of stabilization is a flexibility for redesign for a series of rate, and the distributive conflict in the feature valid both in programs that rely SECALs. on one nominal anchor and in heterodox Most institutional diagnoses done for success or failure of those programs. Focusing on the costs of stabilization plans that use several nominal anchors SECALs focus on technical capabilities. and the lessons to be drawn from each to stabilize. There is too little assessment of the inter- case, Sohimano examined three types of This paper is a product of the Macro- est groups affected and the ability of top anti-inflationary experience: stabilization economic Adjustment and Growth Divi- leaders to mobilize support for reform of hyperinflation (in Germany, 1923; sion, Country Economics Department. and to resist opposition. Joint diagnostic Austria, 1922; and Bolivia, 1984-85); Please contact Emily Khine, room N11- exercises are likely to yield a better mix orthodox stabilization programs in the 055, extension 37462 (44 pages with of technical, organizational, and political Southern Cone in the mid-1970s and early tables). analysis and provide a better basis for 1980s; and heterodox stabilization pro- assessing the feasibility of implementa- gram inArgetin, 195-8, an Brziltion. grams in Argentina, 1985-87, and Brazil, 227. Institutional Reforms in When the issues and causes of prob- 1986-87. He concluded that: Sector Adjustment Operations lems are unclear, a "process approach" to Stabilization ofhyperinflation entails diagnosis is called for - and a good case costs-in terms of employment and real wages-but they seem to be lower than Samuel Paul can be made for bringing together key the costs of stabilizing chronic-interme- players with different perceptions of the diate inflation, mainly through restric- Institutional reforms stand a greater problems or in other ways using the di- tive demand policies, chance of succeeding when there is ade- agnostic process for early consensus build- The orthodox experiences in the quate institutional diagnosis and design, ing or at least an appreciation of the Southern Cone in the mid-1970s show including assessment of the interest different perceptions involved. It is im- that stabilization programs that focus groups affected and the ability oftop lead- portant to sensitize Bank staff to good only on restrictive monetary and fiscal ers to mobilize support for reform. A designs and processes, and to draw on policy can be slow in producing anti-in- good case can be made for bringing the experts when Bank staff are not experi- flationary results and may cost consid- key players together in a process approach enced in process issues. erably in terms of activity levels and real to diagnosis, so that diagnosis becomes Complex institutional reforms should wages. Orthodox programs based on ex- an early stage of consensus building be implemented a stage at a time, in a change rate management (tried in the among those who will be affected by the thoughtful sequence. If a simultaneous late seventies and early eighties) reduced reforms. attack on different fronts is necessary, a 94 Policy, Research, and External Affairs Working Paper Series strategic approach to implementation conducive to increased domestic savings that translates demographic projections must be planned - getting the full sup- - two problems compounded by political into savings-rate projections. Modeling port of top leaders who alone can influ- expediency in democratic regimes. Sub- explicitly the behavior of each cohort of ence or control the actors involved and do Saharan countries seem to be mired in a households separates the effects of chang- team-building, and following up with poverty trap, with low investment levels ing population shares of children and supervision and monitoring for early iden- and generally inappropriate exports. retirees. These shares behave differ- tification of problems. If the prospects for the most deprived ently and have different effects on saving SECALs have not given enough at- and highly indebted countries are to be as the population growth rate changes. tention to building capabilities for policy improved, they will need to channel sig- Baseline World Bank population analysis, a task that calls for staff-inten- nificant real flows into investments. This projections assume that by the middle of sive supervision and along-term perspec- could be done through a combination of the twenty-first century, if not sooner, tive - which are seldom available in new external debt initiatives and growth- the net reproductive rate of women in adjustment operations involving many inducing domestic policies. Appropriate every country will decline to 1.0, a level reforms. domestic policies are essential so that that will eventually lead to a stable popu- This paper is a product of the Public external inflows are not negated by higher lation. As the last cohort of those born in Sector Management and Private Sector consumption levels. the years of high reproductive rates Development Division, Country Econom- Perhaps it is time to reassess the reaches adulthood, the proportion of ics Department. Please contact Ernestina Marshall Plan that reinvigorated the working-age population rises sharply. Madrona, room N9-061, extension 37496 depleted post-war Europe or the more Then, as baby boomers retire and die off, (167 pages with tables). recent EEC institutional umbrella that it declines toward the steady-state level. provided stability for the economies in Webb and Zia simulated aggregate Italy, Spain, Greece, and Portugal. The rates for life-cycle savings for Brazil, 228. Recent Economic Marshall Plan provided needed resources China, Korea, Mexico, Nigeria, Pakistan, Performance of Developing in a relatively short period, and since the and Turkey. Countries aid did not carry an interest burden the The savings rates increase 5 or 6 authorities were not preoccupied with percentage points when the last baby Robert Lynn and F. Desmond McCarthy financial engineering. Quantum changes boomers enter the work force and begin of some sort are needed to replace the to save after their children leave home. Some (mainly Asian) developing coun- tired marginalist approaches that are The effect on life-cycle saving is dramatic; tries prospered in the 1980s. Many (typi- yielding such indifferent results in many the effect on total savings rates, which cally in Sub-Saharan Africa) regressed. developing countries. are often three or four times as high, is The highly indebted countries stagnated. This paper is a product of the Inter- not. Perhaps a new Marshall Plan is needed national Economic Analysis and Pros- Simulated life-cycle savings rates to replace the tired marginalist ap- pects Division, International Economics peak at an absolute 10 percent or less in proaches that are yielding such poor re- Department. Please contact Mila Divino, all cases. The patterns in these projec- sults. room S7-038, extension 33739 (45 pages tions seem robust with regard to assump- with charts and tables). tions about productivity growth, interest The GDP growth rate in the developing rates, and age-specific participation in countries averaged 4.1 percent between the labor force. 1980 and 1988. Many dynamic countries 229. The Effect of Demographic This paper is a product of the Macro- chiefly in Asia - did exceedingly well Changes on Saving for Life-Cycle economic Adjustment and Growth Divi- during this period, but many others - Motives in Developing Countries sion, Country Economics Department. typically in Sub-Saharan Africa - re- Please contact Emily Khine, room N11- gressed. In general, the highly indebted Steven B. Webb and Heidi S. Zia 055, extension 37462 (27 pages with countries have stagnated. charts and tables) Domestic policies that appear to be Declining fertility and the transition to critical to successful performance are stable populations is likely to increase investment rate, stability of incentives, aggregate saving rates measurably. Say- 230. Unemployment, Migration, and real effective exchange rates. Key ing for retirement will probably increase and Wages in Turkey, 1962-85 external factors include buoyancy of the but not dominate total saving changes. world economy, terms of trade, and a Bent Hansen country's ability to adjust its export pro- If developing countries follow the same file to take advantage of buoyant OECD paths industrialized countries have fol- Long-term voluntary unemployment of a market opportunities. lowed, saving for retirement will initially more fully educated youth population is Highly indebted countries have gen- become more important as the popula- as much a factor in the long-term upward erally been unable to achieve the critical tion growth rate declines. trend in unemployment in Turkey as in- investment level because they need to To calculate the potential importance voluntary unemployment because of sta- generate an export surplus to service their of life-cycle saving (saving for retirement), bilization. debt and are unable to provide a climate Webb and Zia set up a simulation model Policy, Research, and External Affairs Working Paper Series 95 Working with poor, incomplete data on 231. The World Bank Revised guidance about the policies or prices Turkey's labor market, Hansen analyzed Minimum Standard Model: needed to reach the indicated levels. At the status and development of Turkey's Concepts and Issues first glance it would seem that the model labor market since 1962. He concludes has a rather limited scope. This is not so. that: Doug Addison The usefulness of any model is deter- The estimated steady upward trend mined by the questions asked of it. One in unemployment since 1962 (to 12.7 The Revised Minimum Standard Model can easily and quickly discover whether percent in 1985) may be misleading. was originally created in 1973 to ensure a or not a targeted growth rate is accept- Cyclical short-term changes have been consistent approach to World Bank pro- able in terms of its impact upon per- important, unemployment was probably jections. Its primary purpose, like the capita consumption and external financ- declining in the early 1970s and again original two-gap models, is to show the ing needs. It is also easy to manipulate after 1982, and unemployment increased user what levels of investment, imports, the models' parameters to find out how most between 1978 and 1982, with the and external borrowing will be required the economy might be restructured to stabilization program. At the same time, to reach targeted real GDP and export make a target growth rate practical. This young, educated single people with rela- growth rates. But the RMSM cannot sort of experimentation can lead to some tively little work experience and long provide guidance about the policies or very useful observations about the path spells of unemployment dominated the prices that would be needed to reach those a country should take in the future. unemployment picture. So long-term levels. This paper was prepared in the Af- unemployment of youth was as much a rica Country Department IV with the ad- factor as unemployment because of sta- The Revised Minimum Standard Model vice and support of the Country Econom- bilization. ics Department staff. Please contact Josie Rural-urban migration was substan- (RMSM) was originally created in 1973 Onwuemene-Kocha, room N11-041, ex- tial between 1965 and 1975 but, remarka- as a means of ensuring a consistent ap- tension 39066. bly enough, was reversed between 1975 proacito WorldBn poections and 1980 - probably as a result of the thus facilitate intercountry comparisons. recession accompanying the stabilization These objectives are met through the 232. Women and Food Security poiyof 1978. This helps to explain why provision of a standard list of variables i ey policy unemployme t hc la wer and a minimum set of economic relation- In Kenya rural unemployment which was lower ships. The decision to minimize the than urban unemployment in 1973-74, number of linkages recognizes two facts: Nadine R. Horenstein but has increased much more than ur- butan um incrasedmuch re th u the quality of data for econometric analy- ban unemployment since then . sis is generally poor, and users undoubt- As farmers, traders, income earners, moth- Hansen concludes that, all things edly want to modify the model to meet ers, and family caretakers, women are a considered, the long upward trend in un- their country-specific needs. critical link in achieving food security. employment in Turkey is partly a matter The RMSM is a thinking and plan- In these roles, women need better access of the voluntary unemployment of a bet- ning tool. Its primary purpose, like the to credit, labor-saving technologies, and ter-educated population of youth, and original two-gap models, is to show the agricultural and nutrition extension in- partly a matter of involuntary unemploy- user what levels of investment, imports, formation, in addition to greater access to ment related to the stabilization program. and external borrowing will be required and control over income. Although the data are extremely for a targeted real GDP growth rate. The unreliable, Hansen believes that wages planner's choice ofa real growth rate will Women play a key role in producing and in manufacturing and mining for 1962- determine what level of investment will providing food for the family, managing 85 have been determined less by market be necessary. If the RMSM is run as a and allocating household resources, and forces than by increasingly militant un- trade-gap model, the level of imports caring for children. Alleviating their time ions, government intervention, and the needed to sustain this rate of growth is constraints is the single most important establishment of an incomes policy, in- driven by GDP, investment, and con- way to improve household food security- cluding minimum wages. sumption - which is, in turn, residual. since it will allow women to take advan- This paper is a product of the Politi- If the RMSM is run as a two-gap model tage of new resources and opportunities cal Economy of Poverty, Equity, and and the savings constraint is binding that may have direct links to their abil- Growth study. Please contact Celina imports rather than consumption are ity to assure household food security. Bermudez, room 4-006,extension39248 residual. Real export growth is exogenous A combination of complementary ( pages wi ). in both cases. The difference between interventions that address the multiplic- exports and imports determines the need ity of women's household and market for external borrowing. This reflects the roles is likely to be most effective. These Bank's "needs" or "requirements" ap- include: proach, and contrasts with the "con- * Better access to agricultural and straints" or "availabilities" approach, nutrition extension information. Both the which determines the real rate of GDp process of providing that information, and growth given available foreign capital. the information itself, should be adapted The RMSM cannot, however, provide to the needs of women. More efforts 96 ' Policy, Research, and External Affairs Working Paper Series should be made to select contact farmers 233. Public Enterprise Reform in matter of hard conditionality, because from the population of women, particu- Adjustment Lending they require more time than several larly poor women; to channel communi- SALs. Institutional development proj- cations to women; and to stress the need John Nellis ects that parallel adjustment operations for a balance between cash and food crops, may be one solution. including kitchen gardens. Home econom- The Bank might also consider estab- ics/nutrition extension information Specificdivestituredatesandinstitutional lishing "primary conditions" (a few key, should be integrated with the agricul- public enterprise reform should probably clear, easily monitored objectives, non- tural extension system because of the not be a matter of hard conditionality for fulfillment of which would bring an op- complementarity of the topics and their sectoral adjustment lending. One alter- eration to a halt) and "secondary condi- implications for food security. native is to establish institutional devel- tions" (including most institutional and * Better access to technology. opment projects that parallel adjustment PE reforms in general), nonfulfillment of Women's access to labor-saving technolo- operations. Another is to establish "pri- which would evoke sanctions but not end gies such as posho mills (for grinding mary conditions," nonfulfillment of which operations. - maize and other cereals) can save time would bring an operation to a halt, and This paper is a product of the Public and also provide income. Improving "secondary conditions" (including most Sector Management and Private Sector water supplies can provide substantial institutional and public enterprise re- Development Division, Country Econom- benefits in terms of time savings, and forms), nonfulfillment of which would ics Department. Please contact Rose Mal- health and nutrition. evoke sanctions but not end operations. colm, room N9-055, extension 37495 (27 * Better access to credit. Joint title pages with tables). between husbands and wives or legally- Adjustment operations have required or recognized user rights could expand requested: women's access to formal credit that re- * Divestiture (in its many forms). 234. A Consistency Framework quires land as collateral. Group lending * Policy changes, particularly about for Macroeconomic Analysis schemes-some of which have a 95 per- pricing. cent repayment rate are one means of * Enterprise use of fewer and better William Easterly sharing the risks and benefits of borrow- managed resources, including labor. ing. Innovative credit schemes that com- * Better guidance and evaluation by Illustrating with data for Colombia and bine informal and formal credit schemes, the state. Zimbabwe, Easterly presents a consistency and broader dissemination of informa- * Restructuring and rehabilitation framework useful for checking projections tion about credit facilities, should also at the firm level. or constructing macroeconomic models, help. Across the board - but particularly reconciling separate accounts for the gov- * Better access to and control over in connection with institutional manage- ernment, monetary system, nonfinancial income. Because of women's predomi- ment, guidance, and performance evalu- private sector, balance of payments, and nant role in providing food for the family, ation - much remains to be done. There national accounts. their access to and control over income is is little information about the post-priva- critical to their roles in assuring house- tization performance of divested firms Consistency is a hobgoblin (to borrow a hold food security. Women's income tends and disturbingly little evidence that effi- phrase from Emerson) that macroecon- to be spent along more nutritionally ad- ciency gains account for the perceived omists cannot avoid. Macroeconomic vantageous lines. financial improvement in many enter- consistency is the requirement that If the employment possibilities and prises - which are probably attribut- budget constraints be observed. Budget incomes of women are to improve on a able to investment cuts and price in- constraints do not uniquely determine a continuous basis, short-term solutions creases in monopolies. particular economic outcome, but they do based on the development and dissemi- Many governments have reduced the allow analysts to rule out many outcomes nation of new technologies must be com- flow of resources into poorly performing when they have some notion of "reason- plemented by longer-term policies to in- public enterprises (PEs) but most PE re- able" behavior. Often this is enough to crease women's access to training, credit form being instituted through adjustment evaluate whether a particular adjustment' and other resources. can be seen as preliminary or "brush- scenario is feasible. What seems at first This paper is a product of the Women clearing" steps. These steps have reduced to be a reasonable projection may be re- in Development Division, Population and the burden on the budget, but it is un- vealed as highly unlikely when analyzed, Human Resources Department. Please clear whether the reforms will promote in a full consistency framework. contact Mila Villar, room S9-127, exten- efficiency. Even where a fully specified behav- sion 33752 (41 pages with tables). The World Bank should continue to ioral model is desired, the consistency move away, in adjustment conditional- relations are invaluable in defining the ity, from specifying numbers of PEs to be structure of the model. The consistency sold by date X-which is counterproduc- framework is not itself a model, which tive. The divestiture process is too un- can be used to do projections. It is a certain for date setting, particularly in generic check on any projection done by the short run. It also appears unwise to an explicit or implicit behavioral model. make purely institutional PE reforms a Easterly's consistency framework for Policy, Research, and External Affairs Working Paper Series 97 macroeconomic analysis includes five no effect on real resource flows, they dicate productivity (allowing for enter- accounts, in current prices: government, would account for less than 20 percent of prise capital, location, and the age and monetary system, nonfinancial private the debt buildup. sex of the workers). sector, balance of payments, and national Adverse changes in terms of trade Returns differ markedly among four accounts. Easterly presents these as in- since 1978, accumulating with interest, subsectors - retail trade, textile manu- dividual accounts, then integrates them accounted for most of the debt buildup in facturing, other manufacturing, and per- through a matrix of income, expenditures, many non-oil developing countries. The sonal services - and by gender and loca- savings, and accumulated assets and lia- mostly favorable terms of trade for oil tion (Lima, other cities, rural). bilities. exporters, on the other hand, gave them Postsecondary education has a fairly Examples of estimation of the frame- large gains that could have more than significant payoff in urban areas, for both work are presented for Colombia and covered the losses of the oil importing men and women. Returns for women are Zimbabwe. developing countries. higher than for men, perhaps because This paper is a product of the Macro- Heavy borrowing by oil exporters education is still less frequent among economic Adjustment and Growth Divi- during favorable times seems to have women. sion, Country Economics Department. been a major factor in precipitating the Primary education is especially valu- Please contact Raquel Luz, room N11- debt crisis. able for women, who dominate the tex- 057, extension 39059 (39 pages with Since the debt crisis, the highly in- tile trades - for which only primary tables). debted countries have greatly increased schooling pays off. Men dominate in the their official borrowing, apparently at the personal services subsector, for which expense of other developing countries. post-primary education is valuable. Thus 235. Borrowing, Resource Increased official lending might help male-female differences are strongly as- Transfers, and External Shocks to the resource balance and domestic in- sociated with sectoral differences in the Developing Countries: Historical vestment of lower income countries more value of schooling. and Counterfactual than those of middle-income countries In the retail trade sector, post-pri- with high commercial debts. mary education appears to be valuable in Steven B. Webb and Heidi S. Zia This paper is a product of the Macro- urban but not in rural areas. economic Adjustment and Growth Divi- In general, as might be expected, The 16 highly indebted countries received sion, Country Economics Department. education pays off in jobs that require about half the net transfers to developing Please contact Emily Khine, room N11- literacy, numeracy, or the ability to ad- countries from official and commercial 067, extension 37462 (76 pages with just to change. These results are consis- lenders in 1978-82 - and accounted for charts and tables). tent with earlier research indicating that all the resource flows back to creditors in education improves farmers' earnings 1983-86. very little so long as they follow tradi- 236. Education and Earnings in tional farming practices, where the nec- Peru's Informal Nonfarm Family essary knowledge is transmitted infor- Since the late 1970s the buildup of exter- Enterprises mally. Education becomes especially nal debt and the struggles to service it valuable only when individuals take up have dominated the economic situation Peter Moock, Philip Musgrove, new methods of production, because in many developing countries and Morton Stelener schooling enables them to apply these Statistical evidence on the magni- methods more quickly and more profita- tude of international lending and repay- Education improves the earnings of self- bly to their particular circumstances. ment - and on the question of whether employed individuals very little when they This paper is a product of the Educa- repayment reduced the resources avail- engage in traditional economic activities. tion and Employment Division, Popula- able for development in the 1980s - It becomes valuable when they take up tion and Human Ressources Department. confirms many commonly held beliefs. new methods of production, or engage in Please contact Cynthia Cristobal, room Here Webb and Zia focus on the findings activities that require literacy, numeracy, 86-001, extension 33640 (40 pages with that seem new or controversial: or the ability to adjust to change. tables). Although most debtor countries have made net transfers of resources to credi- Moock, Musgrove, and Stelcner used data tors since the 1980s, middle-income coun- from the 1985 Living Standards Survey 237. The Curricular Content of tries that have not had to reschedule in Peru to categorize 2,735 nonfarm fam- Primary Education in Developing their debts in the 1980s have averaged ily enterprises - "informal" businesses Countries smaller net transfers than those that did that hire little or no labor - and to ex- reschedule. In other words, the well- plain earnings per hour of family labor. Aaron Benavot and David Kamens behaved creditors seem to have received The central question they addressed: some reward already. Does formal schooling make a difference? There is no evidence to support the claim Neither high real interest rates nor Regression analyses show that that developing countries teach more adverse terms-of-trade shocks explain schooling affects earnings significantly, subjects or emphasize different subject most of the debt buildup. for all enterprises combined. This can- matter in primary schools than developed Even if high real interest rates had not reflect only "screening" but must in- countries do-so efforts to change or sim- 98 Policy, Research, and External Affairs Working Paper Series plify their primary curricula may be ligion; LAC countries more courses in on both exports and poor households. strongly resisted. manual training than other regions do. Country-specific administrative ca- Few developing countries offer a course pabilities must be considered in design- Benavot and Kamens examined the cur- in"business" or"vocational" education at ing alternative tax systems, but gener- riculum policies for primary schools in a the primary level. Countries in the SSA ally the VAT will be preferable to a sys- wide range of developing countries in the include at least one course in prevoca- tem of ad valorem retail sales taxation. 1980s and, to a lesser extent, the 1960s. tional education (usually agriculture or The retail sales tax also avoids cascading They researched what subjects are domestic science). No Asian countries but yields more uncertain revenues than taught, what percentage of instructional offer a course in domestic science. the VAT, which is collected at each stage time is allocated to each subject, and how This paper is a product of the Educa- in the production process, not just at the much instructional time is available over- tion and Employment Division, Popula- retail level. Indeed, one option is to adopt all in primary education. They learned tion and Human Resources Department. a VAT at the import and manufacturing the following: Please contact Cynthia Cristobal, room stages and at the wholesale level. There is little debate about school S6-001, extension 33640 (53 pages with A VAT also provides a better flow of curricula in national and international tables). information-useful in the collection of reports, apparently because there is so income and corporate taxes, and in re- much consensus around the world about ducing distortions in production decision- what subjects to offer and emphasize in 238. The Distributional making. A correctly designed consump- primary school and how much time to Consequences of a Tax Reform on tion-based tax instrument such as the devote to them. In terms of official cur- a VAT for Pakistan value-added tax (VAT) can increase the riculum policies, anyway, today's primary tax base and remove production distor- school curriculum is increasingly taken Ehtisham Ahmad and Stephen Ludlow tions - at the same time protecting the for granted. interests of the poor. Moreover, the curricula of mass edu- Policy tools, especially tax instruments, This paper is a product of the Public cational systems are increasingly alike can be designed to increase revenues and Economics Division, Country Economics all over the world, with surprisingly little at the same time protect the poor. Theau- Department. Please contact Ann Bhalla, regional and national variation. Almost thors' method of estimating the conse- room N10-061, extension 37699. all national educational systems equally quences of tax reform shows, for example, emphasize certain core subjects: language that a value-added tax would make Paki- (35 percent), math (18 percent), science stan's tax system more buoyant and re- 239. The Choice between (8 percent), and social science (9 percent). duce the production distortions inherent Unilateral and Multilateral Trade Within core subject categories, in- in Pakistan's current tax system-and not Liberalization Strategies teresting variations exist. For example, at the expense of the poor. countries in sub-Saharan Africa (SSA) Julio Noguds are more likely than countries elsewhere To what extent do rich or poor lose or to teach an official language that is not a gain from different tax reform packages? Developing countries would gain far more mother tongue for most of the popula- Using estimates of directions of reform from unilateral trade liberalization than tion. They also offer more instruction in from Ahmad and Nicholas Stern (1988), from multilateral trade liberalization ne- local languages than countries elsewhere. Ahmad and Ludlow compare the conse- gotiated over many years. Industrial All countries in the EMENA region quences of different options by analyzing countries could increase both economic (southern Europe, the Middle East, and actual patterns of consumption and pro- and political incentives for reform by North Africa) offer instruction in an offi- duction. granting credit when developing coun- cial language and are also more likely to They illustrate, for policymakers, tries undertake unilateral trade liberali- offer instruction in foreign languages than how directions of reform might be evalu- zation. other regions. ated without overly complicated models As for social sciences, countries in of the economy, using the sort of data Under plausible assumptions applied for Latin America and the Caribbean (LAC) now increasingly available -for example, Argentina, Nogu6s calculates that a offer more instruction in social studies household surveys being conducted by strategy of unilateral trade liberalization and less in history and geography than various World Bank divisions, and by in Argentina would produce significantly other regions, except that Asian coun- statistical offices around the world. more in exports (net present value) than tries offer the least instruction in history A country such as Pakistan, which would similar liberalization negotiated and geography. Countries in the SSA relies on a narrow tax base - consisting multilaterally over a period of 15 years. and EMENA offer more instruction in primarily of tariffs on intermediate goods Waiting to negotiate multilaterally history and geography than other coun- and excises on domestic manufacturing- entails a true cost (loss of exports be- tries. Countries in the SSA offer the has difficulty ensuring that the tax sys- cause of continued misallocation of re- most civics courses. tem keeps pace with the growth in na- sources) and an uncertain benefit (the Variety is greater for peripheral tional income and activity, without fre- market access a country expects to gain subjects. Countries in Asia offer more quent discretionary changes. by waiting to negotiate a reciprocal re- courses in moral education; countries in Such changes increase the distortions duction of trade barriers). Liberalizing the SSA and EMENA more courses in re- caused by cascading, with adverse effects unilaterally implies a fast increase of Policy, Research, and External Affairs Working Paper Series 99 exports from improved resource alloca- 240. The Public Role in Private marks. tion but could imply a loss from a lower Post-Secondary Education: A The paper also discusses ways to degree of market access. Review of Issues and Options promote quality among private institu- Generally, Nogu6s concludes, as long tions. Certain government policies may as the costs a country suffers from its Ake Blomqvist and Emmanuel Jimenez influence higher education at least as barriers are higher than those from other much as various forms of direct regula- countries' barriers, it pays that country Should private educational institutions tion or subsidy. The most efficient way to liberalize unilaterally. be encouraged, through financial incen- to make schools better is probably to Developing countries tend to have tives and constraints, to play more of a design an incentive system that rewards more protectionist trade policies than the role in post-secondary education? What institutions on the basis of how their industrial countries. To the extent that public policies, subsidies, and regulations graduates perform - although this might this is so, it probably doesn't pay for de- should be used to influence them? favor students from high-income fami- veloping countries to wait to negotiate in lies. the multilateral trade negotiations Can private educational institutions, re- In addition, inappropriate labor (MTNs) - because to the extent that sponding to financial incentives and con- market legislation and government be- concessions are balanced, developing straints, play more of a role in helping havior as an employer may have contrib- countries are not likely to end up with society provide efficient and equitable uted to problems of graduate unemploy- liberal trade regimes. post-secondary education? This question ment, credentialism, and a generally Those conclusions are based on eco- is important because budget constraints swollen bureaucracy in some countries. nomic analysis, however, and developing are forcing developing countries to look This paper is a product of the Public countries are increasingly driven by poli- for alternatives to heavily subsidized Economics Division, Country Economics tics - and only marginally by economics public services. The authors review the Department. Please contact Ann Bhalla, - to participate in the MTNs. literature, focusing on how public subsi- room N10-059, extension 37699(42 pages If industrial countries were to give dies can be used to meet social objectives with tables). developing countries credit for unilateral when education is privately provided. liberalization programs, both economics The appropriate level of public sub- and politics would shift in favor of faster sidy to private post-secondary education 241. The Effect of Job Training on reform programs. If credit were given, hinges in part on the extent to which Peruvian Women's Employment negotiating in the MTN would never be social exceed private benefits. and Wages preferable to unilateral trade liberaliza- In recent years there is increasing tion. evidence in many developing countries of Ana-Maria Arriagada The net present value of increased a growing problem of graduate unem- exports from unilateral trade liberaliza- ployment and tendencies toward "creden- Post-school training significantly im- tion in Argentina would increase from tialism"in the allocation of desirable jobs proves the employment probabilities but US$19 billion (if no credit were given) to in the public sector and elsewhere. not the wages for urban salaried and self- US$33.4 billion (if credit were granted in Higher education is also perceived as a employed women in Peru, possibly be- increasing amounts for the first 15 years socially unproductive but privately prof- cause they train for low-paying jobs. and remained constant thereafter). And itable screen or signalling device. The Because their chances of receiving job the political excuse for not liberalizing authors argue that public subsidies training are largely determined by edu- unilaterally would suffer a major blow. should be targeted toward disciplines that cational attainment, women with limited Waiting for multilateral negotiation have high social returns. They call for schooling also face limited training op- of trade liberalization is certainly prefer- more empirical work to allow poli- portunities. able to maintaining protection, however cymakers to distinguish among activi- Nogu6s estimates that the present value ties. of forgone exports would be US$53 bil- If subsidies are to be used to make How does post-school training affect the lion if the present degree of protection private higher education more accessible employment and wage opportunities of were to remain unchanged. to the poor, a strong case can be made for urban women? This study of 3,826 ur- This paper is a product of the Inter- targeted subsides such as scholarships ban Peruvian women aged 15 to 65 - national Trade Division, International and/or loan guarantees available only to drawn from the Peruvian Living Stan- Economics Department. Please contact students from low-income families (and dards Survey - produced several con- Salome Torrijos, room S8-033, extension only to low-income students with good clusions: 33709 (20 pages with charts and tables). marks, if one goal is efficiency). Attendance in post-school training A general subsidy to all post-secon- programs is extensive. About 28 percent dary students, designed to allow low-in- of all women participate in occupational come students to attend school, might training outside the educational system. have a regressive impact because chil- Most female trainees prepare for predomi- dren from higher-income families are nantly female occupations (clerical jobs) more likely to use the subsidy than chil- by attending proprietary institutes (aca- dren from low-income families - all the demes) rather than job-based programs more so if the subsidy is rationed by good sponsored by the government through 100 Policy, Research, and External Affairs Working Paper Series vocational training institutions. What makes one school more effective S6-001, extension 33640 (66 pages with The more schooling a women has, than another - particularly which in- tables). the more likely she is to receive job train- puts and management practices most ing. Women with less than secondary efficiently enhance student achievement schooling have few opportunities for train- - has become the center of lively debate 243. Averting Financial Crisis - ing. The typical trainee has completed in the literature. Which method to use to Kuwait secondary school, is in her early twen- compare school effects particularly con- ties, and tends to have had over a year of cerns analysts. Fawzi H. Al-Sultan work experience when she receives train- Lockheed and Longford used a multi- ing. level model to analyze what improved Speculation in Kuwait's surging stock Post-school training generally in- performance in grade 8 mathematics in market in the early eighties fueled a fi- creases a woman's chances of entering Thailand. They concluded that: nancial crisis that threatened the bank- the labor force. Training increases the * Schools in Thailand were equally ing system and requiredgovernment inter- probability of private sector wage em- effective in teaching students eighth vention. ployment by 10 percent; public sector grade mathematics (for example, in trans- employment by 2 percent; nonwage sec- forming pretest scores into posttest On August 8, 1982 a leaflet was distrib- tor employment by 5 percent. scores). uted in the Suq Al Manakh building and Controlling for this employment ef- * Schools and classrooms contrib- in the basement of Commercial Center fect and contrary to expectations, job uted 32 percent of the variance in posttest No. 5, the offices of the parallel stock training did not increase the hourly wage scores and individual characteristics 68 market and the Kuwait Stock Exchange. rates of women in the wage (private) and percent. The leaflet carried the names of most of nonwage employment sectors. * Greater learning occurred in the dealers in the stock market and it There are several possible explana- schools having a higher proportion of declared a one-month moratorium on all tions for this finding. First, since women, teachers qualified to teach mathematics, payments of maturing future cheques. on average, tend to expect to work out- classrooms having an enriched curricu- The moratorium, informal as it was, was side the home fewer years than men, lum and in which textbooks frequently respected by the dealers. By that time, they have an incentive to train for occu- were used. close to a month had passed since the pations that require lower investments * Learning was higher for boys, first major default, and backlogs in pay- in human capital than those chosen by younger students, and for children who ments had brought the accepted form of men. Typically, these occupations are reported higher educational aspirations, clearing to a halt. The moratorium also characterized by flat wage profiles. Sec- less parental encouragement, more con- marked the beginning of a financial cri- ond, there are no standards for assessing fidence in their own mathematics ability, sis that would absorb the country's full the quality of the training in proprietary greater interest in mathematics, and a attention. institutes where most women are trained. feeling that mathematics was relevant to During the next two years stock Finally, discrimination against women them. market and real estate prices fell more may prevent them from entering not only * Schools in Thailand were more than 50 percent, devastating investors the most successful training programs uniform in their effects on learning than who had bought the underlying assets at but also the jobs that allow more wage previous research in developed countries future prices that were multiples of the and career advancement as well. had suggested would be the case. current market value. Because these This paper is a product of the Educa- The model developed by Lockheed equities had been bought with postdated tion and Employment Division, Popula- and Longford was able to explain most cheques-the acceptable form of payment tion and Human Resources Department. variance between schools but significantly in future transactions-buyers and sell- Please contact Cynthia Cristobal, room less within schools. Only one variable ers found themselves unable to settle S6-001, extension 33640. slope was observed: the relationship be- their accounts and the government was tween educational aspirations and forced to intervene. achievement. The government's actions should be 242. A Multi-Level Model of School Lockheed and Longford applied seen in the context of its desire to main- Effectiveness In a Developing multi-level techniques to longitudinal tain social harmony in a small, closely Country data recently collected by the Interna- knit society during the protracted Iran- tional Association for the Evaluation of Iraq war. Accordingly, officials pursued Marlaine E. Lockheed and Educational Achievement in Thailand. a policy to sidestep commercial regula- Nicholas T. Longford One question they tried to answer tions and bankruptcy law in the interest was: How do estimates obtained from the of settling outstanding claims as quickly Schools in Thailand are more uniformly new multi-level techniques compare with as possible. effective than previous research in devel- those obtained from ordinary regression While asset prices continued to fall oping countries would suggest. Higher methods? under the impetus of government inter- levels ofmath achievement are associated This paper is a product of the Educa- vention, the decline was reinforced by with more qualified math teachers, an tion and Employment Division, Popula- political and economic shocks that af- enriched curriculum, and frequent use of tion and Human Resources Department. fected domestic growth. The sharp drop textbooks. Please contact Cynthia Cristobal, room in oil prices and production cutbacks led Policy, Research, and External Affairs Working Paper Series 101 to lower government revenues, reducing (which rely heavily on ocean transport) resources following rules set by conser- the level of public spending programs. than on manufactured goods (arelatively vationists. Under the new paradigm that At the same time, the continuation of the high percentage of which are shipped by is developing, indigenous peoples are seen Iran-Iraq war and the recession in the air). as an integral part of protected area plan- oil-dependent Gulf countries reduced Although they do not pay higher ning through agreements worked out in nonoil trade and dampened economic average freight costs than their competi- partnership with conservation authori- expectations. tors, Caribbean exporters could reduce ties. An example of this new approach is This paper traces the development their freight costs by improving ports, the role of indigenous peoples are play- of Kuwait's financial crisis and describes bulking cargoes, forming shippers' un- ing in the design biosphere reserves. the interventions devised by the govern- ions, and adopting uniform transport Poole argues that recognizing the ment as events unfolded. The critical modes. land rights of indigenous peoples, far from question is whether the solutions will Several lines of analysis warrant hindering the rational occupation and reignite Kuwait's nonoil economy and further study: development of these lands, allows bet- stimulate the participation of the private How can the Caribbean countries ter use of their environmental knowl- sector. best exploit the cost advantage they have edge. His findings apply only in areas This paper is a product of the Office for products exported by air? where resident indigenous populations of the Executive Directors. Please con- Why is ocean transport so much less and protected wildlands areas overlap. tact Rafia Simaan, room E1-127, exten- cost efficient than air freight for Carib- He recommends that nongovernment sion 72167 (52 pages with charts and bean countries? organizations (NGOs) be given more re- tables). Why do certain product groups, such sponsibility for reconciling the often con- as food and agricultural raw materials, flicting interests of national land-use cost proportionately so much more to planners and indigenous communities - 244. Do Caribbean Exporters Pay transport? because native groups are more likely to Higher Freight Costs? This paper is a product of the Inter- trust NGOs than large public sector or- national Trade Division, International ganizations. Alexander J. Yeats Economics Department. Please contact The Bank should pay close attention Jean Epps, room S8-035, extension 33710 to these collaborations with NGOs, he Air freight is more cost efficient for most (164 pages with charts and tables). contends - especially those in threat- Caribbean countries than ocean trans- ened rainforest areas - and where con- port. Most Caribbean countries pay less ditions merit integrate them into Bank for air cargo service than their competi. 245. Developing a Partnership of policy discussions and project planning. tors - and about the same for ocean Indigenous Peoples, Poole suggests that the Bank and freight. They pay a premium, however, Conservationists, and Land Use other development organizations pay on food and raw agricultural products. Planners in Latin America more attention to "vernacular economies" - economies based on local resources, Using two independent sources of data Peter Poole used either for subsistence or as a source on international transport and insurance of revenue. These mixed subsistence- costs, Yeats investigated the charge that Recommendations for working in part- cash economies - many of them based Caribbean exporters are at a competitive nership with indigenous peoples, recog- on the management and extraction of disadvantage because of discriminatory nizing their land rights, incorporating wild resources - do not easily conform freight rates - particularly liner confer- their environmental knowledge into to prevalent models for either develop- ence pricing practices. He concluded that: wildlands and native area planning, and ment financing or ecosystem manage- Air cargo service costs are lower for paying more serious attention to the eco- ment. They demand an approach that most of the Caribbean countries studied nomics and resource implications of local allows for experimentation and recognizes than for their competitors. (Dominica activities to harvest wild resources - local needs and capacities. and Guyana are exceptions, due to un- especially in environmentally delicate Vernacular economies correspond to usual air freight costs for several major areas such as tropical rainforests. the "third option" for economic evolution products.) Over one-third of all ship- that may emerge when indigenous and ments to the United States (excluding Illustrating from a rich body of case ma- industrial economies come into contact. petroleum and sugar) involve air trans- terial from Canada, Latin America, and Mixed cash-subsistence economies that port - the use of which has been rising other regions, Poole suggests certain prin- often result from such contact are seen rapidly in the 1980s. ciples for incorporating indigenous by some as a transitional phase in an Most Caribbean countries pay about peoples and their environmental knowl- inevitable process of assimilation - and the same ocean freight rates as their edge into wildlands and native area plan- by others as an evolutionary process in competitors, although Guyana, St. Kitts, ning. which features of indigenous and indus- St. Lucia, and Suriname pay more on His report reflects a shift away from trial economies are combined in an as- many major exports. the traditional view - represented by similative system that eludes conven- Caribbean exporters are more likely certain national parks and similar pro- tional economic analysis. to pay a premium on transport costs for tected areas - that indigenous peoples Poole recommends more research food and agricultural raw materials be allowed to occupy and use an area's into the economics and resource implica- 102 Policy, Research, and External Affairs Working Paper Series tions of these local activities to harvest previous studies to diagnose the causes are the key determinants of the inflation wild resources, especially in environmen- of death in children and adults, the au- process. As a general rule, government tally delicate areas such as tropical rain- thors recommend developing and vali- debt as a fraction of GDP should not forests. dating diagnostic algorithms to determine exceed the government's relative partici- Drawing on a rich pool of case stud- the causes of adult deaths, for use in pation in generating that GDP. ies - illustrating clashes between ani- single-round surveys, using lay interview- Fiscal deficits are probably a key de- mal protectionists and indigenous hunt- ers to conduct retrospective interviews of terminant of trade deficits - particu- ing societies, for example - Poole con- relatives of the deceased. larly when the fiscal deficit is financed cludes by identifying 10 areas of recom- Techniques for determining cause- abroad. The trade deficit generally de- mended action. specific adult mortality require thorough pends on all variables directly linked to This paper is a product of the Envi- field testing and validation. The authors the desired rate of foreign savings. Ef- ronment Division, Latin America and the discuss several possible approaches, and forts should be made to estimate the Caribbean Technical Department. Please categorize selected major causes of death equilibrium trade deficit with all avail- contact Shelton Davis, room 14-039, ex- according to whether they are likely to be able relevant information, as this esti- - tension 38622 (96 pages). diagnosed or excluded, on the basis of mate is important in determining the symptoms reported by relatives. They real exchange rate. consider methods for classifying and pre- The main determinants of the real 246. Causes of Adult Deaths senting data on cause of death and con- exchange rate are the level of excess' in Developing Countries: A clude with recommendations for further spending in the economy (measured by Review of Data and Methods methodological research. the trade deficit), the external terms of This paper is a product of the Popu- trade, and domestic measures of com- Richard Hayes, Thierry Mertens, lation, Health, and Nutrition Division, mercial policy that allow for a difference Geraldine Lockett, and Laura Rodrigues Population and Human Resources De- between domestic and foreign prices. partment. Please contact Sonia Ains- The instruments of the adjustment Little is known about the causes of adult worth, room S6-065, extension 31091 (40 program may affect the equilibrium val- deaths in most developing countries. The pages with charts and tables). ues of the key macroeconomic variables: authors recommend developing and vali- inflation, the fiscal deficit, debt ratios, dating diagnostic algorithms to determine the trade balance, and the real exchange the causes of adult deaths, using lay in- 247. Macroeconomic Policies for rate. If they do, measures should be terviewers to conduct retrospective inter- Structural Adjustment taken to keep the target variables at their views of relatives of the deceased. desired levels and the endogenous vari- Carlos Alfredo Rodriguez ables at their new equilibrium levels. Relatively little attention has been paid In particular, the fiscal deficit should to the problem of premature adult mor- A stable macroeconomic environment and be compatible with the acceptable infla- tality in developing countries, despite a functioning market economy are two tion rate - and the real exchange rate taliy i devlopng cunties,desiteshould be at its equilibrium level. high levels of mortality in many coun- essential preconditions for successful tries - and despite the potentially se- structural adjustment. Macroeconomic Macroeconomic stability is essential vere social and economic consequences of stability requires a low fiscal deficit to to both adjustment and growth. Given a adult deaths. support external balance and low infla- stable macroeconomic environment and This inattention is reflected in a tion. Only under these conditions can a the correct microeconomic incentives, dearth of information about the causes of change in microeconomic incentives suc- resources will be allocated to their most adult deaths in these populations. Such ceed in developing resources to their most productive use without additional macro- al economic incentives such as subsidized information is available from vital regis- productive uses. credit or an arbitrarily high real exchange tration data in certain Latin American rate. Growth is best served by a func- and Middle Eastern countries, but else- Structural adjustment is an economywide tioning capital market; governments where - especially in Sub-Saharan Af- adjustment effort aimed at allocating should not interfere by controlling inter- rica and Southern Asia - the sparse in- resources better. Functioning markets est rates at below-equilibrium level, or formation available comes mainly from and a low, stable inflation rate are two targeting an arbitrarily high real ex- survey and hospital data and is gener- macroeconomic preconditions for imple- ally of limited usefulness. menting structural adjustment, contends change rate. Circulatory diseases and external Rodriguez. He further concludes: This pAp erisadctoth Mac- causes (injuries) appear to be major In highly distorted economies, the econoic Adju s tment causes of adult deaths in most countries. market system must be restored before sion, contR Eomi rmNt. The relative contribution of other impor- adjustment efforts are undertaken. An Please contact Raquel Luz, room Ni- 057, extension 39059 (66 pages with tant causes - including tuberculosis, inflation rate over 20 percent is likely in charts and tables). cancer, liver disease, respiratory disease, most countries to generate unstable prices and maternity-related complications - that would impair adjustment. varies between countries. Fiscal deficits and policies about After reviewing methods used in (internal and external) government debt Policy, Research, and External Affairs Working Paper Series 103 248. Private Investment, * Creating a supportive macroecon- worked "unit cost" approach. Government Policy, and Foreign omic environment. The sample consisted of 38 observa- Capital in Zimbabwe Together these measures would con- tions of 15 hospitals, with 1 to 3 annual stitute a radical shift in the business en- observations per hospital. About half Mansoor Dailami and Michael Walton vironment - one that need not lead to the hospitals had fewer than 76 beds; the an unwarranted rise in either the foreign other half had more than 150 (some more Policy measures to encourage recovery of share of profits or the share of foreign than 300). Hospitals reported expendi- private investment in Zimbabwe should capital in the economy. tures rather than costs (thus undoubt- focus not on measures to raise current This paper is a product of the Finan- edly understating total costs). Data on profits but on measures to relieve supply- cial Policy and Systems Division, Coun- input prices were unavailable; proxy side constraints, to reduce perceived risk, try Economics Department, and the variables were used. to clearly define the rules of the game for Country Operations Division, Southern Analysis showed that the number of foreign investors, and to create a more Africa Department. Please contact Ma- inpatient days, deliveries, and laboratory favorable environment for investment de- ria Raggambi, room N9-031, extension exams had a positive and statistically cisionmaking. 37657 (64 pages with charts and tables). significant effect on total cost. The vol- ume of outpatient activity, as measured The response of private investment is 2by the number of first outpatient visits to Tetresptonse fepivatess i stment 249. The Determinants of Hospital the hospital's clinic, also had a positive centrl to there tivnes aoft astmtl Costs: An Analysis of Ethiopia impact on total costs. measures in bringing about structural Teetmtdcs ucinwsue change and sustained growth -but there . is little analysis of this issue for Africa. Ricardo Bitran-Dicowsky and David W. Dunlop to compute marginal and average incre- n smental costs. Calculated marginal costs In some African countries there is little or no indigenous business sector; in For hospitals to become more independ- slightly exceeded average incremental many, foreign corporations play an im- ent in financing their costs, they must costs - suggesting that hospitals in our portant role. Zimbabwe's business sec- know how those costs are influenced by sample had reached the pont of constant tor is relatively well-developed by Afri- output and other variables. This analysis economies of scale for inpatient days, can standards - and since there is a of costs in Ethiopian hospitals addresses laboratory exams,and delivery outputs. working stock exchange, the accounts of for the first time the issues of economies A negative and statistically signifi- much of it are in the public domain. of scale and scope in delivery of hospital- cant coefficient associated with the out- This study focused largely on the based health care services in a poor coun- put interaction term indicated the exis- behavior of this part of the private sector try. tence of economies of scope between the - in the context of overall determinants number of inpatient days and the num- of private investment. The problem of financing health care in ber of first outpatient visits. Dailami and Walton conclude that poor countries has become acute. Hospi- The number of total beds in a hospi- no simple policy shift will initiate and tals are viewed skeptically as facilities tal appeared to have a positive and sig- sustain the recovery of private invest- that are not cost-effective in providing nificant independent effect on total hos- mentin Zimbabwe. The reasons for weak primary health care services. Increas- pital cost. Neither of the input price private investment are complex. Adjust- ingly it is thought that hospitals should proxy variables had a statistically sig- ments in conventional areas are unlikely become more financially independent nificant impact on total cost. to work when the problem also lies in the from government subsidies and find other This paper is a product of the Health overall environment for investment deci- ways to finance both their recurrent and and Nutrition Division, Population and sionmaking and intangible perceptions capital costs. Human Resources Department. Please of future risk. First, it is necessary to know how contact Sonia Ainsworth, room S6-065, The government's current focus on hospital costs are influenced by output extension 31091 (26 pages with tables). the guidelines for foreign investment is and other variables. In this paper, Bi- appropriate and important, but should tran-Dicowsky and Dunlop analyze the be cast in abroader context. Policy meas- determinants of hospital expenditures (a 250. The Baker Plan: Progress, ures should be geared toward: proxy for hospital costs) in a poor coun- Shortcomings, and Future * Relaxing supply-side constraints. try, using data from Ethiopia. * Reducing perceived risks. The authors specified and estimated William R. Cline * Defining new, clearer rules of the a translog-like cost function, using ordi- game. nary least squares (OLS). This specifica- The basic strategy spelled out in the Baker * Facilitating investment decision- tion allows an explicit determination of Plan (1985-88) remains valid, but stronger making. the marginal expenditure for care, given policy efforts are needed, banks should * Encouraging the underlying de- the structure of output and other factors, provide multiyear new money packages, mand for expanding capacity. such as input prices, that might affect exit bonds should be guaranteed to allow * Improving incentives for invest- the structure of expenditures. Thus it voluntary debt reduction by banks, and ment to be economically efficient. provides a theoretically more appropri- net capital flows to the highly indebted * Dealing with the ownership issue. ate framework for analysis than the over- countries should be raised $15 billion a 104 Policy, Research, and External Affairs Working Paper Series year. Successful emergence from the debt fiscal deficits and inflation), not the debt It is therefore believed that the North crisis, however, will depend primarily on burden. Of the six large Latin American would profit from tighter patent proce- sound economic policies in the debtor debtor countries, the three with the larg- dures in the South, to protect Northern countries themselves. est outward transfer of resources rela- firms from imitators in their export mar- tive to GNP (Chile, Colombia, and Vene- kets - and that the South would like to The Baker Plan essentially made exist- zuela) achieved the highest growth and pay as little as possible for these innova- ing strategy on the debt problem more the lowest inflation in 1986-88, indicat- tions, which lax patent procedures al- concrete. Like existing policy, it rejected ing that external debt does not explain lows. It is recognized that this reduces a bankruptcy approach to the problem, high inflation or low growth in Argen- the incentive for R&D in the North, but judging that coerced forgiveness would tina, Brazil, and Mexico. as long as the South is a small part of the "admit defeat" and cut borrowers off from The basic international debt strat- market, free riding does little harm. capital markets for many years to come. egy remains valid, but intensified policy In this paper, Diwan and Rodrik It assumed that the principal debtor coun- efforts are necessary. Banks should pro- bring another feature to the debate: the tries could grow their way out of the debt vide multiyear new money packages. possibility that the North and South may problem and could expand their exports Banks should also confer senior status have differing technological needs. Just enough over time to reduce their debt on "exit bonds," and the World Bank as the North would like to develop drugs burden to normal levels. It called for should then guarantee these instruments against cancer and heart disease, and structural reform (particularly trade lib- - to make viable substantial voluntary the South drugs against tropical disease, eralization, more liberal policies on di- debt reduction by interested banks. Bi- so the North's labor-saving innovations rect foreign investment, and reform of lateral and multilateral creditors should are less useful in the South, where labor the state enterprise sector). And it con- raise annual net capital flows to the is cheap. Southern patents might pro- tinued the adjustment efforts in the highly indebted countries by $10 billion mote the development of technologies debtor country in return for financial annually, and the banks by $5 billion, to appropriate to the South that might not support from foreign official and bank cut the outward resource transfer in half have been developed if there were no creditors. over the next 3 years. The key to suc- patents. In this case, lower patent pro- The plan did shift emphasis, how- cessful emergence from the debt crisis, tection in the South would not benefit ever: from short-term balance of pay- however, will have to be sound economic the South - and increased patent pro- ments stabilization to longer-term devel- policies in the debtor countries them- tection in the South can hurt the North opment objectives, and thus from the IMF selves. when the resources that go into R&D are to the World Bank as lead institution in This paper, prepared for the confer- limited. debt management. It did not address the ence "Dealing with the Debt Crisis," is a Diwan and Rodrik develop a formal problem of the transition from "involun- product of the Debt and International model for IPRs, emphasizing the dimen- tary" lending of new money - in which Finance Division, International Econom- sion of technological choice. This model all banks were pressured to lend new ics Department Please contact Sheilah allows for a continuum of potential tech- amounts proportionate to their exposure King-Watson, room S8-029, extension nologies, with a range of preferences in - back to voluntary capital flows. And it 31047 (52 pages with charts and tables). the North and South; free entry into the failed to integrate all public lending, R&D sector rather than duopolistic com- remaining silent on the role of the IMF. petition between two firms; and grada- Except for the collapse of oil prices, 251. Patents, Appropriate tions of patent protection. It assumes global economic conditions were broadly Technology, and North-South that both markets are segmented, due to favorable to debt management under the Trade different patent-law application in the Baker Plan. Major Latin American debt- two regions. ors achieved important reductions in in- Ishac Diwan and Dani Rodrik Some of the usual free-rider consid- terest/export ratios. On the other hand, erations must be qualified if the analyst the banks provided one-third less new The debate about stronger enforcement of considers the possibility that patent laws money than the Baker Plan target, and patents on intellectual property rights in the two regions affect both the quan- the multilateral development banks assumes that the technological needs of tity and quality of innovation. This be- raised net flows by only one-tenth of the the North and the South are similar. comes important when the two regions targeted $3 billion annually. If the IMF What happens to the debate when we al- have different technological needs. and bilateral export credit agencies are low for different technological preferences What are the results of the analysis? included, net capital flows from official in the North and in the South? First, an increase in patent protection in sources to the highly indebted countries either region leads to an increase in in- (HICs) actually fell, from $9 annually in At the heart of the debate about intellec- novative activity, as well as a greater fit 1983-85 to $5 billion annually in 1986- tual property rights (IPRs) that is con- between the available technologies and 88. suming so much attention in the Uru- the preferences of the patenting region. Political fatigue is evident in major guay Round of trade negotiations is one By implication, this skews the technol- debtor countries but their recent stag- basic economic issue. Most patented prod- ogy range away from the needs of the nant growth has been caused primarily ucts or processes that make it to South- other region. by internal economic distortions (high ern markets are developed in the North. Second, although a strictly utilitar- Policy, Research, and External Affairs Working Paper Series 105 ian global welfare function would assign Hajivassiliou found, however, that governments in countries like Brazil and identical rates of patent protection to the secondary market values tend to reflect Mexico than foreign debt does. This is a North and South, placing greater weight past difficulties, not anticipate future relatively new experience for developing on the welfare of the South necessitates ones - so they can't be used to build a countries but not for OECD countries. differential treatment. But it is not clear case for debt relief. The secondary mar- Reisen's discussion of rising govern- a priori whether the South ought to have kets - still in an early evolutionary stage ment indebtedness, therefore, includes a lower or higher level of protection than - are quite "thin" and thus unable to the experiences of four developing (Bra- the North. exploit efficiently and quickly all avail- zil, Mexico, Korea, and Indonesia) and Third, when patent rules are set in able information on creditworthiness. three highly indebted OECD countries an uncoordinated manner, it is possible Hajivassiliou also uses the model (Belgium, Ireland, and Italy). (Neither that a narrowing of the gap between the estimates to analyze other issues, includ- are the former four, especially Korea and technological preferences of the two re- ing whether large surpluses by the oil- Indonesia). gions will lead to lower rates of patent exporting nations significantly affected Why, Reisen asks, has government protection in both the North and the international lending markets after the debt been rising since 1984 despite ra- South. Similarly, an increase in the rela- first major oil shock; the question of li- tioned foreign lending and efforts at fis- tive market size of the South can lead to quidity vs. solvency; the degree to which cal consolidation? He finds the major a reduction in patent protection in both discrepancies between official and black determinants of debt to be: regions. market exchange rates can predict fu- * External transfers, which imply This paper is a product of the Debt ture financing problems (little evidence an internal transfer of resources from and International Finance Division, In- was found to support the proposition that the private to the public sector. ternational Economics Department. overvaluation is a precursor of debt cri- * Fiscal rigidities, because of fail- Please contact Sheila King-Watson, room sis); and the degree to which factors ex- ure to broaden tax bases and cut govern- S8-029, extention 31047 (37 pages with ogenous to a country (such as imports by ment consumption. charts and tables). industrialized countries, inflation in * High interest rates coupled with OECD nations, and world interest rates) low growth of GDP, both explained largely contribute to a country's debt crisis. by depressed savings and investment. 252. Do the Secondary Markets World economic factors were gener- * Massive devaluation of the real Believe In Life After Debt? ally found to be statistically insignificant exchange rate and big swings in value as predictors of repayment problems in among key currencies. V.A. Hajivassiliou developing countries - except that infla- How can the rise in government debt tion in the industrialized countries in be stopped in the long run? Not through Secondary market values tend to reflect some versions of the models is found to aburst of inflation, even when itis largely past difficulties rather than anticipate marginally reduce the likelihood of fu- unanticipated - because the demand for future ones. They can't be used to build a ture debt problems in developing coun- base money is now too small relative to case for debt reliefon the grounds that it tries. public domestic debt. Nor through do- would cause secondary discounts to fall This paper, prepared for the confer- mestic and foreign default - unless the and hence the value of outstanding debt ence "Dealing with the Debt Crisis," is a government runs a substantial primary to rise. product of the Debt and International surplus (which is mostly not the case) Finance Division, International Econom- and can credibly commit to not default- Using panel-data econometric techniques ics Department Please contact Sheilah ing again (which is unlikely). to examine the case for external debt King-Watson, room S8-029, extension Possible remedies, Reisen suggests, relief, Hajivassiliou explores the rela- 31047 (40 pages with charts and tables). are growth-oriented fiscal adjustment, tions between measures of credit- improved debt management, and volun- worthiness and debt discounts on the tary debt reduction. He calculates the secondary market. 253. Public Debt, North and South noninterest surplus governments would Do the discounts on the secondary have to run to stabilize (and then reduce) market reflect a history of past repay- Helmut Reisen public debt ratios and make their budg- ment problems - or do they anticipate ets consistent with other macroeconomic future debt crises? Different answers to Why has government debt risen since 1984 targets. He also discusses how fiscal this question imply different things about despite rationed foreign lending and ef- adjustment can foster growth at the same the desirability of debt relief, forts at fiscal consolidation? And how time that it minimizes real depreciation If the secondary market discount is can the rising debt be stopped? Possible of the exchange rate and reduces the cost a good predictor of future debt problems remedies are growth-oriented fiscal ad- of domestic public debt. -and not merely a reflector of past prob- justment, improved debt management, This paper, prepared for the confer- lems - then debt relief, in averting an- and voluntary debt reduction. ence "Dealing with the Debt Crisis," is a ticipated problems, will reduce the sec- product of the Debt and International ondary market discounts and increase The recent rise in domestic public non- Finance Division, International Econom- the value of debt held by international monetary debt and in domestic bond ics Department Please contact Sheilah lenders. yields is imposing a heavier burden on King-Watson, room S8-029, extension 31047 (34 pages with tables). 106 Policy, Research, and External Affairs Working Paper Series 254. Future Financing Needs of differentiating between countries on the financial system, so it generates little the Highly Indebted Countries same continent that have managed their publicity. economies well and are close to credit- But their external debt represents, Ishrat Husain and Saumya Mitra worthiness from those whose economic by many measures, a more severe eco- policies and management are of ques- nomic burden than the debt of the middle- What amount ofexternal resources would tionable quality. income countries. Ten of the most se- be required to reverse recent investment The next logical step is to develop a verely indebted African countries owe an trends and bring about modest growth in cooperative framework that channels average of over 1,000 percent of their per capita incomes? Between $18 and $20 money through equitable burden shar- annual exports. billion of net new disbursements annu- ing and promotes credit enhancement, Poverty and economic rigidities in ally. But consider the alternatives... debt reduction, and other innovative fi- the African countries make it harder for nancing techniques in support of growth- them to grow out of their debt problems Under base scenario assumptions, the oriented adjustment programs. without special assistance. These coun- authors estimate that the Baker 17 coun- The alternative is continued stagna- tries are more dependent than the highly tries will require about $18 to $20 billion tion in the highly indebted countries - indebted countries on primary commod- of net new disbursements annually to which could mean political and social ity exports, which often require long in- reverse recent investment trends and unrest, a greater reluctance to maintain vestment periods to increase production. bring about modest growth in per capita orderly debtor-creditor relationships, and Expanding the output of tradable goods, incomes. a disruption of debt servicing even in which is central to adjustment, is diffi- The most significant shortfall is in countries that have carried out their ob- cult and likely to be slow. commercial bank lending. Without an ligations unfailingly. Recognizing the problems of these adequate burden-sharing arrangement, This paper, prepared for the confer- countries, several bilateral donors have it is unlikely that official creditors - ence "Dealing with the Debt Crisis," is a converted concessional development loans particularly the multilateral institutions product of the Debt and International to grants in many of these countries. - would be prepared to assume a dispro- Finance Division, International Econom- Donor governments have endorsed portionately large exposure risk in these ics Department Please contact Sheilah concessional debt relief. The near-term countries. King-Watson, room S8-029, extension relief from rescheduling will not be great, Husain and Mitra conclude that with 31047 (34 pages with tables). but the principal of orderly debt reduc- sound adjustment policies in the debtor tion has been put into practice, countries, a combination of concerted new Debtor countries must take the lead lending, debt reduction, reflows of flight 255.The External Debt Difficulties in establishing and maintaining work- capital, and intermittant accumulation of Low-Income Africa able medium-term adjustment programs. of interest arrears will be the principal Once adjustment is occurring, it is in the means of financing. Charles Humphreys and John Underwood interests of donors and creditors to con- Some countries - such as Mexico, tinue supporting recovery well into the Venezuela, Nigeria, and Ecuador - need The debt crisis tht affects middeincome 1990s. external financing to offset their worsen- developing countries gets more publicity This paper, prepared for the confer- ing terms of trade. Others need it to re- than the one that affects low-income Afri- ence "Dealing with the Debt Crisis," is a store productive investment to reason- can countries - but the debt service in 10 product of the Debt and International able levels. of those countries averages 80 percent of Finance Division, International Econom- At least some countries should be annual exports. Poverty and economic ri- ics Department Please contact Sheilah able to work their way out of the debt gidities make it hard for them to grow out King-Watson, room S8-029, extension crisis, as their needs are feasible, so of their debt problems without increased 31047 (49 pages with charts and tables). commercial bank creditors willconcessional aid and debt rescheduling. respond favorably. Others will have to balance the finance from official and pri- 256. Cash Debt Buybacks and the vate creditors. Two debt crises affect developing coun- Insurance Value of Reserves Others will be unable - even under tries. The more publicized crisis affects the most stringent conditions and poli- the middle-income Baker Plan countries, Sweder van Wijnbergen cies - to grow out of their present diffi- including Nigeria and Cbte d'Ivoire. The culties without some reduction in the less well known crisis affects most of stock or servicing of their debt. Africa's 34 low-income countries. Secondary market prices on debt don't The lumping together of good and The total external debt of these coun- reflect the insurance value reserves have bad debtors is repulsing efforts of coun- tries - about $70 billion - is less than for debtors (but not creditors) - so a tries that should have access to volun- the debt of Mexico alone. International country buying back debt with reserves tary lending. The main actors should bank exposure there is less than $10 bil- may end up worse off in terms of welfare. begin by abandoning the concept of a lion. Low-income Africa's external lia- homogeneous group of 15 or 17 highly bilities are mainly loans from, or guaran- Bulow and Rogoff (1988) have shown that indebted countries (HICs). The contagion teed by, official creditors. Their debt rep- auction-based purchases of debt may not effect should not deter the creditors from resents no threat to the international be an effective way to capture the secon- Policy, Research, and External Affairs Working Paper Series 107 dary market discount, since the purchase A period of rapid growth and heavy ex- Van Wijnbergen concludes that with pushes up the secondary market after- ternal borrowing ended for Mexico with foreign financing in place, and Mexico's ward. (The problem is that marginal the debt crisis of mid-1982. This episode internal reform program continued and debt is bought back at an average price, taught certain lessons, according to van deepened, a cautiously optimistic prog- while the marginal price is substantially Wijnbergen: Growth accompanied by nosis seems justified. Growth is likely to below the average if more debt reduces unsustainable borrowing could produce begin recovering by the end of 1989, with creditworthiness.) later losses that more than offset earlier positive per capita growth thereafter. Van Wijnbergen points out another gains. Mexico's agenda should therefore Although this will require additional problem with cash debt buybacks - one be renewed growth within the limits of funding from abroad, Mexico's debt indi- that arises because terms-of-trade-con- creditworthiness. Fiscal constraint is cators should decline substantially. If tingent instruments do not exist in inter- equally necessary, to keep inflation low Mexico continues its reform program, national capital markets, and because of and predictable. investing in Mexico should pay off hand- the differences in risk aversion that one As long as internal interest rates somely. may plausibly assume to exist between remain as high as they are, Mexico's fis- This paper is a product of the Coun- commercial creditors and the developing cal problems are intractable without re- try Operations Division, Latin America countries that are their debtor clients. newed access to foreign capital markets. and the Caribbean Country Department Under such circumstances, secon- But rollover of half or two-thirds of for- II. Please contact Myriam Bailey, room dary market prices fail to reflect the in- eign interest payments, in addition to 18-169, extension 31854 (30 pages with surance value reserves have to debtors principal payments, would bring a solu- charts). but not to creditors - since, after all, the tion within reach. However, service of secondary market reflects mostly intra- the face value of the current debt - with- bank transactions. out substantial amounts of new money 258. Understanding Voluntary Since a country can always opt not - is incompatible with renewed output Organizations: Guidelines for to use its reserve for debt service, re- growth and thus not really in anyone's Donors serves have an insurance value that is interests. specific to the country. This insurance Renewed access to foreign capital L. David Brown and David C. Korten value will thus not be reflected in the markets is imperative both for restoring price at which the country can buy back medium-term growth and for success of No responsible donor should undertake debt in the secondary market using its the current short-term stabilization ef- to "assist"or "use"nongovernment organi- reserves. fort. But not all forms of access are zations to help in development unless it is As a result, the country buying back equally beneficial. prepared to invest in understanding their debt with reserves clearly ends up worse What would be the macroeconomic nature and distinctive roles. Financial off (in terms of expected utility), even if it effects of debt-equity swaps? Swapping incentives, wrongly applied, can destroy succeeds in capturing the full secondary public debt for private equity, says van the voluntarism of all but the most market discount prevailing before the Wijnbergen, would raise the equilibrium strongly self-aware of voluntary organi- buyback - because the buyback reduces inflation rate substantially if they were zations. the insurance possibilities open to the implemented on a scale large enough to country. be interesting from a macroeconomic Voluntary development organizations This paper is a product of the Coun- point of view. But without access to have demonstrated substantial compara- try Operations Division, Latin America foreign capital markets in one form or tive advantage in developing countries and the Caribbean Country Department another, output growth would be com- - especially in their ability to innovate, II. Please contact Myriam Bailey, room promised. adapt to local conditions, and reach and 18-169, extension 31854 (12 pages). The increase in external debt im- work with poor and difficult-to-reach plied by renewed access to international populations. capital markets does not really threaten These capabilities are a function of 257. Growth, External Debt, and Mexico's creditworthiness. Lending to their values, special skills, small size the Real Exchange Rate in Mexico Mexico would probably increase the ex- limited resources, flexibility, and free- pected net repayment, in terms of dis- dom from political constraints. Their Sweder van Wijnbergen counted value, rather than decrease it - weaknesses are a function of many of the increased upfront borrowing notwith- same characteristics - particularly their Can external restraint and internal bal- standing. value commitments, small size, independ- ance in Mexico be reconciled at savings But much depends on developments ence, and lack of administrative rigidity. and investment levels that allow satisfac- in world commodity and capital markets. In this paper on what makes non- tory output growth? What role do fiscal A 2 percent increase in world interest government organizations (NGOs) tick, policy, interest rates, oil prices, and ex- rates would slow down Mexico's growth Brown and Korten suggest that it is change rates play? How would a cutoff an estimated 1 percent. equally inappropriate to criticize: from external capital markets affect out- Therefore, external debt arrange- * Voluntary organizations for their put growth? This paper develops and ments should include contingency clauses limited ability to provide routine serv- uses an econometric model for Mexico to conditional on developments in oil prices ices to large populations on a sustained, discuss these questions. and interest rates. self-financing basis, 108 Policy, Research, and External Affairs Working Paper Series * Government organizations for their 259. Dealing with Debt: The 1930s process. The analogy with Chapter 11 limited ability to innovate and adapt re- and the 1980s bankruptcy proceedings - which permit sponsively to the needs of many different a clean break with the past - applied no groups. Barry Eichengreen and Richard Portes more in the 1930s than it does in the * Commercial organizations for their 1980s. In many cases, debt service was limited ability to provide services below The debt crisis of the 1930s illustrates the interrupted only sporadically, and un- cost to persons who cannot afford to pay. difficulty ofglobal plans for resolving the certainty about the magnitude of trans- In relating to NGOs, they say, do- debt crisis-and underscores the impor- fers lingered for decades. nors should avoid the danger of equating tance of market-based debt-reduction * Government intervention in the small with simple. Most NGOs are small schemes. It highlights the advantages of 1930s and 1980s differs less in extent by donor standards, but are simple nei- dispersing foreign obligations among than in direction. In recent years, credi- ther in their organizational form nor in many private investors rather than con- tor-country governments have exerted their development roles. They are par- centrating them in the hands of finan- continuous pressure on debtors to main- ticularly complex in the aggregate. cially vulnerable commercial banks. tain service on their external debts. In The only thing NGOs have in com- the 1930s and 1940s, creditor-country mon as a group is that they are non- The debt crisis of the 1980s differed in governments pressured debtors and credi- government and are legally registered as fundamental ways from that of the 1930s, tors alike. nonprofits. NGOs include market-ori- but the earlier crisis illuminates the cur- * Global schemes to short-circuit the' ented public service contractors (PSCs), rent crisis in several ways. protracted process of bilateral negotia- values-driven voluntary organizations It shows us that bondholders have tions proved unavailing. Nearly every (VOs), and member-accountable people's been no more adept, historically, than aspect of the global solutions proposed in organizations (POs). the banks at avoiding loans to countries the 1980s was first suggested in the Some VOs are strictly voluntary and with a record of defaulting. It alerts us to 1930s. Ultimately those global schemes work with no budget; others have well- how much creditor-country governments foundered on the issue of who should paid full-time professional staff. Their can promote or impede a negotiated reso- fund them and control their administra- commitments span a wide range, and lution of the crisis. It reminds us of the tion. their participants range from saints to serious obstacles to global plans for re- * Unlike global plans, market-based scoundrels. solving the debt crisis. And it under- debt reduction helped to resolve the debt The strongest VOs and POs respond scores the importance of market-based crisis of the 1930s by reducing the debt to a good deal more than financial incen- debt-reduction schemes. overhang and eliminating marginal credi- tives. Their strength lies in the fact that Eichengreen and Portes conclude: tors. they are not the same as government * Economic variables alone do not This paper, prepared for the confer- organizations or businesses. At they same explain the incidence and extent of de- ence "Dealing with the Debt Crisis," is a time, they are not immune to financial fault. Noneconomic variables, such as product of the Debt and International incentives, which if wrongly applied can proximity to a major military power and Finance Division, International Econom- destroy the voluntarism of all but the international political links, also appear ics Department Please contact Sheilah most strongly aware of VOs and POs. to be important. King-Watson, room S8-029, extension The issues are complex, the necessary * The implications of different debt- 31047 (44 pages with charts and tables). data elusive (Brown and Korten suggest management strategies for subsequent a research agenda), and the potential for macroeconomic performance remain dif- damage substantial. ficult to isolate. In the 1930s as in the 260. Growth, Debt, and Sovereign Donors cannotautomatically assume 1980s, efforts to maintain debt service Risk In a Small, Open Economy that existing staff experience and train- tended to be associated with fiscal aus- ing prepare them to play a constructive terity, import compression, and export Jagdeep S. Bhandari, Nadeem UI Haque, role in helping NGOs become more effec- subsidies - while the decision to sus- and Stephen J. Turnovsky tive in their essential roles in national pend payments was often accompanied and global development. by fiscal expansion, monetary reflation, This paper develops a macroeconomic This paper is a product of the Public and policies of import-substituting indus- model for a small, open, developing econ- Sector Management and Private Sector trialization. Countries that interrupted omy that borrows abroad - to study the Development Division, Country Econom- service on their external debts seemed to dynamic interaction between debt and ics Department. Please contact Zeny recover more quickly from the Great growth and the impacts of various poli- Kranzer, room N-9051, extension 37494 Depression than did countries that cies and exogenous shocks on the rate of (40 pages). avoided default. capital accumulation, the current account, * There is little evidence that coun- and debt. Adjustment policies that in- tries that defaulted in the 1930s suffered crease productivity and efficient use of reduced access to capital markets after capital increase both growth and the stock World War II, once they reached settle- of external debt - but the new level of ment agreements with their creditors. debt may be sustainable in the long run. * The readjustment of defaulted debts entailed a protracted negotiation Policy, Research, and External Affairs Working Paper Series 109 Most macrodynamic models of economies 261. Inflation, External Debt, and 262. Adjustment and External treat the supply of debt as infinitely elas- Financial Sector Reform: A Shocks In Ireland tic. Using a more realistic model, Bhan- Quantitative Approach to dari, Haque, and Turnovsky have ana- Consistent Fiscal Policy Dermot McAleese and F. Desmond McCarthy lyzed the dynamic consequences of vari- ous kinds of disturbances in a represen- Sweder van Wijabergen, Robert Rocha, and Long delayed, the Irish adjustment pro- tative small developing economy that can Ritu Anand gram might well be described as an eco- borrow only at a premium and therefore nomic success story - so far. How it faces an upward-sloping supply of debt. This new model can be used to derive the comes out depends greatly on the external They conclude that: financeable fiscal deficit, given inflation environment. * An upward shift in the supply of targets, or to derive an equilibrium infla- debt - which may be taken to represent tion rate for which no fiscal adjustment The Irish economy has faced adjustment an increase in the world interest rate - would be necessary. Here it is used to problems similar to those of the highly leads to a long-run decline in external analyze inflation, external debt, and fi- indebted developing countries. debt, a higher domestic interest rate, less nancial sector reform in Turkey. It enjoyed buoyant growth through capital stock, and a reduced trade sur- the late 1970s, at which time the econ- plus. At some stage, the trade surplus This new model uses an integrated frame- omy suffered external shocks due to ad- becomes a deficit and more debt is accu- work to assess the consistency between verse terms of trade and the slowdown in mulated. fiscal deficits and other macroeconomic the world economy. * An increase in the marginal cost targets, such as output growth and the The initial policy response was to of debt (risk premium) - which almost rate of inflation. It can be used to derive rely on additional external borrowing, certainly raises the long-run domestic the financeable fiscal deficit, given infla- higher taxes, and increased public spend- interest rate and lowers the capital stock tion targets, or to derive an equilibrium ing - in short, to postpone adjustment. - may or may not lower long-run exter- inflation rate for which no fiscal adjust- This led to external debt problems and nal debt as well. It depends on the ratio ment would be necessary. unemployment of crisis proportions in the of the country's external debt to the net The "financeable deficit" is the defi- mid-1980s. credit of its private sector cit that does not require more financing Since then, the economy has bene- * An increase in productivity raises than is compatible with sustainable ex- fited from favorable external shocks. More the long-run stock of capital but leaves ternal and internal borrowing and exist- important, in early 1987 a newly elected the level of external debt and the inter- ing targets for inflation and output minority government began implement- est rate unchanged in the long run. . growth. ing long-delayed adjustment policies. * Fiscal expansion (an increase in The model can assess how the rela- These efforts were supported by the main government spending) has almost no ef- tionship between fiscal adjustment and opposition parties and the European fect in either the short run or the long sustained inflation rates are affected by: Community. run. Consumers offset government * Financial sector reforms that af- External shocks and internal efforts spending by reducing private consump- fect base money demand. have combined to produce a dramatic tion. (This conclusion is based on the as- * Changes in interest rates paid on turnaround in economic performance. sumption that employment is fixed.) foreign and domestic public sector debt. Government borrowing declined from Bhandari, Haque, and Turnovsky * Output growth targets. 13 percent of GNP in 1986 to 3 percent in developed their macroeconomic model for * Exchange rate policy. 1988. A chronic balance of payments a small, open, developing economy that The model was used to analyze the deficit of 14 percent of GNP was elimi- borrows abroad - to study the dynamic relationship between inflation, external nated. And inflation fell from over 20 interaction between debt and growth and debt, and financial sector reform in Tur- percent to 3 percent. the impacts of various policies and ex- key. Ireland's economy is not yet out of ogenous shocks on the rate of capital ac- The model can also be used to see the woods. The political consensus may cumulation, the current account, and what happens if the required fiscal ad- weaken. Unemployment remains high. debt. They used the intertemporal opti- justment is postponed. The authors ex- Tax levels are higher than in other EC mizing representative agent model, which plore two scenarios: one in which fiscal countries. And the debt overhang leaves incorporates a realistic debt supply sched- adjustment takes place eventually, and Ireland vulnerable to exchange rate fluc- ule and the risk premiums associated one in which the inflation tax is used tuations and a rise in interest rates. with lending to sovereign borrowers, eventually to close any financing gap. It remains to be seen whether the which most models lack. This paper is a product of the Coun- new policies will be sustained long enough This paper is a product of the Macro- try Operations Division, Latin America to produce the desired results and rectify economic Adjustment and Growth Divi- and the Caribbean Country Department the mistakes of the previous decade. sion, Country Economics Department. II. Please contact Myriam Bailey, room This paper is a product of the Eco- Please contact Raquel Luz, room N11- 18-169, extension 31854 (31 pages with nomic Analysis and Prospects Division, 057, extension 39059 (46 pages with tables). International Economics Department. tables). Please contact Milagros Divino, room S7- 037, extension 33739 (23 pages with tables). 110 Policy, Research, and External Affairs Working Paper Series 263. How Has Instability In World motivated and if the infrastructure is in ficiently allocated, in markets lacking ag- Markets Affected Agricultural good condition at the time management gressive competition. Export Producers In Developing is turned over to the farmers. Using techniques similar to the ear- Countries? lier studies, Yeats examined the relative Two Colombian irrigation projects are prices paid for iron and steel products by Peter Hazell, Mauricio Jaramillo, studied in this report, the Coello and selected African and other developing and and Amy Williamson RUT projects. Management of the RUT developed countries. project is going to be transfered soon from His findings parallel those of the World prices are notoriously unstable, and public managers to farmers. The Coello earlier studies. Typically, international unless farmers can efficiently diffuse the project has been farmer-managed for markets that are more concentrated (less risky returns from export crops, price vari- about 13 years. competitive), or that rely on fewer trade ability may impede the expansion of agri- The keys to its success have been: contacts, bring higher prices. cultural exports in many developing coun- * The dynamism ofthe private farm- Analysis of the price premiums that tries. ing sector and support services in Colom- 20 former French colonies paid for iron bia. and steel imports from France shows World prices have been traditionally un- * The high level of farmer training. excess price margins so high as to have stable, but Hazell, Jaramillo, and Wil- * Patterns of land tenure - with policy implications since they seriously liamson find the much-publicized turbu- farms an average size of 15 hectares. drain limited resources. lence in world markets in the mid-1970s * Regular maintenance. Over the longer term (1962-87), the and early 1980s to have been more a * The continuity of medium- and African countries paid an average pre- statistical fluke - an unlucky chance low-level staff, many of whom have been mium of 20 to 30 percent over other im- sample - than the beginning of any employed 10 to 15 years by the district. porters. The losses from those prices longer term increase in market instabil- * The availability of communication came to about $2 billion by 1987 - a ity. and transportation facilities. figure roughly equal to the combined long- Variability in world prices has been * Some use of hydraulic engineer- term debt in 1987 of Burkina Faso, Chad, almost entirely transmitted to develop- ing in the design of irrigation facilities, Mauritius, and the Central African Re- ing countries in the dollar value of their to simplify operations and reduce main- public. export unit values. However, it has not tenance costs. This overpricing extends to other been fully transmitted to average pro- This study is part of a series of case (non-French) African countries. Former ducer prices. Producer prices have been studies on the interaction between de- colonies of Belgium, Portugal, and the buffered by real exchange rates, domes- sign and performance of irrigation sys- United Kingdom still pay premiums of tems in selected countries. This series of 20 to 30 percent on imports from those tic marketing arrangements, and govern- ment intervention, but still the level of studies is carried out in collaboration with three developed countries. instability remains sizable - and is the the Bank Operations Evaluation Depart- This paper is a product of the Inter- dominant source of instability in crop ment and the International Irrigation national Trade Division, International revenues for most producers. Management Institute (IIMI), Kandy, Sri Economics Department. Please contact Unless farmers are able to diffuse Lanka. Jean Epps, room S8-037, extension 33710 the risky returns from export crops, price This paper is a product of the Agri- (44 pages with tables). variability may seriously impede the culture Production and Services Division, expansion of agricultural exports in many Agriculture and Rural Development developing countries. Department. Please contact Herve 266. Policy Changes that This paper is a product of the Agri- Plusquellec, room N-8067, extension Encourage Private Business cultural PoliciesDivision, Agriculture and 30348 (75 pages with tables). Investment in Colombia Rural Development Department. Please contact Cicely Spooner, room N8-037, 265. Do African Countries Pay extension 30464 (34 pages with charts More for Imports? Yes To sustain expansion of private business investment, Colombia should consider an Alexander J. Yeats investment tax credit, frequent forecast- 264. Two Irrigation Systems in ing ofbusiness variables (to reassure busi- Colombia: Their Performance and Overpricing iron and steel imports in nessmen of the favorable climate for in- Transfer of Management to Users' Africa supports the theory that less com- vestment), a shift from historical cost Associations petition - in international and domestic accounting to replacement cost account- markets - leads to higher prices. ing, and preferential treatment for small Herve Plusquellec and medium-size firms in the allocation Numerous analysts have studied the in- of available capital. Two Colombian projects show how local fluence of market structure on perform- farmers can manage an irrigation system ance in domestic markets in industrial Private business investment has ex- in a developing country if the manage- countries. Most show that prices and panded remarkably in Colombia's recent ment and personnel are well-trained and profits are higher, and resources less ef- economic recovery. Sustained expansion Policy, Research, and External Affairs Working Paper Series 111 of this investment is considered crucial tension 37657 (53 pages with charts and certain types of their income from taxa- to continued economic growth and in- tables). tion, to guard against abuse. creases in production. * Develop "presumptive" methods of Having analyzed demand, the cost of assessing taxes for groups (small firms capital, and the availability and alloca- 267. Issues In Income Tax Reform and the self-employed) that are difficult tion of investable funds, Dailami con- In Developing Countries to tax. cludes the following: * Carefully limit deductible ex- * Motivating firms to expand capac- Cheryl W. Gray penses for firms to the necessary costs of ity is a key requirement for continued earning income. expansion. Many firms are already oper- Revenue, efficiency, and equity should be * Simplify depreciation rules by ating at high capacity utilization rates. the three main goals of income tax re- avoiding "fine tuning" of categories or An investment tax credit designed to form. Add to those enforceability - which rates. As an alternative, allow full lower the effective price of capital goods furthers the other three goals simultane- writeoff ("expensing") of capital invest- would help to target investment expan- ously. ment in the first year, but disallow the sion and hence would be desirable. deduction of interest paid on loans to * Frequent forecasting of such vari- Of all taxes, income taxes are the most finance such investment. ables as GDP, interest and exchange difficult to implement. Developing coun- * Collect as much income tax as rates, and credit and monetary aggre- tries are usually able to generate large possible on both labor and capital income gates, would tend to improve the climate amounts of income tax revenue only from through withholding and current pay- for investment by enabling the private large corporations or foreign investments. ments (P.A.Y.E.), but keep the procedures sector to make informed decisions. They are rarely effective in taxing wealthy simple. * The real (marginal) cost of capital individuals or small or medium-size busi- * Enforce tax compliance by charg- to the nonfinancial corporate sector is nesses. ing reasonable interest and penalties on high in Colombia: currently about 16 How can income taxes be made more late payments. Seizure and auction of percent. Policy efforts that induce corpo- effective in developing countries? property and/or criminal penalties may rations to substitute equity for debt fi- Using recent tax reforms in Jamaica, also be necessary to enforce compliance. nancing should lead to a more balanced Indonesia, and elsewhere as examples, However, these enforcement tools need corporate capital structure and possibly Gray discusses the pros and cons of spe- to be counterbalanced by fair avenues for a lower overall cost of capital. The elimi- cific tax reform elements and makes the taxpayer objections and appeals. nation of dividend income taxes as part following suggestions: This paper is a product of the Office of the 1986 tax reform eliminated double * Limit the distinctions between of the Vice President, Development Eco- taxation of capital and thus helped re- business and individual income taxes. nomics. Please contact Norma Campbell, duce the cost of equity financing. On the This has the advantage of simplicity and room S9-049, extension 33769 (41 pages). other hand, it prompted shareholders to avoids an abrupt shift in tax liability on pressure corporate management to dis- incorporation. tribute more dividends - which limits a * As a general principle, broaden the 268. Shortcomings in the Market corporation's ability to finance its invest- tax base while keeping tax rates low to for Developing Country Debt ments internally. moderate. Avoid special tax incentives * The cost of capital could also be when possible. John Wakeman-Linn reduced by shifting the tax treatment of * Tax the full range of income under depreciation allowances away from his- a country's jurisdiction - taxing resi- Creditors and highly indebted countries torical cost accounting system toward a dents on their worldwide income (with a alike would benefit from a credit market replacement cost accounting system. foreign tax credit) and nonresidents on in which penalties for default were heav- * High inflation and low savings all income earned in the country. This ier or more certain, in which multina- rates keep the prevailing lending rates helps to close a wide loophole for tax tional and international organizations high in Colombia - and it is generally avoidance. were used to improve the flow of informa- easier for larger firms to get capital than * Include all types of interest in- tion about the debtor countries to possible for small and medium-size firms. There come in the tax base, including interest creditors, and in which methods were are at least two reasons why small and on bank deposits and government bonds. designed to increase the precommitment -medium-size firms should get preferen- * Fully tax capital gains (particu- of funds. tial treatment in allocation of available larly under a flat-rate or nearly flat-rate capital: (1) they tend to be concentrated income tax). It is important to deal with the immedi- in relatively more labor-intensive activi- * Deal with the thorny problem of ate debt crisis in ways that do not harm ties and sectors, and (2) their existence fringe benefits (which go disproportion- the credit market, but efforts should be and survival are necessary to guard ately to the better-off employees) by al- made to improve that market. The two against increased industrial monopolies. lowing as deductions for the provider only chief problems limiting the market for This paper is a product of the Finan- those benefits for which the recipients developing country credit are unenforce- cial Policy and Systems Division, Coun- pay tax. able contracts and asymmetric informa- try Economics Department. Please con- * Require that all nonprofit organi- tion, according to Wakeman-Linn. tact Maria Raggambi, room N9-031, ex- zations file tax returns, and exempt only Instead of undertaking investments 112 Policy, Research, and External Affairs Working Paper Series that could pay rates of return greater access to factor markets. Increasing their trated in fewer, more traditional, less than the opportunity cost of their funds, capacity to respond to incentives has major remunerative lines of work. Investments creditors are financing investments in implications for the economy, population, in human capital for women have a high projects with lower rates of return but and environment. payoff - but women and girls often get enforceable contracts. less than men or boys, especially when Creditors and debtor countries alike This set of recommendations on women the costs to families of education, train- would benefit if some method could be in development highlights considerations ing, health care, and even food are high. found to make loan contracts enforceable and key findings that can be used to Improving the education of women and to increase the flow (and quality) of identify issues and develop action plans is probably the easiest program to tar- information about the developing coun- concerning women in economic and sec- get, but key health and family planning tries' ability and willingness to repay tor analysis and project design. Among needs include stronger prenatal screen- loans (including their susceptibility to those findings: ing and care, help with delivery, improved penalties) and about how they intend to Women already contribute far more family planning, and a reduction of ane- use the loan proceeds. economically than is usually recognized. mia. The most effective measures for Short of creating an international Women account for over half the food reducing birth rates include expanded court whose judgments are supported by produced in the developing world and earning opportunities and education for an international army - which is highly provide one-fourth of the developing women, combined with family planning unlikely - there is no way to make con- world's industrial labor. Their contribu- and health care. tracts in this market strictly enforceable. tion is undervalued partially because Improving opportunities for women It should be possible, however, to im- women's work often "does not count,"and remains a sensitive topic - a leadership prove incentives for developing countries partly because of the nature of home- issue - in many places. Through policy to repay future loans. based work. Their productivity and ca- dialogue and lending, institutions like Specifically, Wakeman-Linn recom- pacity to work is often constrained by the World Bank can help highlight the mends: culture and tradition, which often keeps costs of neglecting women and the gains * Finding ways to increase the pen- women homebound, while men go into to development from more vigorous ef- alties for default, or making the penal- the "outside" world. forts to include them. ties more certain. This would increase Expanding women's economic choices This paper is a product of the Women the debtor countries' willingness to pay, - by improving technologies or increas- in Development Division, Population and which would benefit all parties, ing their options for cottage industry or Human Resources Department. Please * Studying how to use existing outside work - can increase output and contact Judy Lai, room S9-125, exten- multinational and international organi- efficiencyby enablingwomen tofindtheir sion 33753 (95 pages with charts and zations to increase the flow of relevant true comparative advantage. Improving tables). information to potential creditors. women's education provides much the * Increasing precommitment of same economic return as improving men's funds through increased penalties for education - and tends to lead to smaller, 270. Fuelwood Stumpage: default and other approaches. IMF con- healthier families. Financing Renewable Energy for tingency programs are already used ex- Women tend to be disproportionately the World's Other Half tensively to establish some form of pre- represented among the poor, so economic commitment. Further use of interna- adjustment programs should deliberately Keith Openshaw and Charles Feinstein tional organizations along these lines may take into consideration women's special be possible. Mutually beneficial contracts needs and constraints. For example, By collecting an adequate stumpage fee are not currently possible because pre- women often have trouble traveling far for woodfuels grown on public lands, commitment is not enforceable. from home so they especially need local developing country governments could This paper is a product of the Debt roads or paths, better water supplies, finance the investments needed to main- and International Finance Division, In- simple forms of transport - and infor- tain a regular fuelwood supply and to ternational Economics Department. mational infrastructure (such as radios) prevent long-term environmental damage. Please contact Sheilah King-Watson, that facilitates education and training. room S8-029, extension 31047 (42 pages). The same set of prices on agricul- In many developing countries, households tural products may have a different in- rely heavily on woodfuels (firewood and centive effect on men and women - who charcoal) as their main source of energy - 269. Women in Development: have different degrees of control over for cooking and heating. The internal Issues for Economic and Sector income from different products. When trade in woodfuels is often sizable. Analysis women's productive capacity is seriously In Africa alone the annual value of constrained, it is important not simply to traded fuelwood and charcoal is probably Women in Development Division "get the prices right" - to establish ap- more than US$2 billion - and the an- propriate incentives - but also to im- nual total "value" of wood products (in- Women respond well to incentives but in prove their capacity to respond, through cluding self-collected fuelwood) may be many parts of the developing world they investment programs and policy changes. about $6 billion to $8 billion. are not equipped to respond: limited in Labor markets are often segmented Yet few governments are aware of human capital development, they also lack by gender, with women typically concen- wood-fuels' importance - and few re- Policy, Research, and External Affairs Working Paper Series 113 coup more than a small fraction of the formance indicators would increase economic Adjustment and Growth Divi- value of raw wood material grown on worker motivation. sion, Country Economics Department. public lands. * Current regulations contribute to Please contact Raquel Luz, Room N11- African governments now collect the underuse of labor. Relaxing regula- 059, extension 39059 (124 pages with stumpage fees of $30 million a year for tions about (paid) hours of work, layoffs, tables). fuelwood and charcoalwood, or only about and the use of temporary (daily) workers 2 percent of the selling price of the fin- would, along with transfer payments, ished products. improve the welfare of all parties. 272. Women's Changing By charging an adequate fee for these * Some form of collective action or Participation In the Labor Force: wood resources, Openshaw and Feinstein government intervention may be needed A World Perspective argue, woodfuels production and con- to provide the training that firms do not sumption can be made more efficient. In provide for fear of later being raided by T. Paul Schultz addition, governments would be better other firms. able to finance the investments in their * No particular type of ownership Research has rarely tested the proposi- forest sector that are needed to maintain has been linked with higher productiv- tion that women have lost more than men a regular fuelwood supply and to prevent ity, so policies geared toward changing when low-income countries introduce Jong-term environmental damage. enterprise ownership or providing pref- minimum wage legislation and certain Openshaw and Feinstein outline the erential treatment toward certain types other labor market regulations that raise methods energy planners can use to esti- of ownership should be based on a care- the cost of labor to firms compared with mate fuelwood values and discuss sev- ful examination of specific cases, not families. But such interventions in the eral problems that arise in assessing and general rules (such as privatization, Se- labor market may slow women's transi- collecting fuelwood stumpage fees. negalization, or preferential treatment tion from nonmarket and family work to This paper is a product of the En- of foreign capital). employment by firms. And that may af- ergy Strategy, Management, and Assess- * Protection generates inefficiency. fect the rate and structure of economic ment Division, Industry and Energy De- This inefficiency is not an economic rent growth. partment. Please contact James Mullan, reflected in higher wages. Recent poli- room S4-029, extension 33250 (51 pages cies aimed at reducing protection should This paper describes how the composi- with charts and tables). improve productivity. tion of the labor force changes with eco- * Popular hypothesis is that the nomic development. It considers recent more firms in developing countries are trends in women's labor force participa- 271. How Industry-Labor Relations exposed to world markets, the more pro- tion and the type of jobs held in various and Government Policies Affect ductive they become. Terrell and Svejnar sectors as national per capita income Senegal's Economic Performance found that the extent of an enterprise's increases. export orientation had no bearing on its What policies affect the relative com- Katherine Terrell and Jan Svejnar productive efficiency. petitiveness of families and firms - and * The unwillingness of firms to in- the extent to which women work for one Renewed growth in Senegal calls for more vest in physical and human capital - or the other? Women are more likely to worker training, fewer government regu- combined with labor market and other work in the family or informal labor lations, less trade protection, and more government regulations - seems to have market if the labor costs to firms exceed cooperation between labor and industry contributed to Senegal's decline in total the opportunity costs of female labor to - for example, by linking wage supple- factor productivity. family enterprises. Firms are at a rela- ments to performance indicators. * The average contribution of non- tive disadvantage compared with fami- Africans has been high, but their grad- lies in the employment of less experi- Senegal is in the grip of a long-term eco- ual exodus appears to have benefited enced and less skilled labor, presumably nomic crisis. Senegalese industry suf- Senegal's economy. because their labor costs are affected by fers from a highly adversarial system of * Special consideration should be such regulations as minimum wage leg- industrial and labor relations, excessive given to retraining displaced workers islation, social insurance premiums, lim- government regulations in some areas within existing firms rather than outside its on firing, costs of monitoring produc- and inadequate government support in of them, as the return (in terms of earn- tivity, and rules about severance pay. others, and many misperceptions about ings) is higher on firm-specific experi- The minimum-wage two-sector model the ethnically diverse labor force and ence than on general experience. predicts that raising effective minimum enterprise ownership. Terrell and * The burdens of rising unemploy- wage levels would increase the share of Svejnar conclude that: ment and limited hiring of young work- families (or the uncovered sector) in the * Senegal needs to adopt a social ers are borne mostly by older industrial labor force. compact that would replace the current workers who must support ever larger There are statistically significant re- adversarial system with more coopera- extended families and would thus bene- lationships between income per adult in tion among labor, industry, and the gov- fit from economic growth. Output growth a country and the share of wage earners emnment. Linking a part of worker com- would also probably increase workers' in most sectors of the economy - par- pensation (for example, the wage supple- earnings. ticularly in manufacturing, commerce, ment) to specific individual or group per- This paper is a product of the Macro- services, transportation, and utilities. As 114 Policy, Research, and External Affairs Working Paper Series real income per adult increases, the over- tion specialists and more training of sen- percent of Bank lending to 5 percent or all fraction of wage earners increases, ior economists and managers on the sub- more, current staff resources are inade- except in the case of women's entry into ject. quate. There is a shortfall in PHN staff wage employment in agriculture. resources of about 20 staffyears (1.3 staf- In Asia and Africa, an increase in PHN lending rebounded in FY88 to fyears per PHR division), to meet the tar- the proportion of employment in firms $304.9 million for eight projects, a 50 geted level of 12 to 14 projects and $500 within the major sectors accounts for most percent increase in volume over the pre- million a year in PHN lending. of the rapid growth in women's overall vious five-year average. This paper is a product of the Popu- share of wage employment. In Latin Lending for health predominated, lation, Health, and Nutrition Division, America, however, growth in the propor- while population lending (featured in five Population and Human Resources De- tion of firm employment has been slower of the eight projects) accounted for 27 partment. Please contact Sonia Ains- than elsewhere, and share of women in percent of the total. Interest in nutrition worth, room S6-065, extension 31091 (56 wage employment has even fallen over- increased, but nutrition lending received pages with tables). all in several countries. This is consis- little emphasis (except in connection with tent with the greater labor market dis- structural adjustment). tortions in these countries of Latin Amer- Important trends included increased 274. Efficiency and Equity ica during the 1960s and 1970s - which attention to project "software," contin- In Social Spending: How and Why hindered more firm employment of lower ued support for decentralization ofhealth Governments Misbehave paid workers. Latin American women systems, more efforts to involve the pri- were progressively less likely to enter vate sector in delivering PHN services, N the labor force in manufacturing, a sec- more emphasis on health costs and fi- ancy Birdsall and Estelle James tor that absorbs many women as wage nancing, development of new ways to workers in other regions. reach clients at the periphery, and more In most countries it is easy to identify re- Enforcement and coverage of mini- emphasis on focused projects. allocations of public spending for social mum wage legislation are difficult to Supervision coefficients for PHN programs that would improve efficiency measure, but it appears that women (and projects declined from 16.5 staffweeks in and simultaneously improve the distri- to a lesser extent men) participate less in FY87 to 13 in FY88. Only seven of 40 bution ofincome and better serve the poor. the overall labor force when minimum projects had major problems - princi- The authors suggest why these realloca- wages are higher as a proportion of GNP pally with technical assistance, lack of tions are difficult but not impossible to per adult. counterpart funds, and inadequate mana- bring about. It is not unreasonable to assume that gerial capacity. women have lost more than men from The recommendations of the review A hot issue in development economics is market regulations and distortions, but are that the Bank should use more spe- how much to rely on user charges and little research has addressed this propo- cialized technical personnel (usually lo- private organizations to provide such sition. If it is true, however, these inter- cal consultants) on missions, and more social services as health and education. ventions in the labor market may be re- local consultants in sector work; place Most analysts arguing on either side of sponsible for slowing women's transition more Bank personnel in the field or in- the issue assume that any policy deci- from nonmarket and family work to firm crease field office responsibility for su- sions involve a tradeoff between equity employment. This in turn may affect the pervision; build monitoring into the proj- and efficiency. rate and structure of economic growth. ects and provide training for it; and set Birdsall and James argue that in This paper is a product of the Women project supervision coefficients at appro- many settings in the developing world in Development Division, Population and priate levels (perhaps 15 staffweeks). that assumption is incorrect. In many Human Resources Department. Please Sector work for FY88 was twice that countries, they argue, the current situ- contact Maria Abundo, room S9-125, ex- for FY87, half of it for the Africa region. ation is inefficient partly because it is tension 36820 (47 pages with tables). Sector work focused mainly on internal inequitable; more equitable social spend- efficiency, costs and financing, and man- ing would be more efficient in reducing agement capacity. mortality, for example, or in maximizing 273. Population, Health, and Population lendinghas accountedfor social returns to spending on education. Nutrition: FY88 Annual Sector about one-third of PHN lending for three The model they use assumes that Review years, but more should be done. Bank the degree of efficiency and redistribu- work in population is hampered by rela- tion is endogenous, so the real problem Population andHuman ResourcesDepartment tively weak demand for population proj- is: How does one break into the chain of ects, the shortage of Bank specialists on causes and bring about a new, more effi- PHN lending increased in FY88, despite the subject, and the ready availability of cient and equitable equilibrium, when a shortfall of PHN staff resources. Lend- grant funds from other donors. this was apparently not in the interest of ing for health predominated, but popula- The Bank should capitalize on its the main actors or it would already have tion lending accounted for 27 percent of comparative advantage in affecting popu- happened? the total. Bank leaders should continue lation policy and programs. If well-defined groups know they are emphasizing population concerns. The If lending to PHN sectors is to in- "losers," they are more likely to mobilize Bank should also consider more popula- crease from its current low level of 2 to 3 and foment opposition to existing poli- Policy, Research, and External Affairs Working Paper Series 115 cies - so the "gainers" benefit from per- Arnold reviews the World Bank's previ- tion ofmarkets do not, although they raise petuating a "veil of ignorance." Most ous estimates and projections of interna- agricultural output. commonly, some private goods may be tional migration through the year 2000 publicly provided and oversupplied be- and recommends revised figures - on Do public programs and infrastructure cause they benefit a politically influen- the basis of recent information about that promote agricultural growth improve tial group in a nonobvious way - for immigration and emigration. Net inter- real agricultural wages and thus reduce example, by oversubsidizing colleges and national migration figures should be re- rural poverty? undersubsidizing education at lower lev- vised upward for most of the sending and That depends, says Khandker, bas- els. receiving countries. ing his conclusions on district-level panel Birdsall and James argue for a pol- In the early 1980s, net international data from India. icy that concentrates government fund- migration to all receiving countries to- Whether public policies increase real ing on public goods and encourages the taled more than 1.2 million persons a agricultural wages depends on whether market to do what it does best: fund and year. Arnold assumes this figure to they promote rural nonfarm employment, produce private goods. With public spend- gradually decrease to fewer than 900,000 to absorb the growing labor force. ing concentrated on services that yield persons a year in the period 1995-2000. For example, although educational public goods, the poor automatically bene- The current male dominance of interna- infrastructure, public irrigation, and fit even if they are not targeted, and tional migration flows is also expected to regulation of markets raise agricultural since the rich also benefit they may be decrease gradually over time. output, they depress real agricultural reluctant to oppose these programs, even In the 1980s, the United States was wages because they do not increase non- if they prefer government spending on the net recipient of about as many immi- farm employment. private services from which they benefit grants as all the rest of the countries in In contrast, rural electrification, more. the world together. Arnold assumes that roads, and banks can increase real agri- They recommend ten political strate- the importance of the United States as a cultural wages, because they increase gies for reallocating government funds in prime destination of immigrants will in- nonfarm employment. the public sector in a way that maxi- crease substantially in the 1990s. Nine Rural financial institutions and elec- mizes the benefits of targeting, reduces other countries were net recipients of trification reallocate labor from agricul- costs, and minimizes resistance to change more than 20,000 international migrants ture to rural nonfarm activities, however, and the withdrawal of the middle and a year in the 1980s. The major destina- while roads promote both farm and non- upper classes' political and tax support. tion countries include Australia, Saudi farm employment. This paper - a product of the Popu- Arabia, Canada, and Cbte d'Ivoire. This paper is a product of the Women lation and Human Resources Operations Mexico is by far the largest net ex- in Development Division, Population and Division, Country Department I, Latin porter of international migrants, and its Human Resources Department. Please America and the Caribbean Regional dominance in this area is expected to contact Belinda Smith, room S9-125, ex- Office, in cooperation with the Popula- increase in the 1990s. Most of the other tension 35108 (25 pages with tables). tion and Human Resources Department major source countries for migration are - is part of a larger effort in PRE to in Asia. The United Kingdom is the only 277. The Effect of Formal Credit address issues in the economic manage- European country with net emigration of on Output and Employment In ment of the social sectors in conjunction more than 15,000 persons a year, al- Rural India with operations. Please contact Nancy though Poland, Ireland, and Portugal also Birdsall, room 17-019, extension 31822 have substantial net outflows. Shahidur R. Khandker and (38 pages). This paper is a product of the Popu- HansP. Binswanger lation, Health, and Nutrition Division, Population and Human Resources De- partment. Please contact Sonia Ains- Improving credit in rural India greatly 275. Revised Estimates and worth, room S6-065, extension 31091 (88 improves rural nonfarm employment and Projections of International pages with charts and tables). output. It has only a modest effect on Migration: 1980-2000 crop output - more because of increased use offertilizer than because ofcapital in- Fred Arnold 276. Improving Rural Wages in vestments, which merely substitute for India farm labor. Here are country-by-country recommen- dations for revising the World Bank's Shahidur R. Khandker Using a two-stage model to distinguish previous estimates and projections of net demand for formal credit from supply, international migration for the period Do public programs and infrastructure to Khandker and Binswanger conclude that 1980-2000, for use in the Bank'sWorld promote agricultural growth improve real increased formal credit has a positive Population Projections. Net migration agricultural wages and thus reduce rural effect on crop production, on the use of figures for most major sending and re- poverty? Rural electrification, roads, and fertilizer, and on private investment in ceiving countries should be revised up- banks do - because they increase non- machines and livestock. ward. farm employment. Educational infra- The effect of expanded credit on crop structure, public irrigation, and regula- output is small, however. Crop output 116 Policy, Research, and External Affairs Working Paper Series improves more because of increased use The paper discusses three alterna- There is little direct support for the of fertilizer than because of capital in- tives for avoiding these effects: idea that exogenous increases in the say- vestments, which merely substitute for 1. Indexing items in the income ings rate by themselves cause increases labor. statement. in the rate of technological change. Ap- Credit decreases farm employment, 2. Indexing the balance sheet and parently exogenous increases in the rate yet increases the real agricultural wage deriving the income as a residual. of savings and investment seem to be because of its overwhelmingly positive 3. Redefining the tax base in terms associated with lower rates of return to effect on rural nonfarm employment. of cash flow rather than income. capital. In short, improved financial inter- The option of partial indexation Increased openness to international mediation in rural India greatly improves (indexation of a few selected items on the trade speeds up growth. So does an in- rural nonfarm employment and output, income statement) is shown, through crease in the number of scientists and has a modest effect on crop output, and simulations, to be an incomplete and of- engineers. Increased investment in tends to substitute capital investment ten more distorting "correction" for infla- physical capital alone does not. for farm labor. tion. The rate of technological change, and - This paper is a product of the Women The paper shows, with the help of therefore the marginal product of capi- in Development Division, Population and numerical examples, that the most accu- tal, seem to increase when there are more Human Resources Department. Please rate method to correct for inflation-in- scientists and engineers, as one would contact Belinda Smith, room S9-125, ex- duced mismeasurement of income is to expect. tension 35108 (28 pages with tables). use alternative 2 - to index the balance Increased openness to international sheet and derive the income as a resid- trade also seems to increase the rate of ual. Experience with this approach in technological change. Countries more 278. Inflation and the Argentina, Brazil, and Chile - three open to trade have a higher level of in- Company Tax Base: Methods to countries that have had high rates of vestment and capital growth - which is Minimize Inflation-induced inflation - indicates that the method is not associated with a fall in the marginal Distortions administratively practical. product of capital. Countries that be- But because this method of inflation come more integrated with world mar- Anand Rajaram adjustment is fairly demanding in terms kets seem to have a higher marginal prod- of the general level of bookkeeping and uct of capital. Conceptually, the most accurate way to accounting skills in the economy, its use Increases in capital investment as- correct for inflation in reporting taxable or recommendation for any country sociated with a higher per capita GDP income is to index the balance sheet and should be guided by a realistic appraisal are associated with a fall in the marginal derive income as a residual. The experi- of those skills. It should be noted that product of capital. Increases in capital ence ofArgentina, Brazil, and Chile indi- countries like Chile, which employ such investment associated with increases in cates that this method is workable. comprehensive methods today, arrived trade are not. Whether it is practical for other countries at that point after various simpler This suggests that policies to encour- depends on the administrative and book- schemes were gradually modified over age more open trading may be as impor- keeping limitations of each case. several years. tant to growth as additional foreign lend- This paper is a product of the Public ing - especially in their cumulative ef- Inflation causes conventionally reported Economics Division, Country Economics fects - and at the same time enhance income to differ from real economic in- Department. Please contact Ann Bhalla, the efficient use of foreign loans. come because standard accounting pro- room N10-059, extension 37699 (70 pages Method: Romer summarizes known cedures are based on the assumption of with charts and tables). correlations between growth in per cap- price stability. For example, deprecia- ita income over time and other economic tion deductions based on the historic cost variables, particularly those related to of assets cause a firm's reported income 279. What Determines the Rate of investment and international trade. He to exceed real economic income. Allow- Growth and Technological presents some regression evidence that ing firms to deduct nominal interest ex- Change? extends the existing correlations. But pense has the opposite effect. The valu- his main contribution is to interpret these ation of inventory items, capital gain, Paul M. Romer correlations - particularly correlations and foreign exchange gain is similarly between the rates of technological change distorted. Policies to encourage more open trading and capital accumulation - in the con- Because of this mismeasurement of and accumulation of human capital may text of an aggregate theory of growth economic income, a tax on reported in- be as important to growth and techno- that explicitly models technological come may distort economic decisions and logical change as additional foreign lend- change. generate undesirable distributional ef- ing. This paper is a product of the Macro- fects. Marginal effective tax rates, for economic Adjustment and Growth Divi- example, may differ across sectors, in- After analyzing cross-country correlations sion, Country Economics Department. dustries, and even firms - making re- between economic growth and other vari- Please contact Raquel Luz, room N11- source allocation less efficient. ables, Romer concludes the following: 057, extension 39059 (45 pages with tables). Policy, Research, and External Affairs Working Paper Series 117 280. Adjustment Policies In East Campbell, room S9-047, extension 33769 282. EMENA Manufactured Asia (26 pages with tables). Exports and EEC Trade Policy Bela Balassa 281. Tariff Policy and Taxation In Bela Balassa Policy differences explain why East Asia's Developing Countries EMENA's trade performance in the EEC newly industrializing economies outper- Bl aas M Astaepromnei h E rd La merica's in per capita Bela Balassa has been far from uniform. Reforming come. But it is inappropriate for Korea countries (Turkey and Morocco) have in- and Taiwan to run current account sur- In moving toward an ideal policy scheme, creased their market share - socialist pluses when they can get higher returns value-added taxes and excises on luxury countries have seen theirs fall. from domestic investment than from for- commodities and on commodities that eign securities or gold. create negative consumption externalities This paper has examined the implica- can be established instantaneously while tions for EMENA of EEC trade policy. Having passed through the first stage of a tariff reform will take time. At the Following an analysis of EEC trade agree- import substitution, which involved the same time, tariffs should be reformed ac- ments with EMENA countries, the paper 'replacement of the imports of nondurable cording to a predetermined timetable, has shown that EMENA's trade perform- consumer goods and their inputs by made public in advance, that permits ance in the EEC has been far from uni- o producers to adjust. form. While Turkey and Morocco, coun- domestic production, two East Asian ptries that carried out economic reforms, newly industrialized economies - Koreainraethrmrktsreoacnid and Taiwan - embarked on an outward Developing countries are well advised to increased their market share to a consid- oriented development strategy that gave adopt appropriate tariff and tax policies. countries and Iran lost market shares. a boost to manufactured exports and eco- An ideal scheme of such policies would coun t helaut make ss nomic growth. This contrasts with the include the following: A oteftr,i a ensg policies applied by three Latin American Export taxes should be set on the gested that the enlargement of the Com- newly industrializing countries, Argen- basis of the long run elasticity of foreign oen eMaret n Ehav ca lie h na- tina, Brazil, and Mexico, which passed to demand in the case of commodities in ti ton E N contreheng the second stage of import substitution which the country has market power and association or cooperation agreements that concerned consumer and producer at a rate to ensure that exportable pro- with the EEC and a more pronounced durables and intermediate products and duction equals the quota when export negative effect on countries that do not reformed their policies only after the quotas are applied have such agreements. In turn, the com- adverse effects of these policies became q Import tariffs should be set at pletion of the internal market of the EEC apparent. equal rates on all manufactured goods, by 1992 would favor products from the The two East Asian economies con- complemented by taxes on their primary member countries over products from the tinued with outward-oriented policies inputs, to ensure equal effective rates of outside, including EMENA countries. during the period of the two oil crises and protection at desirable levels, preferably However, EMENA countries would bene- limited reliance on external borrowing. not exceeding 10 percent. Primary ac- fit from the acceleration of economic In turn, the three Latin American econo- tivities and exports in general should be growth in the EEC upon completion of mies again turned inward and placed con- exempted from tariffs on their inputs, the Europe-1992 program. siderable reliance on foreign loans. These * Value-added taxes should be lev- The paper has further indicated that policy differences by and large continued ied on all commodities at equal rates, the comparative advantage of the after the debt crisis, except that the three supplemented by excise taxes on luxury EMENA countries lies in labor intensive Latin American economies had to apply commodities and on commodities that products, with the low-wage countries deflationary measures in view of the un- create negative consumption externali- having good prospects in unskilled-labor availability of external capital. ties, intensive products and the socialist Differences in the policies applied In moving toward an ideal policy EMENA countries in skill-intensive prod- explain the different economic perform- scheme, value-added taxes and excises ucts. At the same time, the investigation ance of the East Asian and the Latin on luxury commodities and on commodi- of export prospects would have to be car- American economies, with the former ties that create negative consumption ried further by providing greater product much surpassing the latter in per capita externalities can be established instan- and country detail. incomes. At the same time, it is inappro- taneously while a tariff reform will take This paper is a product of the Office priate for Korea and Taiwan to run cur- time. At the same time, tariffs should be of the Vice President, Development Eco- rent account surpluses when they can reformed according to a predetermined nomics. Please contact Norma Campbell, obtain higher returns on domestically timetable, made public in advance, that room S9-047, extension 33769 (37 pages invested capital than on capital invested permits producers to adjust. with tables). in foreign securities and gold. This paper is a product of the Office This paper is a product of the of the Vice President, Development Eco- Office of the Vice President, Development nomics. Please contact Norma Campbell, Economics. Please contact Norma room S9-047, extension 33769 (21 pages). 118 Policy, Research, and External Affairs Working Paper Series 283. Experiences of Financial these companies not been rescued, the been mixed, although unfavorable expe- Distress In Thailand costs of a promissory note exchange, net riences have mostly been due to short- of a partial recovery from liquidation of comings in implementation and comple- Tipsuda Sundaravej and assets, would have cost close to Baht 8 mentary activities rather than inade- Prasarn Trairatvorakul billion. And rehabilitation allowed busi- quacy of the approaches themselves, ness concerns to continue borrowing from Some of the factors crucial for suc- Rehabilitating the financial institutions these institutions, strengthened the fi- cessful group lending are: that were failing in 1984 appears to have nancial system, and may have allowed * Homogeneous borrowing groups cost the Thai government no more than shares held by authorities to appreciate. that are jointly liable and assume some closing them down and paying offdeposi- Of course, the rescue option meant managerial and supervisory responsibili- tors would have cost. In a situation like using government facilities and person- ties. Mandatory joint liability has only a this, authorities must make a tradeoff nel. And it is more difficult to prosecute positive effect on repayments as long as between preserving the financial system's former managers under a rehabilitation borrowers have strong reason to believe well-being and being able to hold manag- scheme than if the institution closes that the majority of their peers will also. ers of failed institutions accountable for down. The dilemma authorities face in a repay. their failure. situation like this is the tradeoff they * Establishing a common bond other must make between preserving the fi. than credit, such as mandatory deposits Between 1983 and 1984, 15 Thai finance nancial system's well-being and prevent- that will only be reimbursed upon full' companies - with Baht 9.8 billion in ing moral hazard. repayment, enhances loan repayment at assets - went under, and many others This paper, a background paper for the same time as it introduces savings were distressed. Authorities were faced the 1989 World Development Report, is a mobilization. with the choice of rescuing the troubled product of the Office of the Vice Presi- * Denying access to future credit to institutions or closing them down. Clos- dent, Development Economics. Please all group members in the case of default ing an institution down is often less costly, contact the World Development Report by any member is the most effective and financially, than rescuing it - and the office, room S13-060, extension 31393 (28 least costly way of enforcing joint liabil- most effective way to penalize sharehold- pages). ity. But this only works as long as the ers and management. The risk in closing lending institution can continue to pro- institutions is that you might set off sys- vide clients with favorable and timely temwide panic that hurts both the do- 284. The Role of Groups and credit services. mestic market and the country's ability Credit Cooperatives In Rural Important factors for successful out- to attract foreign funds. Lending comes of credit cooperatives include: Although some companies failed to * Bottom-up institutional develop- recover, the measures Thai authorities ment and training at the grass roots as took succeeded in restoring public confi- Monika Huppi and Gershon Feder well as all management level. dence in the system. Deposits in finance * Savings mobilization by credit co- companies, which had dropped to their Borrowing groups and credit coopera- operatives renders them financially less lowest levels in 1984, gradually rose back tives are potential channels through which dependent on outside sources and en- to normal after the governments inter- small-scale farmers can improve their hances borrowers incentives to repay. vention - despite problems with inexpe- access to credit. * Credit cooperatives shouldn't rush rienced management, high overhead to expand their activities beyond finan- costs, and the refusal of many former Small farmers often have no credit rec- cial intermediation before strong institu- managers of these companies to cooper- ords and a mixed reputation for repay- tional and managerial capabilities exist. ate with the authorities. ment. Processing and collection costs of This paper is a product of the Agri- How did the authorities succeed in loans made to small farmers are high cultural Policies Division, Agriculture and restoring public confidence? First, in relative to the amount lent, so that it is Rural Development Department. Please choosing to rehabilitate many financial hardly surprising that rural lenders of- contact Cicely Spooner, room N8-039, institutions, the government demon- ten prefer to channel their funds to larger extension 30464 (55 pages). strated its commitment to preserving farmers. financial institutions as much as pos- Lending groups and credit coopera- sible. Second, changes in the Bank of tives have been ascribed the potential to 285. Enhancing the Contribution Thailand Act and the regulations gov- reach small farmers with affordable credit of Land Reform to Mexican erning commercial banks and finance because the processing of one large loan Agricultural Development companies gave the authorities more rather than numerous small loans may power to handle problem institutions and allow for savings in administrative costs. John Richard Heath prevent further crises. As these lending arrangements entail Rehabilitating these institutions some form of joint liability, they have Radical change in the land reform pro- appears to have cost no more than clos- also been expected to reduce the risks of gram is not in order in Mexico, but cer- ing them down and paying off depositors loan default. tain institutional changes would improve would have cost. The April 4, 1984 reha- In practice, the record of group lend- agricultural growth on farmlands gov. bilitation scheme cost Baht 8 billion. Had ing schemes and credit cooperatives has erned by land reform. Policy, Research, and External Affairs Working Paper Series 119 The ejido is a rural community on which 286. Poverty and Undernutrition cultural Policies Division, Agriculture the Mexican government has conferred in Indonesia during the 1980s and Rural Development Department. land and water resources. Ejido mem- Please contact Cicely Spooner, room bers (ejidatarios) can use the land but Martin Ravallion and Monika Huppi N8-039, extension 30464 (54 pages with are prevented by agrarian reform law figures and tables). from selling it. The ejido seems to be a Because of sustained growth in average more or less fixed element in the Mexi- real consumption, a modest improvement can rural economy. in overall equity, and gains to the rural 287. The Consistency of Heath found no conclusive evidence sector - particularly the poorest of the Government Deficits with that individual ejidos are significantly poor - poverty and undernutrition con- Macroeconomic Adjustment: An less productive than private farms, and tinued to be alleviated during Indonesia's Application to Kenya and Ghana hence it seems unlikely that privatiza- recent period of macroeconomic adjust- tion ofejidos would greatly improve agri- ment. Thanos Catsambas and Miria Pigato cultural growth. At the margin, however, ejidatarios face more constraints on pro- Indonesia adjusted rapidly to sharply This model analyzes the relationship be- ductivity growth than private farmers. falling external terms of trade during the tween the fiscal deficit, the real interest Heath recommends the following 1980s - using a classic package of cur- rate, the real growth rate, and the real piecemeal improvements to the existing rency devaluation, budgetary and mone- exchange rate - to indicate what condi- structure: tary restraint, and regulatory relaxation. tions are needed to stabilize a country's * Accelerate the drive to give ejida- How did the country fare in its ef- debt-to-GDP ratio. tarios titles to their parcels of land. forts to alleviate poverty and undernu- Sustainable medium-term debt strategies * Grant ejidatarios titles irrespec- trition during that period? are essential to adjustment programs tive of the size of their parcels. It is difficult to measure poverty at committed to high growth and should be * Simplify and clarify restrictions for one point in time - much less compare integrated into a consistent macroecon- private farmers on holding size and land poverty in two periods - but Ravallion omic framework that encompasses debt, use. and Huppi answer that question using growth, and inflation strategies. * End restrictions on renting or two large, comparable sets of household One initial step in this direction is sharecropping by ejidatarios. data for 1984 and 1987. They tested a the unification of the accounts of the * Allow ejidatarios to sell their land wide range of possible poverty lines and government and the central bank, to in- parcels to other members of their ejido poverty measures - and the sensitivity sure that some components of the budget (not outsiders). of key results to many of the underlying are not shifted from one to the other. A * Improve management of commu- assumptions about poverty. second step is to evaluate the govern- nal lands. They found robust evidence that ment's fiscal stance in relation to stabili- * Extend credit directly to individual poverty continued to decline during the zation objectives. ejidatarios, on the basis of their credit- period. Catsambas and Pigato have devel- worthiness. Although caloric intake data are far oped an analytical model that takes both * Cease having the whole ejido bear from ideal, they found evidence that the steps into account. Its purpose is to ana- the burden of loan default by one or more extent of undernutrition also fell signifi- lyze the relationship between the fiscal ejidatarios. cantly. For a caloric intake level which deficit, the real interest rate, the real * Provide credit toejidatarios wholly 37 percent of the population failed to growth rate, and the real,exchange rate in cash and allow them to decide what attain in 1984, they found that only 27 - and to indicate what conditions would inputs to purchase and what crops to percent of the population failed to attain be necessary to stabilize a country's debt- plant. it in 1987. to-GDP ratio in the long run. This paper - a joint product of the Why was this so? Gains to the rural Catsambas and Pigato analyze three Agricultural Policy Division, Agriculture sector contributed greatly to the allevia- fundamental concepts of deficit: cash (or and Rural Development Department, and tion of poverty. Gains to the urban sec- observed), primary, and operational. the Agriculture Operations Division, tor and population shifts from the rural They show that the operational deficit Latin America and the Caribbean Re- to the urban sector also helped but were best reflects the government's absorption gional Office, Country Department II - quantitatively less important than direct of real resources and is thus the most assesses the institutional aspects of agri- gains to the rural poor. appropriate indicator for measuring fis- cultural development. Reforms in land Increases in average real consump- cal policy under stabilization and adjust- and credit policies, which are the focus of tion and an improvement in overall eq- ment. this effort, can have a major impact on uity both helped to reduce poverty. In Applying their model to the empiri- both equity and agricultural growth. addition, Indonesia's recent economic cal data for Kenya and Ghana, Catsam- Please contact Cicely Spooner, room N8- history had created conditions favorable bas and Pigato reach these conclusions: 039, extension 30464 (85 pages with to alleviating poverty so long as modest The fiscal effortin Kenya should have tables). growth in private consumption per cap- been somewhat stronger between 1980 ita could be maintained during the ad- and 1987. For the period 1988-91, the justment period. projected fiscal balance is broadly consis- This paper is a product of the Agri- tent with stabilization, and the same goal 120 Policy, Research, and External Affairs Working Paper Series can be achieved with a lower inflation or 289. Inflation and Seigniorage in The inflation tax remained close to, growth rate. Argentina and even exceeded, maximum sustain- In Ghana, the average fiscal perform- able levels during the first half of the ance between 1980 and 1987 was only Miguel A. Kiguel and Pablo Andr6s Neumeyer 1980s - and was probably the single slightly weaker than it should have been. most important source of revenue to the Projections for 1988-91 suggest that the In Argentina, increases in inflation ap- government at that time. The implica- government has substantial room for pear to be closely linked to government tion: any serious stabilization effort re- maneuver in its stabilization goals. attempts to increase seigniorage (govern- quires finding an alternative source of This paper is a product of the Trade ment revenues from issuing money). The revenue to replace the inflation tax. and Finance Division, Africa Technical implication? Any serious stabilization This paper is a product of the Macro- Department. Please contact Miriam effort requires finding an alternative economic Adjustment and Growth Divi- Ruminski, room J8-262, extension 34349. source of revenue to replace the "inflation sion, Country Economics Department. tax Please contact Raquel Luz, room N11- 357, extension 39059 (43 pages with fig- 288. School Effects and Costs for In their model of the relationship be- ures and tables). Private and Public Schools in the tween inflation, the inflation tax, and Dominican Republic seigniorage, Kiguel and Neumeyer ana- lyze the Argentine experience - for the 290. Risk-Adjusted Rates of Emmanuel Jimenez, Marlaine E. Lockheed, last decade. Return for Project Appraisal Eduardo Luna, and Vicente Paqueo To study the robustness of their model under different regimes, they split Avinash Dixit and Amy Williamson This study suggests that both elite and the study into three periods - each with non-elite private schools are more effec- distinctive rules about the exchange rate, Risk premia vary greatly across countries tive - and more cost-effective - than interest rates, and the mobility of inter- and sectors - so adjusting for risk on an public schools. national capital flows. individual project's merits makes more Argentina - where increases in in- sense than applying a general risk pre- Using statistical methods to adjust for a flation appear to be closely linked to gov- mium on calculations for all lending. bias in selectivity, Jimenez, Lockheed, ernment attempts to raise seigniorage - Luna, and Paqueo analyzed the relative is a natural choice for this study because Incorporating risk assessment into pub- effectiveness and cost-effectiveness of of its persistent high rates of inflation lic project appraisal makes sense when public schools and two types of private and fiscal imbalance. Monetization of project riskis significantly correlated with schools - elite and non-elite - in the fiscal deficits becomes a major force for uncertainty about national income. It is Dominican Republic. creating money and inflation in coun- especially important in countries that Controlling for selection, they found tries with limited access to domestic and specialize in particular agricultural or that students in eighth grade mathemat- foreign credit. resource sectors. ics achieve more in both types of private Kiguel and Neumeyer found that Calculating costs and returns is school than they do in public schools - inflation in Argentina played an impor- similar for real and financial investments and achieve more in elite than in non- tant role in generating public sector reve- - but the treatment of risk is better elite schools. nues. developed for financial investments. Dixit Differences in teachers'backgrounds At the revenue-maximizing rate of and Williamson present a pilot model - and teaching practices account for some inflation, they found, the government can analogous to the capital asset pricing of this difference in achievement - but get seigniorage of about 7.5 percent of model - that relates the excess return differences in the students' peer back- GDP in steady state (this was true for required from a project to project risk. ground characteristics are substantially the tablita and pre-Austral periods). Dixit and Williamson found that: more important. Between June 1978 and April 1985, there Risk corrections can be substantial. Both types of private school appear was a clear, positive relation between The size of the adjustment is affected by to be more cost-effective than public inflation and the inflation tax for rates of the coefficient of variation of GNP, the schools. inflation below 18 percent. coefficient of variation for project return, This paper is a product of the Educa- Events are more difficult to inter- and the correlation between GNP and tion and Employment Division, Popula- pret at inflation rates near and above 20 project return. tion and Human Resources Department. percent. In the 20 percent range, the The intuition that risk is great for Please contact Cynthia Cristobal, room inflation tax ranged from 7 to 10 percent further investment in a crop or sector S6-214, extension 33640 (38 pages with of GDP. Steady-state seigniorage is at a thatconstitutes alarge partof acountry's tables). maximum 7.5 percent when inflation is GNP is not invalid, but this effect may be around 20 percent a month. Increases in offset by other forces in operation. inflation above 20 percent do not give the Risk corrections can be negative be- government more inflation tax revenues. cause of a negative correlation between The revenue from inflation seems to fall project return and GNP. Project risks unambiguously once inflation exceeds 22 with negative risk adjustments - such percent. as projects involving rice in Nigeria and Policy, Research, and External Affairs Working Paper Series 121 groundnut oil in Senegal - are espe- to the stop-and-go reforms, uncertainty, of political institutions and behavior like cially attractive. It will be useful to know and constant debt renegotiations in many those in the advanced industrial coun- how to identify them, high-debt countries, tries, especially the United States. The Risk premia vary greatly across coun- The gains from this stable policy en- state is seen as passive, and the empha- tries and sectors - so recognizing the vironment - in avoiding capital flight, sis is on the activities of interest groups risk correction needed for each project on attracting productive foreign investment, to get legislation favorable to themselves its own merits makes more sense than and export diversification - far exceed passed by political parties whose only including a common general risk pre- the likely benefits of contentious debt concern is electoral success. mium in the rate of return required for reduction negotiations currently under Most developing countries are ruled all lending. The result would be a reallo- way in several highly indebted countries. by military juntas or one-party dictator- cation of lending among projects, not a Unlike many other developing na- ships. One doesn't see in them the kind stiffening of standards for all projects tions, Indonesia has focused on resolving of equilibrium between contending inter- and therefore acceptance of fewer. its debt problems by increasing exports. est groups that characterizes the New Risk corrections are small for many Ahmed and Chhibber use an econ- Political Economy. sectors and countries. Identifying risk in ometrically estimated macroeconomic Organized private interests in civil project appraisal will be simplified if a model to analyze open-economy adjust- society can be said to emasculate the general class of country and sector com- ment in Indonesia - particularly the state in industrialized nations. In con- binations can be identified in which risk interaction between the exchange rate, trast, the state in developing countries is negligible - so efforts can be concen- the interest rate, growth, and debt - disproportionately dominates (often re- trated on the other categories, where the and to analyze future policy changes in presses) a weak and fragmented civil proposed treatment of risk makes a big light of Indonesia's objectives for growth, society (often in the interests of a minor- difference. external debt, and inflation. ity that controls the bureaucratic appa- Risk affects investment projects in Indonesia's open capital account - ratus). many different, subtle ways. One should domestic interest rates must equal for- Is the New Political Economy rele- not aim for a simple table of risk adjust- eign interest rates plus the expected rate vant in the Third World? ment terms to be read in a manual and of devaluation - eliminates one avenue Yes, says Findlay. applied directly. Even when the proce- for effecting internal adjustment. But it Using the methods and spirit of the dure is refined, each situation will need lends discipline to the country's fiscal New Political Economy, one can develop economic analysis and oversight. and monetary management. a theory of the autonomous state, apply- Resource requirements for this are This paper is a product of the Office ing it to the conditions prevailing in dif- not great, however. After routines are of the Vice President, Development Eco- ferent developing countries. Using this developed, one professional economist nomics. Please contact Maureen Colinet, approach makes possible an explanation should be able to incorporate risk assess- room S9-029, extension 33490 (54 pages of several major features of Third World ment into project analysis in less than a with figures and tables). experience: the extensive growth of gov- week. ernment relative to the private sector, This paper is a product of the Agri- the intensity of trade restrictions and cultural Policies Division, Agriculture and 292. Is the New Political Economy the associated phenomenon of the import Rural Development Department. Please Relevant to Developing Countries? substitution syndrome, the urban bias of contact Cicely Spooner, room N8-035, economic policy and resource allocation, extension 30464 (39 pages with tables). Ronald Findlay and the degree of dependence on foreign capital. Can the methods and spirit of the New After describing the emergence of the 291. How Can Indonesia Maintain Political Economy be used to explain state in Western Europe and the contem- Creditworthiness and common features of Third World experi- porary Third World, Findlay presents Noninflationary Growth? ence -- such features as the extensive an economic model of the state, in which growth of government relative to the pri- he tries to integrate its productive and Sadiq Ahmed and Ajay Chhibber vate sector, the intensity of trade restric- predatory features. tions and the import substitution syn- He applies the insights from that Indonesia - unique among middle-in- drome, the urban bias of economic policy analysis to some simple general equilib- come oil-producing countries - adjusted and resource allocation, and the heavy rium models of trade theory, to consider rapidly to oil price shocks, and it begins a dependence on foreign capital? the activities of a public sector within new decade with good prospects for non- Protectionism and industrial regulation open economies in which trade taxes inflationary growth and better credit- are two topics in which the interplay of provide the main source of revenue. worthiness. What is the country's secret? politics and economics is so strong that He applies his analysis to Turkey Despite external shocks, Indonesia has one wonders why the intellectual merger (which went from surplus-maximizing maintained creditworthiness through between the two approaches - in the traditional monarchy to developmental swift adjustment. New Political Economy - has taken so dictatorship), India (a successor state to Indonesia's flexible economic man- long. a gunpowder empire), Africa (with its agement and clear policy signals have The literature of the New Political marketing boards), Latin America (whose lent stability to the economy, in contrast Economy largely postulates a framework diverse economies tend to go through 122 Policy, Research, and External Affairs Working Paper Series three stages: oligarchy, populism, and necessitate the shortcut of calculating the cining because of liberalization. Uncer- bureaucratic-authoritarianism), and the central bank deficit from changes in its tainty about future tariff structures, and four Far Eastern newly industrializing assets and liabilities. hence over future factor returns, creates economies (Hong Kong, Korea, Singapore, This paper is a product of the Macro- an opportunity cost for committing capi- and Taiwan, the star performers in de- economic Adjustment and Growth Divi- tal to new physical plant. Foreign ex- velopment). sion, Country Economics Department. change and liquid assets held abroad This paper is a product of the Macro- Please contact Raquel Luz, room N11- involve no such commitment, and so may economic Adjustment and Growth Divi- 057, extension 39059 (23 pages). be preferable even though the expected sion, Country Economics Department. rate of return is lower. Please contact Raquel Luz, room N11- Likewise, it may be difficult to stem 057, extension 39059 (44 pages with fig- 294. Irreversibility, Uncertainty, or reverse capital flight if the perception ures). and Investment is that it may become more difficult to take capital out of the country than to Robert Pindyck bring it in. 293. Central Bank Losses: Investments in the energy field may Origins, Conceptual Issues, and Irreversible investment is especially sen- be influenced by the threat of price con- Measurement Problems sitive to such risk factors as volatile ex- trols, windfall profit taxes, or related change rates and uncertainty about tariff policies that might be imposed should Mario 0. Teijeiro structures and future cash flows. If the prices rise substantially. goal of macroeconomic policy is to stimu- Policies that stabilize prices may Central bank losses usually originate late investment, stability and credibility influence investment decisions in mar- when the bank takes on such nontradi- may be more important than tax incen- kets for commodities (such as oil) for tional bank functions as subsidized loans tives or interest rates. which prices are often volatile. to priority sectors, rescues of troubled fi- Increases in the volatility of interest nancial institutions, or takeovers of pri- Most major investment expenditures are or exchange rates depress investment - vate or public debt. There is a way to at least partly irreversible: the firm can- but it is not clear how much. Determin- overcome problems measuring these not disinvest, so the expenditures are ing the importance of these factors - losses. sunk costs. through empirical studies and simula- Irreversibility has important impli- tion models - should be a research pri- Under normal conditions, central banks cations for investment decisions - and ority. will be profitable, since they have access for the factors most likely to affect in- This paper is a product of the Macro- to zero-cost financing (the monetary base) vestment spending. economic Adjustment and Growth Divi- and probably some financing at below- Irreversible investment is especially sion, Country Economics Department. market interest rates - and are able to sensitive to such risk factors as uncer- Please contact Raquel Luz, N11-057, ex- invest these funds at market rates. tainty about future cash flows, interest tension 39059 (53 pages with figures). In his analysis of central banklosses, rates, and the cost and timing of invest- Teijeiro assumes that these sources of ments. cheap financing have been exhausted, so Pindyck reviews some simple mod- 295. Developing Country that at the margin any asset yielding els of irreversible investment - to ex- Experience in Trade Reform below market rates will produce a loss, plain how optimal investment rules can Central bank losses usually origi- be obtained from contingent claim analy- Vinod Thomas nate, he says, when the bank takes on sis or from dynamic programming. other functions besides its normal role, He also discusses how to model in- The countries that received trade adjust- such as subsidized loans to priority sec- vestment when irreversibility is impor- ment loans experienced relatively more tors, rescues of troubled financial insti- tant, so one can understand the likely growth in output than other countries did, tutions, or takeovers of private or public response of investment spending to pol- partly because of growth in imports and debt. icy incentives and other changes in the partly because of policies. The factors The losses are difficult to measure, environment, that most constrain trade reform are however, because of inconsistencies be- To the extent that the goal of macro- macroeconomic instability, inadequate tween central bank and nonfinancial economic policy is to stimulate invest- conviction about reform, weak implemen- public sector accounting. ment, for example, stability and credibil- tation capacity, and conflicts in design. Measurements that cause difficulty ity may be more important than tax in- involve, for example, the central bank centives or interest rates. As a determi- During the 1980s, developing countries treatment of nominal capital gains on nant of aggregate investment spending, have addressed trade reform in varying foreign exchange dealings, accounting for the level of interest rates may be less degrees. loans, and adjusting operating results for important than their volatility (and the There has been major reform in ex- the effect of inflation. volatility of other variables). change rate policy, in the reduction of Teijeiro recommends a method for Trade reform, when suspected to be export restrictions, and in removing im- dealing with these problems. In many only temporary, can also be counterpro- pediments to the imports of inputs needed cases, he admits, data problems may ductive, with aggregate investment de- by exporters. Policy, Research, and External Affairs Working Paper Series 123 Import regimes in many countries on relative caloric intake in households same for both. have been improved by substituting tar- - they concluded that: * Volume generally grew less where iffs for quantitative restructions. The * The result of neglecting in- quotas were binding. lowering of import protection has been trahousehold inequality will probably be * The unit value of shipments sub- more modest in the face of foreign ex- considerable understatement of the lev- ject to binding quotas increased substan- change constraints. els of poverty and inequality. With the tially more than the unit value of uncon- Through adjustment lending, the Philippine data, measured levels of ine- strained items. World Bank has supported trade reform quality and poverty were off 30 percent * Developing countries that were in more than 40 countries. Considering as a result of ignoring intrahousehold new exporters of textile products hoped this emphasis, one might expect stronger variation, to capture a larger share of the textile reforms. Four factors that have con- * Patterns of inequality revealed by market as a result of quotas set for other strained reform action are: household level data are somewhat dif- developing countries. But except for * Macroeconomic instability. ferent from patterns revealed by individ- marginal suppliers who emerged largely * Inadequate conviction about the ual level data, but the differences seem because of the MFA, the needy countries benefits of (and vested interests not to be dramatic. To confirm these re- have benefited little from the MFA. And against) reform. sults, the exercise should be repeated countries whose exports grow soon find * Weak implementation capacity. with data from other countries. themselves on the restricted list. * Conflicts in design. Haddad and Kanbur's conclusions * Domestic producers in the United When considering nine performance are likely to be of interest to those con- States have benefited most from the MFA. indicators, trade loan recipients showed sidering the costly task of surveys fo- This paper is a product of the Inter- stronger improvement in performance cused on intrahousehold patterns in de- national Trade Division, International than nonrecipients in about two-thirds of veloping countries. Unless policymakers Economics Department. Please contact the instances. are interested primarily in more accu- Lucy Tan, room S8-045, extension 33702 Much of the growth in output was rate measurement of levels of inequality (50 pages with figures and tables). associated with additional imports. Pol- and poverty, the exercise may not be cost- icy reform had a positive impact on efficient. growth performance. This paper is a product of the Office 298. Evaluating Global Less progress was made in debt in- of the Research Administrator. Please Macroeconomic Models: A Case dicators. contact Jane Sweeney, room S3-026, ex- Study of MULTIMOD The evidence supports the need for tension 31021(39 pages with figures and continued, stronger efforts to reform trade tables). Ahmad Jamshidi regimes and complementary policies as part of adjustment lending. Structural and theoretical properties of This paper is a product of the Trade 297. Effects of the Multi-Fibre macro models direct their responses. The Policy Division, Country Economics De- Arrangement on Developing simulation results ofMULTIMOD uphold partment. Please contact Sheila Fallon, Countries' Trade: An Empirical the Mundell-Flemming story. The model's room N10-017, extension 38009(39 pages Investigation forward looking property allows faster with tables and figures). adjustment of all prices including ex- Refik Erzan, Junichi Goto, and Paula Holmes change rates. Its responses are symmet- ric, but the degree of linearity varies with 296. How Serious is the Neglect Rather than ease up, the MFA has been the magnitude of policy shocks. ofInthou d getting tougher on most developing coun- Inequality try exporters of textiles and clothing. The growing role of multiregional macro Trade gains for new exporters (except for models in the discussion of international Lawrence Haddad and Ravi Kanbur marginal suppliers) due to MFA have been macroeconomic policyissues necessitates exaggerated; main beneficiaries were the study of their structural and theoretical Ignoring intrahousehold inequality can domestic producers in industrial coun- properties before using them - as is lead to considerable underestimates ofthe tries. planned, for example, in the International true levels ofpoverty and inequality. But After analyzing data on trade and re- Economics Analysis and Prospects Divi- the estimated patterns ofpoverty and ine- strictions in U.S., EC, Canadian, and sion. Two questions arise. First, of the quality across key socioeconomic groups Swedish markets during the 1980s, model's exogenous variables and coeffi- are not affected dramatically. Erzan, Goto, and Holmes conclude that: cients, which ones have more influence * Rather than ease up, the Multi- on the endogenous variables of interest? Haddad and Kanbur developed a frame- Fibre Arrangement (MFA) became more Second, what tools and techniques are work for assessing the consequences of restrictive, particularly for relatively new available to examine the functioning of ignoring intrahousehold inequality in the suppliers, during the 1980s. Proportion- the models with respect to their struc- measurement and analysis of poverty and ately more shipments were subject to tural properties? inequality. quotas. The MFA's grip was tighter on Jamshidi explored the above objec- After applying this framework to clothing than on textiles but the pattern tives in the IMF's MULTIMOD by evalu- data for the Philippines - based mainly across markets and over time was the ating its theoretical specifications and 124 Policy, Research, and External Affairs Working Paper Series validating its structural properties. Rodriguez developed a two-equation 300. How the 1981-83 Chilean He found the model relatively small model for measuring how public sector Banking Crisis was Handled and simple in its theoretical specifica- deficits - and the way they are financed tion, but advanced in its modeling tech- - affect the real exchange rate, the trade Mauricio Larrain niques, exemplified by its "forward-look- balance, the current account, and the level ing" features. The estimation scheme of external indebtedness. He concludes The Chilean government's quick, aggres- employed emphasizes the comparability that: sive response to the banking crisis of 1981- across countries through standardization The level and composition of govern- 83 involved an imaginative compromise of specifications and imposition of com- ment spending affects the real exchange between letting Chile's banks go bank- mon coefficients. Thus, the differences rate because of the effect of spending on rupt, or bailing them out. That compro- in countries' responses to policy shocks nontraded goods. mise, and comprehensive long-term meas- are attributable to the differences in their However, whether the government ures, have brought a quick recovery. structural features. deficit affects the external sector depends The model's forward-looking property on whether the proposition of Ricardian The banking crisis in Chile in 1981-8& allows faster adjustment of all prices, equivalence holds. The general thrust of was widespread - representing about including exchange rates and interest that proposition is that a tax reduction 60 percent of the banking system's total rates, than do conventional macro mod- financed by debt will have no real effect portfolio. els. A major strength of the model is the on the economy if the public discounts The crisis arose because of macro- effective transmission of policy changes future taxes to service the debt and there- economic problems - which weakened across countries. fore increases savings by the exact borrowers'capacity to repay loans - and The examination of linearity and amount of taxes reduced. was exacerbated by unsound financial symmetry measures, using Zellner-Peck If the Ricardian equivalence does not practices. techniques, suggests that the responses hold - and empirical evidence is incon- The government was faced with two of the model are highly symmetric and clusive - government deficits will di- extreme solutions: to let insolvent banks increasingly nonlinear with the growing rectly affect the excess of spending over go bankrupt, or to bail them out, absorb- magnitude of shocks. (In nonlinear mod- income in the economy and therefore the ing their losses. It chose an intermediate els multipliers depend on the starting trade balance. solution. The government and share- values of the endogenous variables, and Changes in the trade balance are holders took over losses. Some institu- simulation results are very sensitive to bound to affect the real exchange rate. tions were liquidated, and others were exogenous variables time paths.) How much depends on how much expen- rescued and rehabilitated, depending on MULTIMOD can be used in many diture must be switched to make the trade their level of solvency. With few excep- ways to discuss North-South issues. The balance compatible with the change in tions, depositors and foreign creditors expansion of North-South links, espe- aggregate spending. The dynamic ef- took no losses. cially financial links, would widen the fects are the result of induced changes in The government used two types of scope for generating useful scenarios. the rate of private accumulation of for- mechanism to rehabilitate the banking Simulation examples are presented eign assets. system. One type was aimed at improv- for monetary and fiscal policy scenarios A two-equation model is necessary: ing borrowers' capacity to repay loans to in the North (with their impacts on the one equation relating the real exchange the banks (mainly across-the-board debt developing economics), oil price shocks, rate to the trade surplus and another rescheduling and coverage for exchange and debt relief schemes. describing the trade surplus as a func- rate losses). The other was aimed at This paper is a product of the Analy- tion of structural parameters, the fiscal rebuilding the banking system's capital sis and Prospects Division, International deficit, and the stock of foreign assets. base (mainly through the central bank's Economics Department. Please contact To make the model dynamic, one purchase of nonperforming loans, with Mila Divino, room S7-037, extension must allow for the fact that the level of shareholders obligated to repurchase 33739 (83 pages with figures and tables). foreign assets - one determinant of the those loans from future profits). trade surplus and current account - The government also strengthened changes over time. The trade surplus, banking supervision by improving loan 299. The External Effects of Public plus foreign interest earned, determines portfolio analysis and increasing the Sector Deficits the evolution over time of the stock of transparency of financial transactions. foreign assets. The decision to recognize and allo-, Carlos Alfredo Rodriguez This paper is a product of the Macro- cate losses quickly, and to implement economic Adjustment and Growth Divi- comprehensive measures to resolve the This two-equation model measures how sion, Country Economics Department. It banking crisis, were the key to Chile's public sector deficits - and the way they was financed by a preparation grant for success in surviving the crisis. Had allo- are financed - affect the real exchange the project "The Macroeconomics of the cation of losses been delayed, or solu- rate, the trade balance, the current ac- Public Sector Deficit." Please contact tions partial, losses would probably have count, and the level of external indebted- Raquel Luz, room N11-057, extension increased and the system would not have ness. 39059 (22 pages). recovered so rapidly. Policy, Research, and External Affairs Working Paper Series 125 Interest rates on loans, which reached almost 40 percent a year in real terms in 1981-82, declined to 7.7 percent by 1987. Returns on equity, negative in 1982, reached a healthy 13.7 percent in 1987. Chile's M2/GDP ratio is recover- ing. This paper, a background paper for the 1989 World Development Report, is a product of the Office of the Vice Presi- dent, Development Economics. Please contact the World Development Report office, room S13-060, extension 31393 (25 pages with tables). - Volume IV Numbers 301 - 400 Policy, Research, and External Affairs Working Paper Series 129 301. Myths of the West: Lessons mists think in terms of projects; bankers tion, though, by: from Developed Countries for rarely do. Banks finance companies, not * Targeting specific rural client Development Finance projects. Project financing can be used to groups with similar educational needs stimulate economic growth only in a few and problems. Colin Mayer areas. On the whole, economic develop- * Providing services that schools ment depends on the promotion of corpo- want to receive. Banks finance firms, and firms finance rate organizations. * Strengthening links between projects. The main contribution ofbanks * Corporate organization, not proj- teacher training colleges, educational re- to economic development is the promo- ect activity, is what distinguishes devel- search institutions, and rural classrooms. tion of corporations, not the financing of oped from developing countries. Eco- Keith recommends including a T&V projects. nomic growth relies on the structure and system in ongoing and future educational quality of financial institutions. projects, after careful evaluation of the World Bank missions between 1948 and * An external agency may have tech- pilot project. 1968 identified inadequate long-term nical skills and financial resources, but This paper is a product of the Public credit as a primary deficiency of devel- its knowledge about individuals and Sector Management and Private Sector oping countries' financial systems. Ex- management teams may be limited. Development Division, Country Econom- isting institutions provided mostly short- Financial assistance is only part of what ics Department. Please contact Jayne term financing and were often foreign is needed to create an appropriate insti- Cheeseman, room N9-065, extension owned. tutional structure. Screening, monitor- 37644 (35 pages with tables). Bank missions recommended estab- ing, and rewarding individuals may of- lishing development finance companies ten be more pertinent. (DFCs) to provide long-term financing This paper, a background paper for 303. Is Undernutrition Responsive for worthwhile (primarily industrial) the 1989 World Development Report, is a to Changes in Incomes? projects. product of the Office of the Vice Presi- The DFCs' performance has been dent, Development Economics. Please Martin Ravallion disappointing. Few are self-supporting; contact the World Development Report a third are in serious difficulty; and by office, room S13-060, extension 31393(36 An approach is offered for simulating the 1983 half of the banks had arrears on a pages with tables). effects of income and price changes on quarter of their loans. By the early various measures of undernutrition, us- 1980s, the Bank's wisdom in establish- ing caloric intake functions. It is argued ing DFCs was being questioned. 302. Improving Support Services that recent econometric estimates of the Mayer makes several observations for Rural Schools: A Management income elasticity of caloric intake may about corporate finance in developed Perspective considerably understate the effect of in- countries. Retentions are the dominant come changes on measures of aggregate source of finance while banks are the Sherry Keith undernutrition. Empirical results are for dominant source of external finance. In Indonesia. no developed country do companies raise An adaptation of the training and visit a substantial amount of finance from system used in agricultural extension may Is aggregate undernutrition responsive securities markets. Securities markets be a good model for managing the deliv- to changes in individual incomes? provide an efficient means for transfer- ery of technical support services to iso- One problem in answering this ques- ring ownership claims in established cor- lated rural schools. tion is defining undernutrition. The ex- porations. Mayer attributes these phe- tent of undernutrition depends not only nomena to the monitoring and control Management is a major weakness of ru- on nutrient intakes but on other factors, function of banks, which depends on ral school supervision systems. Manage- including nutrient requirements - which their managerial ability and on the costs ment systems for rural schools should may differ widely amongst people. of bankruptcy and creditor coordination. emphasize regular school visits by trained In developing countries, we are more From the recent experience of a specialists whose task is to help rural concerned about changes in caloric in- group of developed countries, Mayer teachers with teaching skills and rural take for people who we deem to be "un- concludes that: principals with routine administrative dernourished" than for those who are not. * An efficient banking system is tasks. And among those who are poorly nour- central to the promotion of economic Instead, Bank projects provide unco- ished, we should be more concerned about growth. ordinated "components," such as trans- those who are a long way from adequate * The performance of financial mar- portation and one-time training efforts intake than about those who are close to kets is not necessarily furthered by arti- for field staff. it. ficially lengthening the maturity ofbank The training and visit (T&V) system Ravallion offers an approach to meas- lending. used in agricultural extension provides a uring the effects of shifts in budget con- * Economic growth is not promoted model for managing supervision of rural straints or other household parameters through the financing of projects. Econo- education. It must be adapted to educa- on undernutrition - an approach that 130 Policy, Research, and External Affairs Working Paper Series can address those issues. tions about individual self-interest are always at loggerheads and there often Using household data on calorie con- applied to the political claims of citizens, exists a space in which citizens, public sumption, income, prices, and other to the actions of politicians and poli- officials, and analysts can maneuver to household characteristics for the prov- cymakers, to the behavior of bureaucrats, achieve policy choices that are both po- ince of East Java in Indonesia, Ravallion and even to the actions of states more litically and economically wise. It is illustrates how to: generally. Citizens, politicians, bureau- worthwhile to attempt to model this space * Estimate caloric intake functions crats, and states purposely use the au- and to use such models to help craft pol- for that data. thority of the state to distort economic icy advice. * Use those functions to simulate interactions to their own benefit. In doing This paper is a product of the Macro- the effects of income changes on various so, they are behaving in a way that is economic Adjustment and Growth Divi- measures of caloric undernutrition. politically rational, however irrational the sion, Country Economics Department. Those measures include the popular economic results may be for society. The Please contact Raquel Luz, room N11- headcount index and two alternative solution is to limit government; less poli- 057, extension 39059 (67 pages). measures more responsive to the depth tics makes better economics, or so the of undernutrition, and to individual vari- argument goes. ations in its severity. Grindle argues that this perspective 305. World Bank Work with He proposes a method for account- on politics misrepresents the dynamics Nongovernmental Organizations ing for interhousehold differences in nu- of policymaking in developing countries tritional needs, based on estimate calorie and is seriously limited in its ability to Lawrence F. Salmen and A. Paige Eaves intake functions. Thus the caloric norm explain how policy changes come about need only be predetermined for a specific or how policies are chosen that lead to Nongovernmental organizations provide reference person or household. socially beneficial outcomes, development projects with motivation, Ravallion finds that the income elas- She indicates that society-centric education, and organization. They should ticity of measured undernutrition is con- models of political economy adopted from be involved earlier in project development. siderably higher than the income elastic- the U.S. experience are not relevant for Successful operations depend on well- ity of individual caloric intakes. The most developing countries. State-centric designed linkages between NGOs andgov- reason is that the density of people tends adaptations come somewhat closer to the ernment. to be high in a neighborhood of require- reality of how public policy is formulated ment norms, and intake responses tend and implemented there. But even state- The report reviews 24 of 202 Bank proj- to be highest amongst those who are least centric applications do not address the ects that involved nongovernmental or- well nourished. Recent arguments that dynamics of policymaking and implem- ganizations (NGOs) to identify ways to intakes are unresponsive to income entation in developing countries and are improve Bank-NGO collaboration. changes should thus be interpreted with therefore unable to explain policy changes The Bank has involved NGOs far caution. or wise policy choices. more in implementation (57 percent) than This paper is a product of the Agri- Grindle argues that these are criti- design (11 percent). Service providers cultural Policies Division, Agriculture and cal weaknesses of neoclassical political and intermediaries (45 percent) and con- Rural Development Department. Please economy, and they present policy ana- tractor NGOs (35 percent) were involved contact Cicely Spooner, room N8-039, lysts with a challenge: can alternative much more in project work than the other extension 30464 (45 pages with tables). models of politics be conceptualized that three types. address issues of change, predict the The report identifies five functional content of change, and maintain a role categories of NGO interaction with the 304. The New Political Economy: for those who seek both politically and Bank along a public-private continuum, Positive Economics and Negative economically viable solutions to the ma- based on the varying degrees to which Politics jor problems facing developing countries they represent social (common) goals on in the decades ahead? the public end of the continuum and eco- Merilee S. Grindle She recommends an alternative ap- nomic goals on the private end: commu- proach to political economy that does not nity associations, policy advocacy groups, Neoclassical political economy explains treat politics as a negative factor in pol- service providers and intermediaries, con- why developing countries do not adopt icy choice. She emphasizes understand- tractors, and cooperatives. development specialists'advice more regu- ing the preferences and perceptions of Discussion focuses on the benefits larly. But it misrepresents the dynamics policy elites, the circumstances that sur- and difficulties arising from the involve-' of policymaking in developing countries round the emergence of policy issues, the ment of NGOs in each category in Bank- and cannot easily explain policy changes concerns of decision makers, and the fac- supported projects. or "wise policy choices. tors that affect the implementation and The report concludes that Bank staff sustainability of policy change. In such should better understand NGOs and their Neoclassical political economy provides an alternative, politics consists of efforts involvement in operations. It recom- compelling theory in response to the ques- at problem solving through bargaining mends involving NGOs before implem- tion, "Why should reasonable men adopt and the use of political resources in the entation, developing creative financing public policies that harm the societies context of great uncertainty. mechanisms to support them, and learn- they govern?" Microeconomic assump- Economic and political logic are not ing what they have to teach Bank staff Policy, Research, and External Affairs Working Paper Series 131 about motivation, education, and organi- 307. On the Accuracy of Economic tariff regime. Here is an action plan for zation. Observations: Do Sub-Saharan rationalizing and harmonizing Central NGOs have generally been underused as Trade Statistics Mean Anything? American tax structures. partner institutions. In most cases, NGOs brought into project work contributed to Alexander J. Yeats To harmonize tax policies among Central project success. American nations, Baran recommends The challenge for the Bankis to forge Statistics on trade between African coun- the following: institutional links between governments tries are almost useless for empirical and * Continuing trade liberalization, by and NGOs that extend and complement policy studies -partly because of amug- reducing the level and dispersion of ef- government capabilities. Governments gling and false invoicing. fective trade protection. and NGOs must learn to respect each * Shifting the tax system from reli- other so they can work toward such mu- Matching exporters'f.o.b. trade statistics ance on trade to reliance on domestic tual goals as poverty alleviation. with the corresponding importers' c.i.f. transactions and income. This paper is a product of the Public data, Yeats studied the quality of official * Making the value-added tax (cum Sector Management and Private Sector information on trade between 36 African selective consumption taxes) the back- Development Division, Country Econom- countries. bone of the tax system, and harmonizing ics Department. Please contact Yeats found the disparities in data those taxes among the member countries Ernestina Madrona, room N9-061, ex- so great as to make the official trade of the Central American Common Mar- tension 37496 (96 pages with tables). statistics almost useless for most empiri- ket (CACM). cal and policy studies. He concludes that: * Improving tax administration. * Statistics on matching exports and * Harmonizing taxes on inputs and 306. A Method for Macroeconomic imports vary so much - on average, one exempting nontraditional exporters from Consistency in Current and is more than twice the other - that the paying import duties. Constant Prices data cannot be used to assess the level of * Moving toward coordinating taxes trade between African countries. on factor incomes (personal and corpo- Ali Khadr and Klaus Schmidt-Hebbel * The data are probably equally rate income, property and land taxes, useless for assessing the direction of trade and taxes on financial gains) to avoid An accounting method for showing budget since the countries that exporters report double taxation. flow and stock relations, in current and as the destination of trade often fail to * Eliminating all quantitative im- constant prices, for a six-sector economy. report corresponding imports. port restrictions, prior imports deposits, * The data are inadequate for de- non-common import tariffs, and other Khadr and Schmidt-Hebbel extend ear- termining the composition of trade be- restrictions on imports from other CACM lier work on current-price budget identi- cause countries report on different levels members. ties to treat constant-price flow relations. of detail about what is traded. * Applying similar principles in de- This introduces relative prices and * Large, persistent, apparent differ- signing export taxes on coffee and ba- constant-price values for all relevant ences in trends in intra-African trade may nanas. output and aggregate demand compo- simply reflect different degrees of accu- * Not using differential exchange nents and permits a distinction between racy in country trade data. rates to discriminate against regional real variables and relative price changes. * The fact that reported (f.o.b.) ex- trade. It also permits breaking the changes ports often exceed the corresponding re- This paper is a product of the Coun- in asset and liability holdings down into ported (c.i.f.) imports suggests either that try Operations Division, Latin America (a) changes in real holdings and (b) capi- smuggling is widespread between Afri- and the Caribbean Regional Office, Coun- tal gains and losses due to inflation and can countries or that importers are in- try Department II. Please contact Ti- exchange rate depreciation. This makes tentionally underinvoicing because of pawan Watana, room 18-155, extension possible a distinction between savings high African tariffs or quotas. 31882 (48 pages with tables). and a change in real wealth, or "adjusted" This paper is a product of the Inter- savings. national Trade Division, International In Working Paper 310, Khadr and Economics Department. Please contact 309. How to Improve Public Sector Schmidt-Hebbel apply the framework to Jean Epps, room S8-037, extension 33710 Finances in Honduras data on Zimbabwe for 1981 and 1987. (32 pages with tables). This paper is a product of the Macro- Yalcin M. Baran economic Adjustment and Growth Divi- sion, Country Economics Department. 308. Harmonizing Tax Policies In The Honduran government should de- Please contact Susheela Jonnakuty, room Central America velop a plan to modernize administration N11-039, extension 37453 (60 pages with ofthe public sector, increase public sector tables). Yalcin M. Baran savings, ensure the financial viability of the national electric company, and im- Transforming the Central American Cus- prove the public investment program. tome Union into a modern common mar- ket can be achieved only by reforming the The objectives of a public sector manage- 132 Policy, Research, and External Affairs Working Paper Series ment program should be to use resources Using annual data for 1981 and 1987, on other real variables. more efficiently, rationalize public sector they illustrate the usefulness of impos- For more than two years after the operations, and reduce financial disequili- ing consistency on the flow budget ac- program, a private consumption boom brium. counts (in both current and constant was accompanied by increased economic Baran recommends that Honduran prices) of a developing economy. activity, relatively high real wages and authorities prepare an action plan for This economy is represented by six real interest rates, and a low (appreci- improving public sector management. sectors: the central government, public ated) real exchange rate. That plan should include measures to: enterprises plus local government, the Only in the beginning of the fourth * Increase savings. central bank, the deposit banking sys- year after the program did the consump- * Introduce efficiency-saving meas- tem, the nonfinancial private sector, and tion boom stop, economic activity become ures. the external sector. stagnant, and the rate of unemployment * Improve budgeting, debt manage- Such a framework, they contend, rise. ment, and tax collection. provides: The consumption boom seems closely * Standardize accounting practices * An organizing device with which related to the possibility that the pro- and properly account for debt service to check the internal consistency of data. gram and the fixed exchange rate policy obligations. * A snapshot of the principal re- partially lacked credibility. Apparently * Start external management audits source transfers in the economy, which the public perceived the changes as of enterprises. can be helpful in diagnosing and analyz- mainly temporary. * Establish financial targets for, and ing macroeconomic imbalances and un- The recent rise in unemployment reduce government transfers to, public sustainable resource flows. seems largely to reflect the beginning of enterprises. * A tool for financial programing or a process of structural adjustment * Improve service delivery. a first step in a model-building effort whereby resources are reallocated across * Implement a well-defined privati- that entails specifying behavioral rela- the economy to conform to the new low zation program. tionships. inflation equilibrium. This process may * Prepare and implement a growth- This paper is a product of the Macro- involve less growth in the transitional oriented and financially feasible public economic Adjustment and Growth Divi- stage but will allow an increase in long- investment program. sion, Country Economics Department. term growth after adjustment is com- * Improve decisionmaking and in- Please contact Susheela Jonnakuty, room pleted. crease accountability and autonomy in N11-039, extension 37453 (90 pages with What implications does the Israeli public enterprises. matrices and tables). program - a laboratory experiment in * Improve coordination of the sec- heterodox policy - have for the debate tor. about gradualism versus shock treatment * Target subsidies. 311. Macroeconomic Performance in the process of stabilization? * Produce better financial informa- Before and After Disinflation In In reducing inflation, the program tion on the public sector. Israel seems to have had the same effective- This paper is a product of the Coun- ness as other shock treatment programs: try Operations Division, Latin America Leonardo Leiderman and Nissan Liviatan there was a sharp and immediate disin- and the Caribbean Regional Office, Coun- flation. This was probably because mul- try Department II. Please contact Tipa- Israel's successful 1985 stabilization pro- tiple nominal targets (such as a fixed ex- van Watana, room 18-155, extension gram brought sharp, immediate disinfla- change rate and price-wage controls) were 31882 (35 pages with tables). tion, a private consumption boom, in- used in conjunction with adjustments in creased economic activity, relatively high fundamentals, right from the start. This real wages and interest rates, and a low mix makes the program heterodox. 310. A Framework for (appreciated) exchange rate. Only in the In terms of the real costs of disinfla- Macroeconomic Consistency for fourth year did the boom stop and unem- tion, the program may seem more gradu- Zimbabwe ployment rise. What lessons from that ex- alist. The real costs, in terms ofincreased perience can be applied elsewhere? unemployment, were postponed for sev- Ali Khadr and Klaus Schmidt-Hebbel eral years and in the transition there The Israeli stabilization program of 1985 was actually a boom in economic activity. This framework for macroeconomic con- is generally considered one of the most Which of these results are peculiar sistency (applied here to Zimbabwe) pro- successful such programs in years. Un- to Israel and which are common to hetero- vides an organizing device for checking der it, the inflation rate plummeted from dox policies generally is a question worth the consistency of data, a snapshot of the about 400 percent a year to about 15-20 addressing. principal resource transfers in an econ- percent a year. Method: Using simple times series omy, and a tool for financial programing Leiderman and Liviatan examined techniques applied to monthly data for or model building. how stabilization affected other key eco- 1980-88, Leiderman and Liviatan inves- nomic variables after 1985. They were tigated changes in the time series prop- Khadr and Schmidt-Hebbel apply a particularly struck by the immediate, erties of key macroeconomic variables in framework for consistency, which they abrupt reduction in the rate of inflation 1985 and after. They focused especially developed elsewhere, to Zimbabwe. and the timing and impact of disinflation on changes in the tradeoff between infla- Policy, Research, and External Affairs Working Paper Series 133 tion and unemployment. similar to one operating in Pakistan, and with the negative consequences of un- This paper is a product of the Macro- both are based on systems used in large modified frontier economics and develop- economic Adjustment and Growth Divi- private companies to manage their sub- ment. Serious interest in the more eco- sion, Country Economics Department. sidiaries, which should make the system nomically integrated approach of resource Please contact Raquel Luz, room N11- adaptable to other country circumstances. management has recently begun to take 059, extension 39059 (56 pages with fig- The system has four essential pre- hold. ures and tables). requisites for success: (1) parallel re- Several interdependent forces indi- forms to increase managerial autonomy cate that improving the economic man- and skills, (2) reliable and timely infor- agement of pollution and resources may 312. Improving Public Enterprise mation, (3) adequate skills to supervise be a necessary but insufficient measure Performance: Lessons from South and evaluate, and (4) political will. The to create the conditions for sustainable Korea paper suggests ways to build up and com- development. These forces include pensate for the first three requirements; threats of changes in the ozone layer and -Mary M. Shirley there is no substitute for the fourth. global climate, widespread problems of This paper is a product of the Pri- depletion and degradation of natural re- The performance evaluation system, suc- vate Sector Development and Public Sec- sources and services, and growing dis- .cessfully applied in Korean public enter- tor Management Division, Country Eco- parities between the rich and poor. To- prises, has four essential prerequisites: nomics Department. Please contact Rose gether with the easing of military and (1) parallel reforms to increase manage- Malcolm, room N9-053, extension 37495 ideological competition between the rial autonomy and skills, (2) reliable and (48 pages with graphs and tables). superpowers, these forces may compel a timely information, (3) adequate skills to redefinition of both security and develop- supervise and evaluate, and (4) political ment, allowing for a redeployment of re- will. The paper suggests ways to build up 313. The Evolution of Paradigms sources. and compensate for the first three require- of Environmental Management in The perception of tradeoffs between ments; there is no substitute for the fourth. Development development and environmental quality persists in the present debate, but its In 1983 Korea dramatically changed the Michael E. Colby necessity is greatly exaggerated, accord- way it managed the largest and most ing to Colby. Developmental approaches important group of its public enterprises, From the polarized debate between "eco- that fully integrate environmental, tech- the Government Invested Enterprises, or nomics" and "development" on one side nological, and social systems offer syner- GIEs. The reforms increased enterprise and "ecology" and "conservation" on the getic economic, social, and ecological autonomy, changed managerial selection other, five paradigms for environmental benefits; this is the synthesis ecodevelop- procedures, and began systematically to management have evolved: frontier eco- ment attempts to achieve. evaluate performance and provide incen- nomics, deep ecology, environmental pro- But paradigms may be impervious tives on the basis of the evaluation. This tection, resource management, and ecode- to evidence, and institutions and socie- paper assesses the results of these re- velopment. What do they mean for devel- ties too difficult to change. The adher- forms and suggests ways the Korean per- opment? ents of each may go on talking past each formance evaluation system might be other, avoiding the real discussions and adapted to circumstances in other coun- In the past quarter century, environ- conflicts that are necessary to achieve a tries. mental management has increasingly synthesis. Whether, when, and how it The impact of the reforms on opera- become a concern of governments. More resolves these issues may be modern tional efficiency can be measured for five recently, the traditional split between de- civilization's most significant test. of the GIEs, including two of the most velopers and conservationists has begun This paper is a product of the Strate- important enterprises in the economy: to break down. gic Planning Division, Strategic Planning the Korean Power Corporation (KEPCO) Increasingly, analysts discuss sus- and Review Department. The paper also and the Korean Telecommunication Au- tainable development, with different appeared as Strategic Planning and Re- thority (KTA). This group of enterprises ideas emerging from a range of disci- view Discussion Paper No. 1. Please shows a sharp improvement in efficiency plines as to what that entails. Concep- contact Carole Evangelista, room S13- in the period after the reforms, well above tions of what is economically and techno- 137, extension 32645 (37 pages with fig- their past trends in performance. While logically practical, ecologically necessary, ures and tables). this paper was unable to attribute the and politically feasible are rapidly chang- efficiency gains conclusively to the re- ing. forms, there is strong qualitative evidence Colby discusses the distinctions and 314. Primary Commodity Prices that the changes were an important rea- connections between, and implications of, and Macroeconomic Variables: A son for the operational improvements. five paradigms of environmental man- Long-run Relationship A central feature of the Korean re- agement in development. He says the re- forms is the performance evaluation sys- medial (defensive), legalistic approach of Theodosios Palaskas and Panos Varangis tem, which sets clear targets for man- environmental protection is breaking agement and provides bonuses on the down because it has proven to be an inef- There is a long-run quantifiable relation- basis of outcomes. The Korean system is fective and inefficient means of dealing ship between real interest rates and real 134 Policy, Research, and External Affairs Working Paper Series commodity prices, but not between real supply. Nor is it possible to quantify the considerations need to be addressed. commodity prices and either consumer relationship between money supply and First, there are issues of designing an prices or the money supply. Commodity commodity prices, appropriate patent system. This includes prices in nominal terms strongly affect Palaskas and Varangis use co-inte- considerations of administrative effi- consumer prices but not the reverse - gration techniques, error-correction mod- ciency, the impact on government expen- and some groups ofcommodity prices can eling, and causality tests to analyze the ditures, and the legal administration of be reliable indicators of movements in relationships between macroeconomic intellectual property rights. consumer prices. Changes in the money variables and commodity prices. Second and more fundamentally, the supply affect commodity prices - but not Using an error correction model to investments that patent incentives trig- the reverse, and the relationship is not specify and estimate the relationship ger in research and development are one quantifiable. between real interest rates and real com- of many uses for scarce savings. Returns modity prices provides equations using to investments protected by patents de- In recent years, fluctuations in such other macroeconomic variables which pend on the productivity of the inventive macroeconomic variables as interest rates have good forecasting abilities on com- process and the industrial applicability. and exchange rates appear to have sig- modity prices, such as industrial produc- of innovations. For several reasons - nificantly affected primary commodity tion, exchange rates, and the price of oil. including the paucity of experience in re- prices. This paper is a product of the Inter- search and development - the produc- Could primary commodity price in- national Commodity Markets Division, tivity of inventive and innovative proc-- dices be used as an indicator of inflation? International Economics Department. esses might be low in some developing What was the impact on commodity prices Please contact Dawn Gustafson, room S7- countries. In such situations care should of announcements about the money sup- 044, extension 33714 (54 pages with be taken that scarceinvestmentresources ply, inflation, and economic activity? graphs and tables). are not wasted in unproductive research Palaskas and Varangis studied the and development endeavors. relationship between commodity prices The paper also argues that in un- and various macroeconomic variables. 315. Notes on Patents, Distortions, stable and protected economies, the so- They focused particularly on inter- and Development cial returns of patented innovations might est rates because of the important role be low. One reason for this is that inno- they play in the portfolio adjustment Julio Nogu6s vations that are appropriate for a given model, in which investors move between productive structure might not be appli- commodities, bonds, and money as inter- What are the economics ofpatents? What cable when a shift in policies induces a est rates change. problems arise in implementing a patent new economic structure. If so, the analy- Their tests did not rule out the hy- system? How much do distortions in de- sis suggests a sequencing of policies where pothesis that there is a measurable, long- veloping countries affect the benefits and patent protection should be strengthened run equilibrium between real interest costs of a patent system? And what are once developing countries have achieved rates and real commodity prices. Changes the policies that would increase the likeli- a level of savings compatible with invest- in real interest rates significantly affect hood of patents benefiting a developing ments in risky research and development prices on metals, minerals, nonfuel com- country? projects, relative economic stability and modities, and agricultural raw materials competition through open market poli- - as represented by the World Bank's The idea behind patent policies is to in- cies. commodity price indices. crease the output of commercially useful This paper - a product of the Inter- Their tests rejected the hypothesis innovations by creating a transitory prop- national Trade Division, International of a long-run relationship between real erty right that allows the inventor to ap- Economics Department - is part of a commodity prices and either consumer propriate part of the returns from his larger effort in PRE to increase the un- prices or the money supply (as repre- invention. derstanding of the impact of patent pro- sented by U.S. M2 plus dollar holdings in In practice, the issue is so complex tection on developing economies. Please foreign central banks). that after evaluating the U.S. patent contact Maria Teresa Sanchez, room S8- Causality tests show that commod- system in 1958 Fritz Machlup concluded, 039, extension 33833 (30 pages with fig- ity prices in nominal terms (except for "If we did not have a patent system, it ures and tables). metals and minerals) strongly affect con- would be irresponsible, on the basis of sumer prices (as represented by the our present knowledge of its economic weighted consumer price index of the G- consequences, to recommend instituting 316. The Macroeconomics of 7 countries), but consumer prices do not one. But since we have had a patent Populism in Latin America affect commodity prices. And some system for a long time, it would be irre- groups of commodity prices can be reli- sponsible, on the basis of our present Rudiger Dornbusch and Sebastian Edwards able indicators ofmovements in consumer knowledge, to recommend abolishing it." prices. Empirical research done in the 30 years The experiences of Chile under Allende Causality tests also show that since Machlup's study suggests that the and Peru under Garcia illustrate that changes in the money supply cause patent system has benefited competitive when populist policies fail they do so at a changes in commodity prices, but com- industrial countries in important ways. frightening cost to the very groups they modity prices do not affect the money In developing countries, two types of were meant to benefit. Policy, Research, and External Affairs Working Paper Series 135 By "populism" Dornbusch and Edwards 317. Price and Quality homogenous. mean an economic approach that empha- Competitiveness of Socialist The CPEs appear to underprice their sizes growth and income redistribution Countries' Exports manufactured exports not because of cost and deemphasizes the risks of inflation advantages that make them more com- and deficit finance, external constraints, Zdenek Drabek and Andrzej Olechowski petitive, but because most of their manu- and the reaction of economic agents to factured goods are inferior in quality to aggressive nonmarket policies. The centrally planned economies sell ex- their competitors'. Dornbusch and Edwards analyze two ports of raw materials, food, and some This paper is a product of the Coun- instances of populism - Chile under Al- manufacturing goods at world market try Operations Division, Asia Regional lende and Peru under Garcia - that led prices. Most of their exports of manufac- Office, Country Department II. Please to disastrous consequences for those who tured goods are underpriced - mostly contact Zdenek Drabek, room D8-097, ex- were meant to benefit from them. because they are inferior in quality. tension 72162 (22 pages with tables). They describe these experiences in detail, not as a righteous assertion of Drabek and Olechowski analyzed pricing conservative economics but as a warning of the centrally planned economies (CPEs) 318. Sovereign Debt Buybacks that populist policies ultimately fail - in the highly competitive export markets as a Signal of Creditworthiness and always at a frightening cost to the of the EC countries in the first half of the groups they were supposed to benefit. 1980s. Sankarshan Acharya and Ishac Diwan The very sincerity of the policymakers in They found that the CPEs' export Chile and Peru convinces the authors of prices were lower than prices in both In a signaling equilibrium, countries that the necessity of laying out exactly how developed and developing countries. buy debt back get debt relief Those that and why such programs go wrong. Manufactured goods from CPEs were do not buy debt back do not get debt re- The question is, are populist policies underpriced an average 31 to 45 percent lief unsustainable - or could some variant - even more on some commodities. of them succeed? Protection in the EC countries is Why don't all indebted countries promote More research would be needed to probably not a factor in CPE underpricing buybacks (including debt exchanges and support the authors' thesis that populist of manufactured goods. CPE exports of debt-to-equity swaps)? Why do some policies could succeed only if they stayed raw materials, food, and some manufac- countries promote buybacks only part of far clear of foreign exchange constraints, tured goods tended to be sold at world the time? And why are debt buybacks emphasized reactivation only for a brief market prices, as one would expect from initial period, and then shifted to growth profit-maximizing firms in competitive theimechanism for debt reduction favored policies. markets. by international public policy? Most important, expansionary poli- Typically nontariff barriers would To solve the puzzle of attitudes to- cies must reflect awareness of capacity raise prices on CPE exports. If the CPEs' ward debt buybacks, Acharya and Diwan constraints and must rely for financing exports of manufactured goods were in- use a model that combines considerations on an extremely orthodox fiscal policy deed subject to higher levels of protec- of debt overhang with the possibility of and rigorous tax administration. Given tion, as the CPEs often claim, they should asymmetricalinformationbetween debtor those restrictions, there is significant have been able to upgrade their manu- countries and their creditors, room for the redistribution for which factured exports and raise their prices. may create disincentives for a country to populism aims. Instead, their prices were lower than their rtake a worthwhile investment, and Dornbusch and Edwards conclude by competitors'. undertake a induce theestmnt, to warning that IMF-style policies - un- The systematic "underpricing" of debt relief may induce the country to concerned with growth or social progress manufactured exports could not be also invest and to increase its output, raising - may establish financial stability in explained by a deliberate policy of CPEs future debt repayments. the short run, but inevitably open the to penetrate Western markets. Detailed But creditors cannotdirectlyobserve door to yet another round of destructive analysis of average price ratios and mar- the variables that determine this choice, reaction in the form of populist policies. ket shares does not reveal any evidence and in particular, the "impatience rate This paper is a product of the Macro- of obvious and systematic "underpricing of the debtr's government. economic Adjustment and Growth Divi- of these commodities. Acharya and Diwan show that debt sion, Country Economics Department. The CPEs' inability to upgrade buybacks can credibly reveal a debtor Please contact Raquel Luz, room N11- manufactured exports that are subject to country's willingness to invest and to 059, extension 61588 (64 pages with quotas suggests serious quality con- repay in the future when offered relief charts and tables). straints on exports of manufactured today. In equilibrium, countries that buy goods. Moreover, the systematic "under- do not buy back debt do not get debt pricing" was characteristic for manufac- relief. turing exports, which are generally sub- Acharya and Diwan tested and failed ject to great variations in quality and to reject two implications of their model: product differentiation, but not for ex- * That banks systematically grant ports of raw materials and agricultural debt reliefto countries that have a swap products, which are generally much more programin plce program in place. 136 Policy, Research, and External Affairs Working Paper Series * That the secondary market price developing countries could supply com- 321. Economic and Policy of country debt, conditional on a swap, is petitively. Hence, across-the-board, non- Determinants of Public Sector higher than the debt price, conditional discriminatory liberalization would gen- Deficits on no swap. erally favor South-South trade - par- This paper is a product of the Debt ticularly if liberalization focused on the Jorge Marshall and Klaus Schmidt-Hebbel and International Finance Division, In- most heavily protected sectors. ternational Economics Department. This paper is a product of the Inter- A framework for determining how much Please contact Sheilah King-Watson, national Trade Division, International the most important economic and policy room S8-025, extension 31047 (24 pages Economics Department. Please contact variables contribute to the public sector with tables). Grace Ilogon, room S8-038, extension deficit - and for comparing the direct 33732 (63 pages with figures and tables). effects of economic shocks with those aris- 319. Would General Trade ing from policy-controlled variables. Liberalization In Developing 320. Protection Facing Exports Marshall and Schmidt-Hebbel have de- Countries Expand South-South from Sub-Saharan Africa In the EC, veloped a framework for determining how Trade? Japan, and the United States much the most important economic and policy variables contribute to the public Refik Erzan Refik Erzan and Peter Svedberg sector deficit. Their method involves behavioral General trade liberalization in most de- Sub-Saharan African countries have suf- relations, identities for some key macro- veloping countries would expand South- fered relatively little from trade protec- economic and sector variables, and an South trade, and could as well increase tion in Japan, the European Community, accounting breakdown of the consolidated the proportion of this trade in their total and the United States. This is in part public sector deficit. - particularly if the most heavily pro- due to the substantive preferential treat- This allows one to compare the di- tected sectors were liberalized. ment they receive, especially in the Euro- rect effects of various foreign and domes- pean Community, and in part a conse- tic economic shocks on the deficit with For most developing countries, the pro- quence of the product mix of their exports, those arising from changes in policy-con- portion of (total and manufactured) ex- heavy in primary goods. trolled variables. ports going to other developing countries The method is useful for decompos- has steadily increased since the early Erzan and Svedberg address two ques- ing historical time series of public defi- 1970s. tions in this report: cits according to their main determinants Earlier, analysts would have seen * Have exporters in Sub-Saharan -- and for carrying out simulation or pro- this as a reflection ofinward-looking trade Africa (SSA) faced more or less protec- jection exercises for the level and struc- strategies and regional trading arrange- tion in Japan, the EC, and the United ture of future deficits. ments. Until the early 1970s, most of the States than other developing countries? This paper is a product of the Macro- relatively outward-looking developing * To what extent has protection in economic Adjustment and Growth Divi- countries did (or had a trend in doing) those markets constrained SSA's export sion, Country Economics Department. proportionately less trade with other growth? Please contact Susheela Jonnakuty, room developing countries, particularly in Erzan and Svedberg find that on the N11-041, extension 37453 (54 pages with manufactures. whole SSA suffered relatively little from tables). Since the early 1970s, however, an either tariff or nontariff protection in the outward orientation has often gone hand major industrial markets. in hand with more South-South trade. In part this is because they often get 322. Earmarking Government The proportionate increase in South- abetter preferential treatment, especially Revenues: Does It Work? South trade occurred despite relatively in the EC. In part it is because their higher protection in most developing exports are heavy in primary goods which countries against the very products for are generally subject to less protection. William McCleary which they, as a group, have a compara- There is no compelling evidence that tive advantage. protection in the major industrial mar- Economic theory provides some justifica- The "slowing down of the engine of kets has constrained export growth in tion for earmarking. But in practice it growth" greatly affected the direction of SSA. has proven difficult to set up earmarking developing countries' trade. But the re- This paper is a product of the Inter- mechanisms that are both efficient and sumption of growth in the industrial national Trade Division, International independent, and governments often over- countries did not alter the increasing Economics Department. Please contact ride earmarking arrangements when they trend in South-South trade. A new inter- Grace Ilogon, room 88-038, extension need resources. national economic environment had be- 33732 (56 pages with tables). gun to develop. "Public choice" economists (Buchanan and The structure of tariff and nontariff others) have shown that, under some cir- protection in most developing countries cumstances, earmarking can facilitate discriminates against products that other agreement about additional revenues and Policy, Research, and External Affairs Working Paper Series 137 expenditures when there is no consensus Economics Division, Country Economics A gradual approach - such as the about raising either separately. Ear- Department. Please contact Ann Bhalla, one used in Argentina and Brazil in the marking also may provide some protec- room N10-059, extension 37699 (43 pages 1960s - is more appropriate for econo- tion for priority programs against shift- with tables). mies with low inflation, where the case ing majorities, inefficiency, and corrup- for income policies is much weaker. tion. Tight fiscal policy is critical to the In practice, pricing and taxation ar- 323. The Old and the New In success of a heterodox program - par- rangements that lead to an appropriate Heterodox Stabilization Programs: ticularly during the flexibilization period allocation of resources for the service in in which price and wage controls are question - and that are relatively auto- 1980s removed. In the failures of the 1960s matic and independent of frequent ad- and the 1980s, the budget situation had ministrative decisions - are difficult to already deteriorated when controls were set up. Under a wide variety of circum- Miguel A. Kiguel and Nissan Liviatan removed. A relaxed fiscal stance during stances (such as externalities and non- the freeze led to a sharp acceleration of constant returns to scale), efficient pric- Heterodox stabilization programs can inflation later. ing and taxing would lead to unbalanced bring down inflation quickly without cost- It is also important to maintain a budgets for the earmarked fund and ing much unemployment in the short run. strong nominal anchor, before and dur- hence interdependence with the general But costs that appear up front in ortho- ing flexibilization. In Israel, for example, budget. In addition, earmarked funds dox programs are delayed in heterodox using the exchange rate as the main nomi- seldom achieve independence because programs. Tight fiscal policy and a strong nal anchor during flexibilization helped they depend on government for addi- nominal anchor are critical to their suc- prevent a rekindling of inflation (at the tional, nonearmarked sources of funding cess in the long run. cost of overvaluing the currency). or on frequent government decisions The flexibilization period is the most about prices or taxes for the earmarked Heterodox stabilization programs com- critical time in a heterodox program, but sources. Governments often circumvent bine tight monetary and fiscal policies, policymakers do not perceive this. The the intentions of earmarking by with- characteristic of the orthodox approach, strategy for getting out of the freeze is holding funds or failing to change prices with wage and price controls. perhaps the most important and difficult or taxes or, if need be, simply suspending Heterodox programs are usually part of a heterodox program. Heterodox the earmarking arrangements. These adopted as an alternative to orthodox programs fail not because income poli- problems, and the failure to provide an programs to minimize the costs of bring- cies are poorly designed but because the appropriate balance between recurrent ing down inflation. The heterodox ap- fiscal effort does not persist. and capital expenditures, lie at the heart proach can bring inflation down rapidly This paper is a product of the Macro- of the World Bank's disenchantment with without large costs in the short run (the economic Adjustment and Growth Divi- highway funds. easy part of the program). The costs are sion, Country Economics Department. Skepticism about earmarking is jus- borne later when the authorities have to Please contact Raquel Luz, room N11- tified because in general it hasn't worked concentrate on sustaining low inflation. 057, extension 61588 (79 pages with fig- very well. Any earmarking scheme The magnitude of these costs is not yet ures and tables). should meet a rather formidable set of clear. prerequisites, among which the most im- Whether the stabilization program portant are: should adopt a gradual or shock strategy 324. Ethical Approaches to Family * Is there a substantial overlap of depends on the rate of inflation before Planning in Africa beneficiaries and taxpayers? (Earmark- stabilization. The orthodox shock is most ing works best in local government situ- effective for stopping hyperinflation. In F. T. Sai and K. Newman ations and least well where there are economies with chronic, high inflation, a strong redistributional or social welfare heterodox shock strategy is generally In a world tense with confrontation be- objectives involved.) more appropriate. tween North and South on so many is- * Is earmarking essential (in addi- The quick initial success of hetero- sues, it is important that family planning tion to benefit charges) to ensure service dox programs increases support for the aid offered to Sub-Saharan Africa ap- quality or revenue collection? program, opening the possibility for add- pear to be a rope to help people - not the * Will the pricing and taxing ar- ing fiscal measures to deepen the stabili- "noose" it has seemed in the past. rangements lead automatically to the zation effort. appropriate levels of the service? This opportunity is usually forgone, Africa is the geographical flashpoint for * Is there an agency competent to however. Israel and Mexico introduced ethical issues about family planning pro- carry out the program and appropriate further fiscal adjustment during this grams. Until recently in Sub-Saharan accounting and auditing to guard against phase. In the Austral and Cruzado plans Africa, advocacy of family planning by abuse? (in Argentina and Brazil), the initial suc- non-Africans was unacceptable and by * Is there a cutoff date for deciding cess was taken as evidence that more Africans politically inadvisable. whether the earmarking arrangements fiscal adjustment was not required (or This has changed in the 1980s. The should be continued? could be postponed), and the stabiliza- health rationale for family planning is This paper is a product of the Public tion effort collapsed. backed by strong evidence, especially in 138 Policy, Research, and External Affairs Working Paper Series Africa, where infant and maternal mor- inadequate services affect business and redirect exports, reduce the size of indus- tality and morbidity rates are high. Popu- productivity in urban areas, (2) the op- tries for which countries have compara- lation growth in many African countries tions for more efficiently providing and tive advantage, and cause overall eco- impedes development, which -however maintaining the delivery of various in- nomic losses - especially if the affected impressive -cannot keep up with needs. frastructure services (such as electricity, industry is large in the market for its Earlier attempts to offer family plan- water, transport, telecommunications, factors of production. ning aid were often politically inept and and waste disposal), and (3) potential endangered the needed partnership be- cost savings from improved services. Most economic literature concentrates on tween donor and developing countries. Lee and Anas report research re- the rent transfer accruing to exporting Theoretical arguments and abstract sponses to such questions (on the de- countries when a voluntary export re- demographic projections are less persua- mand side) as: How do firms respond to straint (VER) is binding. It suggests that sive than carefully designed programs the constraints caused by deficient infra- VERs are not very harmful for the ex- geared to the health and well-being of structure? What alternatives do firms porting country. De Melo and Winters ommunties that help plan them. have, and what do they cost? Is the argue that this view is misconceived. Increased cooperation between do- private provision of services a viable al- Most work has focused on the wel- nor and developing countries - in trans- ternative to their public provision? fare loss to the importing country arising ferring technical and financial resources They also report responses to ques- from a loss of income transfer combined so countries can set up their own sus- tions on the supply side: What causes with a distortionary loss in efficiency. tainable and culturally sensitive pro- failure to deliver adequate services? To Implicit is the message that the often grams - has helped resolve some of the what extent are such failures caused by large rent transfer to the exporting coun- ethical difficulties that beset family plan- lack of capacity expansion or by poor try is likely to compensate for any in- ning programs. operations and maintenance? How do duced inefficiency losses. This concise and eloquent report inappropriate pricing and user charges De Melo and Winters study the ef- summarizes many of the practical, ethi- contribute to the problem? What options fects on distribution and efficiency when cal, and cultural considerations in mak- exist in terms of investment, technology, VERs force factors out of industries in ing family planning aid acceptable. institutions, regulations, and financing? which they are most productive. They This paper, an earlier version of Based on empirical observations, Lee develop a general theoretical model that which was delivered at the CIOMS Con- and Anas suggest policy options for im- establishes qualitative conditions under ference on "Ethics and Human Values in proving the provision of infrastructure which a VER will result in industry con- Family Planning" in Bangkok on 19-24 services in Nigeria, the first country for traction, spillovers of exports to unre- zJune 1988, is a product of the Popula- which the Bank has undertaken this type stricted markets, and losses in national tion, Health, and Nutrition Division, ofresearch: welfare. Population and Human Resources De- * Regulatory changes to enable They estimate key parameters of partment. Please contact Sonia Ains- fuller use of existing private capacity (for supply and demand for leather footwear worth, room S6-065, extension 31091 (24 example, allowing the sale of excess pri- exports from Taiwan subject to the U.S. pages with figures). vate electrical power). Orderly Marketing Agreement, and ex- * Participation of the private sector plore the implications in a calibrated in the supply of infrastructure-related simulation exercise. 325. Manufacturers' Responses services. The results are a strong indictment to Infrastructure Deficiencies In * Pricing policies that are more effi- of VERs. Nigeria: Private Alternatives and cient in the presence of congestion, sys- For most plausible parameter val- Policy Options tem failures, and variations (by firm size ues, VERs redirect exports, reduce the and location) in the private provision of size of the industry, and cause overall Kyu Sik Lee and Alex Anas services. economic losses, especially if the affected This paper is a product of the Urban industry is large. This paper presents selected findings from Development Division, Infrastructure and This paper is a product of the Trade a survey of manufacturing establishments Urban Development Department. Please Policy Division, Country Economics De- including the costs of private infrastruc- contact Luisa Victorio, room S10-131; partment. Please contact Maria Ameal, ture provisions and develops policy op- extension 31015 (59 pages with figures room N10-035, extension 37947 (38 pages ions for improving the service delivery. and tables). with tables). As cities in developing countries grow, 'he need to meet increasing demand for 326. Do Exporters Gain from urban infrastructure services has become oluntary Export Restraints? Micro Approach to Measuring an important policy problem. Failure to Industrial Efficiency respond adequately affects productivity Jaime de Melo and L. Alan Winters and the quality of life in those cities. James R. Tybout To make the Bank's lending pro- The results of the model developed here grams in this area more effective, greater are a strong indictment of VERs. For An approach to measuring industrial understanding is needed of: (1) the ways most plausible parameter values, VERs plant efficiency that recognizes and deals Policy, Research, and External Affairs Working Paper Series 139 with data imperfections - including Relation to Trade Regimes" (RPO 674- 329. Latin America and the measurement errors, missing observa- 46). Please contact Maria Ameal, room Caribbean (LAC) Region tions, and selectivity bias. N10-035, extension 37947 (31 pages with Population Projections, 1989-90 tables). Edition Technical, scale, and allocative ineffi- ciency are widely believed to plague the Rodolfo A. Bulatao, Eduard Bos, industrial sectors of developing countries. 328. Europe, Middle East, and Patience W. Stephens, and My T. Vu Tybout presents a way to measure this North Africa (EMN) Region inefficiency with imperfect data. Population Projections, 1989-90 The Latin America and Caribbean region There is great interest in document- Edition contributes about 10 percent of the 90 ing the patterns and magnitudes of inef- million people added to world population ficiency, so that appropriate corrective Rodolfo A. Bulatao, Eduard Bos, every year. This is slightly greater than policies can be designed. But most rele- Patience W. Stephens, and My T. Vu its 8 percent share of world population. vant empirical work has been done at the sectoral level. So making accurate meas- The population of the region is growing To the 5.1 billion people in the world in urements and distinguishing between at 2.4 percent a year, and should double mid-1988, about 90 million were added -different dimensions of performance is in about 30 years. in the following year, and about 91 mil- difficult. lion more will be added by mid-1990. Recently micro survey data have The population of the region is growing The annual increase will be greater ev- become available, so plant-level studies at 2.4 percent a year, second only to the ery year until almost the end of the dec- that more directly measure the dimen- Africa region, and should double in size ade. sions of efficiency have begun to emerge. in about 30 years. The Middle East states Latin America and the Caribbean But these studies are often flawed be- of Qatar and Oman are growing at 4 contributes 10 percent of annual world cause survey data from developing coun- percent a year, the highest rate in the population growth, slightly above its 8 tries are often rife with measurement world. Regional growth would appear percent share of world population. Al- error, missing observations, and selec- even more rapid were growth in coun- though demographically advanced, the tivity bias. tries like these not offset to some extent region is growing faster than the Asia re- Tybout presents a new approach to by slow and even negative growth in the gion. analyzing plant efficiency that recognizes Eastern and Southern European coun- Previous high fertility, which con- and deals with such data imperfections. tries included in the region. tinues in some countries, has left many It should interest students of productiv- Total fertility in the region, exclud- young people and high population mo- ity and technological efficiency in both ing its European part, is above five chil- mentum: even if the young only repro- developing and developed countries. dren per woman, and life expectancies duce themselves, their large numbers Tybout has developed full-informa- are around 60 years. Replacement fertil- ensure that population will grow 60 per- tion maximum-likelihood (FIML) estima- ity, where the average woman only re- cent. tors of production technologies that deal produces herself, will not be reached until This paper is a product of the Popu- with missing data and measurement er- the middle of the next century. About lation, Health, and Nutrition Division, rors, making alternative assumptions that time, the region will be contributing Population and Human Resources De- about the missing data patterns and the more to world population growth than partment. Please contact Sonia Ains- timing of employment and decisions. the far larger Asia region. worth, room S6-065, extension 31091(238 These estimators yield indices of the The projections of fertility and mor- pages with tables). returns to scale, mean square deviation tality are modeled on recent trends world- from the efficient frontier, and - when wide, and therefore incorporate the ef- labor is treated as endogenous - mean fects of deliberate efforts to reduce vital 330. Africa Region Population square deviation from efficient factor rates in various countries. Although al- Projections, 1989-90 Edition mxes. tering projected trends is possible, it To gauge the performance of the al- would require at least as much demo- Rodolfo A. Bulatao, Eduard Bos, ternative estimators, Tybout applies them graphic intervention as in the recent past Patience W. Stephens, and My T. Vu to census data on Chilean industry, and - and probably more. compares the results with "naive" esti- This paper is a product of the Popu- mators that do not recognize data imper- lation, Health, and Nutrition Division, The population of the Africa region is fections. Population and Human Resources De- growing faster than the population in any This paper, a product of the Trade partment. Please contact Sonia Ains- other region. It should double in a little Policy Division, Country Economics De- worth, room S6-065, extension 31091(266 more than 20 years. partment, is part of a larger effort in pages with tables). PPR to quantify linkages between trade The majority of populations in the Sub- liberalization and changes in industrial Saharan Africa region are growing rap- sector performance. It was prepared for idly. In some countries, where the aver- the research project "Industrial Compe- age woman continues to have seven or tition, Productive Efficiency, and their more births, growth is as rapid as 4 per- 140 Policy, Research, and External Affairs Working Paper Series cent a year. The population of the region This paper is a product of the Popu- evidence on these major crops suggests as a whole is likely to double in slightly lation, Health, and Nutrition Division, that in India (as in other developing coun- more than two decades, and slightly more Population and Human Resources De- tries) agriculture as a whole is under- than two decades after that, the region partment. Please contact Sonia Ains- priced, which produces a bias toward the will be contributing more to annual world worth, room S6-065, extension 31091(234 industrial sector. population growth than the far larger pages with tables). Subsidies in Indian agriculture are Asia region. substantial - about 10 percent of value As a consequence of high fertility, added for groundnuts and cotton, 25 per- populations are young and dependency 332. Effective Incentives in India's cent for wheat, and 35 percent for rice - ratios are very high, up to three times Agriculture: Cotton, Groundnuts, and should be considered explicitly in world minimums. Linked with high fer- Wheat, and Rice evaluating incentives for agricultural tility are high levels of mortality: in investment and production. some countries, life expectancy at birth Ashok Gulati with James Hanson and This paper - a product of the Coun- is barely 40. Garry Pursell try Operations Division, New Delhi Resi- The region will require a long transi- dent Mission, and the Trade Policy Divi- tion, perhaps centuries, before popula- A policy that moves prices closer to free sion, Country Economics Department - tion becomes stationary. At that point, trade levels would shift resources from is part of a larger effort in PPR to quan- the region could have six times its pres- groundnuts (or oilseeds) into cotton, rice, tify incentives in agriculture and to ana- ent population. and wheat - crops for which India has lyze the effects of the trade policies of de- This paper is a product of the Popu- more of a comparative advantage and veloping countries on the allocation of lation, Health, and Nutrition Division, would earn more in foreign exchange. resources between different crops and Population and Human Resources De- This would also allow agriculture to between agriculture and industry. Please partment. Please contact Sonia Ains- compete with industry for investment contact Ghislaine Bayard, room N10-021, worth, room S6-065, extension 31091(256 copee extension 38004 (138 pages with tables). pages with tables). rupees. Detailed estimates of effective subsidy 333. An Option-Pricing Approach 331. Asia Region Population coefficients for four crops - cotton, wheat, to Secondary Market Debt (Applied Projections, 1989-90 Edition rice, and groundnuts - yielded the fol- to Mexico) lowing conclusions about agricultural in- centives in India (among others): Rodolfo A. Bulatao, Eduard Bos, Wheat, rice, and especially cotton Stijn Claessens and Sweder van Wijnbergen Patience W. Stephens, and My T. Vu have been disprotected (in effect, taxed) in the 1980s. Groundnuts have been The Asia region has half the world's popu- heavily protected, encouraging a differ- This pricing model for secondary market lation and contributes half the world's ent allocation of resources than under debt is designed to assess the impact of annual population growth. free trade. claims and the market value of different The incentive framework generates clais ofdifferent Of the 90 million people added to world static efficiency losses and net foreign types of guarantees. population this year, half live in the Asia exchange losses, particularly in areas region. Asia's contribution to world popu- where the crops compete directly for re- Claessens and van Wijnbergen present a lation growth is proportional to its size sources. A policy that moved prices closer pricing model for secondary market debt and dwarfs the contribution ofevery other to free trade levels would shift resources designed to assess the market value of region. The scale of this contribution from groundnuts into crops that would varous forms of guarantees and the im- may be illustrated by the fact that India earn more in foreign exchange. This in- pact of debt reduction on the value of is adding to its population every year as creased output, particularly of cotton, remaining claims. many people as live in Australia. could be used to purchase edible oils Their model is more flexible and Population growth is slowing for with a net gain in foreign exchange. realistic than other models. The tech- Asia, though quite unevenly across Investment programs aimed at in- nique used - option pricing - accounts subregions. Three of the five Asia de- creasing cotton, rice, and wheat produc- explicitly for the sources and nature of partments are growing at 1.4 percent an- tion appear to have high economic rates risks on sovereign debt. By so doing it is . nually, China is growing at 1.0 percent, of return - higher at the margin than possible to assess the market value of and Other South Asia (excluding India) investment in industry. Andhra's cotton various forms of guarantees as well as at 1.9 percent. is a financially and economically profit- the impact of debt reduction on secon- The dependency burden is exception- able export even at current exchange dary market pricing. ally variable across Asia. A country like rates. Investment in rice and wheat The model is extremely flexible in Bangladesh has one dependent per per- would yield high economic rates of re- handling different maturity schedules, son of working age (15-64). Nonborrower, turn as import substitutes, particularly differences in seniority, and expectations economically vigorous economies like in areas where subsidies are low. Their about the availability of foreign exchange Singapore and Hong Kong have fewer financial and economic profitability as and willingness to pay. than half as many. exports is, however, more doubtful. The Claessens and van Wijnbergen ap- Policy, Research, and External Affairs Working Paper Series 141 ply the model to Mexico. They first price base when GDP rises 1 percent. growth has been the principal factor in the value of a general obligation claim. Existing methods for estimating this reversing this shift. They then price claims with fixed and elasticity are inadequate, so Ehdaie de- This paper - a product of the Public rolling interest guarantees. They derive velops an econometric method for esti- Economics Division, Country Economics specific market values for general obliga- mating built-in tax elasticity and the Department - is part ofa larger effort in tion debt and for collateralized exit bonds impact on revenues of discretionary tax PPR to study the fiscal aspects of struc- and show the impact of different debt measures. tural adjustment. It proposes a method reduction shemes on the secondary mar- His dynamic simultaneous-equation for estimating the additional revenues ket price. They conclude that the terms macroeconometric model of taxation cap- that might be mobilized within the exist- of the new bonds are in accord with re- tures the interaction between GDP, indi- ing tax system as GDP grows. Please cent secondary market prices of the ex- vidual tax systems, and individual tax contact Ann Bhalla, room N10-059, ex- isting debt. revenues and bases. It requires only time tension 37699 (90 pages with figures and The authors show that the three debt series data on tax revenues, tax bases, tables). restructuring options offered to individ- and GDP. ual banks are not equivalent if the newly Ehdaie's model can also be used to created exit bonds are senior to new- (1) evaluate the macroeconomic impact 335. Macroeconomic Adjustment - money claims. The new-money option is of a tax reform program and (2) examine and the Labor Market in Four Latin worth considerably less. various tax-related economic issues. American Countries This paper is a product of the Debt In this paper, Ehdaie applies this and International Finance Division, In- model to the time series data for Malawi ternational Economics Department and and Mauritius to highlight the roles that Ramon E. L6pez and Luis A. Rivers the Country Operations Division, Latin economic growth and discretionary tax America and the Caribbean Country measures play in effecting the shift from Expanding wage differentials during ad- Department II. Please contact Sheilah the taxation of international trade to the justment imposes a greater burden on the King-Watson, room S8-025, extension taxation of domestic transactions. His poorest workers, making adjustment poli- 31047 (21 pages with figures and tables). overall conclusions are: cies less sustainable politically. And * Discretionary tax measures have nominal devaluation is probably ineffec- been effective in mobilizing resources tive with a segmented labor market. De- 334. An Econometric Method for from the private sector in both countries. regulating the labor market makes ad- Estimating the Tax Elasticity and * Individual and overall tax reve- justment programs more effective and the impact on Revenues of nues have been inelastic in connection equitable. Discretionary Tax Measures with GDP - except for corporate income (Applied to Malawi and Mauritius) tax in Malawi and import tax in Mauri- Implicit in standard macroeconomics of tius, whose long-term elasticities exceed adjustment is the assumption of well- Jaber Ehdaie one. These two taxes are inelastic in integrated labor markets that are respon- terms of their own tax bases. Imports in sive to relative prices. The author develops an econometric tech- Mauritius and value added in the non- But segmentation of the labor mar- nique that deals with shortcomings of agriculture sector in Malawi have grown ket is usually said to be an important existing methods for estimating the tax faster than GDP. source of labor market rigidities. In par- elasticity and the impact on revenues of * The domestic consumption tax had ticular, if segmentation involves differ- discretionary tax measures. He applies more built-in elasticity than import tax ent degrees of real wage rigidity among this model to Malawi and Mauritius to in Malawi; in Mauritius, the domestic different groups in the labor force, nomi- highlight the roles that discretionary tax consumption tax fell short of the import nal devaluation may be ineffective and measures and economic growth play in tax. Because of these structural differ- inequitable in its impact. effecting the shift from the taxation of ences, economic growth has fed the shift Lopez and Riveros use a model of international trade to the taxation of from taxing imports to taxing domestic labor market segmentation in which regu- domestic transactions. transactions in Malawi; it has reversed lations are necessary to distinguish be- the shift in Mauritius. Without economic tween the formal and informal sectors. In reducing the fiscal deficit as part of growth, both countries would shift from Using standard econometric tech- structural adjustment programs, it is taxing imports to taxing domestic trans- niques to estimate four simultaneous important to be able to project what ad- actions. equations, they examine the effect of ditional revenues can be mobilized within * In both countries, discretionary tax devaluation on relative wages in Argen- the existing tax system as GDP grows. measures have contributed more to the tina, Chile, Colombia, and Uruguay. To know if it is necessary to gener- trend toward domestic consumption tax They found that formal wages are ate more revenues-particularly through than to the trend toward import taxes, more responsive than informal wages to politically difficult discretionary tax * In Malawi, economic growth and inflation and that devaluation of the ex- measures - it is important to be able to discretionary tax measures have played change rate, by increasing the wage gap, estimate the built-in tax elasticity as per- almost equal roles in the shift from tax- is a source of sluggish labor mobility. centage increases in tax revenue that ing international trade to taxing domes- They also found that expanding wage result from endogenous increases in the tic transactions. In Mauritius, economic differentials during adjustment imposes 142 Policy, Research, and External Affairs Working Paper Series a greater burden on the poorest workers, * Given tariffs on both inputs and can be predicted from its rate of change making adjustment policies less politi- final imports, introducing a small duty in the previous five years and from fe- cally sustainable. drawback improves welfare provided the male secondary enrollment. For the In addition, they found evidence to final import is substitutable for the ex- longer term, alternative logistic functions support the hypothesis that nominal de- port good using the input. are defined to give medium, rapid, and valuation would probably be ineffective This paper - a product of the Trade slow improvements in life expectancy. with a segmented labor market. Policy Division, Country Economics De- The infant mortality rate can also be This paper is a product of the Trade partment - is part of a larger effort in represented by alternative logistic func- Policy Division and the Macroeconomic PRE to study the design of tariff reform. tions that allow the rate to decline to Adjustment and Growth Division, Coun- Please contact Karla Cabana, room N10- either 6 or 3 per thousand. In the short try Economics Department. Please con- 037, extension 37946 (22 pages). term, the trend can be predicted from the tact Luis Riveros, room N11-061, exten- previous trend. For the long term, Bula- sion 37465 (41 pages with tables). tao and Bos define a medium trend and 337. Projecting Mortality for All alternative rapid and slow trends. Countries "Split" life tables can be chosen from 336. Input Tariffs and Duty the Coale-Demeny models, using the in- Drawbacks In the Design of Tariff Rodolfo A. Bulatao and Eduard Bos fant mortality rate to determine which - Reform with Patience W. Stephens and My T. Vu level to use for mortality at younger ages, and life expectancy to determine which Arvind Panagariya New procedures for projecting mortality level to use for older ages. in each conr.oety hnepei Changes from previous mortality What is the combined effect on welfare of iea country modestly change previ- projections resulting from these new pro- tariff reductions on final goods, small mortality projections. cedures are mostly modest. Projected tariffs on inputs, and duty drawbacks on As part of its worldwide population pro- life expectancies generally stay within a exports? What is the effect ofa duty draw- Aptiof ts e poula ro- few percentage points of older projections. back in the presence of input tariffs? jections, the Bank annually provides Infant mortality and crude death rates projections of mortality in each country. vary somewhat more. Projected popula- Bulatao and Bos reviewed and updated tion is affected only slightly; a 2 percent In recent years, many developing coun- those procedures. change is close to the maximum effect. tries have lowered tariffs on final goods Basically, mortality has been pro- This paper is a product of the Popu- to promote economic efficiency. This jected by first projecting male and fe- lation, Health, and Nutrition Division, change produces a revenue loss. In coun- male life expectancy according to stan- Population and Human Resources De- tries with undeveloped domestic tax dard schedules and then choosing life partment. Please contact Sonia Ains- bases, the search for more revenue in- tables (which give the age pattern of worth, room S6-065, extension 31091 (30 variably leads to an increased tariff on mortality) for successive periods to give pages with figures and tables). inputs. As the initial tariffs on inputs the desired sequences of life expectancy tend to be low, this increase, comple- levels. mented by duty drawbacks, is expected Bulatao and Bos present new proce- 338. Bank Lending for Divestiture: to improve welfare. dures for projecting short-term (one or A Review of Experience Panagariya systematically analyzes two decades) and long-term (one or two the welfare effects of tariffs on inputs centuries) mortality rates. These proce- Sunita Kikeri combined with duty drawbacks. He con- dures involve calculating rates of change cludes that: for and separately projecting male and * Tariffs on inputs, if unaccompa- female life expectancy andinfant mortal- Divestiture, often used as a synonym, is nied by duty drawbacks on exports, have ity and then selecting appropriate model only one aspect of privatization. Bank an ambiguous effect on welfare. life tables. involvement has been timely and suppor- * In a two-good model, a tariff on Bulatao and Bos derived the ap- tive, but experience indicates that the de- inputs combined with a duty drawback proaches to projecting life expectancy and sign and implementation of divestiture on exports improves welfare. In a multi- infant mortality from analysis of data for are complex and time consuming due to a good model, a small tariff on inputs, developed and developing countries. web of contextual and practical factors. combined with a duty drawback on ex- For female life expectancy, alterna- ports, improves welfare provided excess tive maxima of 82.5 and 90 years are After reviewing Bank support for divesti- demand for imports is substitutable for used in defining logistic functions for ture in 70 operations in 35 countries, exports that use the inputs, increase over time. Male life expectancy Kikeri concludes that divestiture opera- * The effect of a large tariff on the is currently 6.7 years lower than female tions are best tailored to country condi- input, combined with a duty drawback life expectancy in developed countries, tions. Other conclusions reached in this on exports, is ambiguous in a multi-good and this differential is assumed to apply review of Bank experience: model but a case can be made for im- at the maximum. Sometimes divestiture yields mini- proved welfare. (The last two results are In the short term, the rate of change mal results. For example, small and me- reinforced if tax revenue is held fixed.) in life expectancy in a particular country dium-sized public enterprises (PEs) may Policy, Research, and External Affairs Working Paper Series 143 be divested, reducing the government's 339. Private Investment and for understanding the lack of investment burden (and increasing revenues) little; Macroeconomic Adjustment: response to incentives under unstable partial divestments may mean contin- An Overview macroeconomic conditions. More work is ued government interference; govern- also needed on the investment conse- ments may assume liabilities higher than Luis Serven and Andrds Soliiano quences of policy credibility, and the pol- the sale price; or new investors may be icy implications of the link between credi- given privileges and monopoly rights that This paper reviews current investment bility and sustainability. produce more inefficiency. Kikeri spells theories, recent models linking macrecon- This paper is a product of the Macro- out appropriate criteria and methods for omic policies and private investment, and economic Adjustment and Growth Divi- better divestiture design and implemen- the effect of uncertainty and credibility sion, Country Economics Department. tation. Please contact Emily Khine, room N11- Someime (epecillyin ub- on irreversible investment decisions. Sometimes (especially in Sub- Empirical studies on the subject are also 055, extension 37462 (42 pages with Saharan Africa) the best policy may be to reviewed, and the general implications of charts). improve the environment in which PEs this literature for the design of growth- function, avoiding an overemphasis on oriented adjustment programs are dis- divestiture. Ownership changes are only cussed. 340. Prudential Regulation and one element of broader PE reform, the Banking Supervision: Building an implementation of which could create a Serven and Solimano review the litera- Institutional Framework for Banks better climate for divestiture later. And ture on the macroeconomic determinants the threat of divestiture could improve of investment, paying particular atten- Vincent P. Polizatto PE efficiency.ofivsmn,pynpatclrte- ThefceBncoud ation to the transmission mechanisms and The Bank could assist by spelling likely effects of different macro policies To establish an effective program ofbank- out the institutional set-up for managing on private investment. ing supervision and prudential regula- divestiture. Some guiding principles: What are the links between adjust- tion, the public policy role of bank super- avoid overbureaucratization by limiting ment, investment, and growth? Correct- vision must be clearly defined and under- the number of institutions involved; en- ing macro imbalances and achieving stood and actions taken along several sure quick access to top decisionmakers; macroeconomic stability are prerequisites parallel tracks to strengthen the bank make available the necessary technical for achieving sustained growth. A strong supervisory process, the legal framework, expertise; set up guidelines for the dispo- response from private investors to incen- accounting and auditing, and the institu- sitiontives introduced as part of an adjust- tions themselves. Bank can help as countries progress to tvsitoue spr fa dut Bnc h a co untrxesiprogresseto ment program is crucial if the stabiliza- more complex divestitures. tion effort is to be followed by sustained Economic deregulation and financial lib- Meanwhile, divestiture can be staff- owheralization are important for a country to intensive where the program is large - growth. eaiainaeipratfracutyt intenve where therprogrmust be ad- Through what transmission mecha- develop a viable and robust financial and Bank staff shortagesm t be ad nisms do macroeconomic policies affect system. But deregulation will remove is aper -aproductf the t l l. private investment? Serven and Soli- the protections previously afforded the This paper - a product of the Public mano discuss how different macro poli- banking system. Increased competition, Sector Management and Private Sector cies affect the variables - the real inter- a changing price structure, new market Development Division, Country Econom- est rate, the market price of installed entrants, and other factors will increase ics Department - is part of a larger capital, and the price of new capital goods the risks banks assume and the instabil- effort in PRE to (1) review past efforts in - that influence the profitability of capi- ity of the financial system. The failure of institutional development, (2) determine tal. Demand conditions and the availa- a large bank or multiple bank failures where these efforts have succeeded and bility of real credit also influence how may force a sudden contraction of the heest thhae Wde d (3) macroeconomic policies affect investment. money supply, a failure of the payments suggest how the World Bank and its bor- Serven and Solimano recommend system, a severe dislocation of the real rowers can better create and strengthen more research in two areas: economy, and real or implicit obligations an appropriate institutional framework * To improve the design of macro- on the part of the government. for economic development. An earlier economic stabilization policies consistent So, the government's goal to ensure version of this paper was presented at a with the resumption of growth, more re- the stability of the financial system is of conference on Institutional Development search is needed on the implications for paramount importance. Prudential regu- and the World Bank, held in Washington private investment of (a) fiscal adjust- lation and supervision are designed to DC in December 1989. Please contact ment (especially cuts in public invest- remove or lessen the threat of systemic Gloria Orraca-Tetteh, room N9-069, ex- ment) (b) changes in the exchange rate, instability. In addition, the safety and tension 37646 (43 pages with graphs and and (c) monetary restraint under alter- soundness of the banking system must tables). native financial market arrangements. be supported by an adequate legal frame- * A high research priority should be work governing a bank's contractual re- the development of models suitable for lationship with its customers. Satisfac- the empirical study ofirreversible invest- tory accounting and auditing standards ment under uncertainty, a relevant issue are also crucial to ensure that financial 144 Policy, Research, and External Affairs Working Paper Series statements adequately reflect each finan- more in urban areas. All the models of growth we have ac- cial institution's condition. Ravallion and van de Walle present cumulated by studying aggregate models Different countries have adopted a tractable empirical method for estimat- of growth could be greatly enhanced by different models of bank regulation and ing spatial cost-of-living differences that studying models of growth at a more dis- supervision. In some cases, the basis is can deal with these problems. Hedonic aggregated level, he concludes. consultation and moral suasion, in oth- rent indices are used as the prices for The crucial assumption about growth ers, "hands-on" verification through on- housing in an AIDS demand model, the of Arrau's model is that new generations site inspection. Organizational ap- calibration of which permits one to re- are endowed with the average level of proaches also vary from country to coun- trieve the parameters of the consumer's skills available when they were born. try. But no model will be effective if cost-of-utility function. They apply this He studies the impact of demograph- significant political interference is per- method to a large set of household data ics and taxation on the endogenous rate mitted. for Java. of growth. Population growth affects the The primary line of defense against They find that the true cost of living age distribution of the population and banking insolvency and financial system in cities is substantially overestimated the equilibrium spillover that sustains distress is the quality and character of by conventional methods. This is more growth. management within the banks them- pronounced at low incomes, since the Unlike what happens with infinite selves. Therefore, efforts to strengthen marginal cost of utility is larger (relative horizon models, this model shows per the financial system must also focus on to expenditures) in urban areas - im- capita income growth and population strengthening management and manage- plying that the relative cost of urban liv- growth to be inversely related. Unlike ment systems through a process of insti- ing increases with income. what happens with recent fertility-based tutional development. In a neighborhood on the poverty models, this model shows the direction of This paper, a background paper for line, the results suggest (allowing solely causality to go from exogenous popula- the 1989 World Development Report, is a for the difference in price vectors) that tion growth to endogenous economic product of the Office of the Vice Presi- an urban-rural cost-of-living difference growth. dent, Development Economics. Please of about 10 percent is closer to the truth To forgo consumption, households contact the World Development Report than the values (as high as 66 percent) hold human and physical capital. Tax office, room S13-060, extension 31393 (33 used in past work on Indonesia. policy can affect the proportion of these pages). This paper is a product of the Agri- assets in household portfolios. Tax pol- cultural Policies Division, Agriculture and icy that favors human capital (as opposed Rural Development Department. Please to physical capital) translates into higher 341. Cost-of-Living Differences contact Cicely Spooner, room N8-039, per capita growth in income. between Urban and Rural Areas in extension 30464 (25 pages with tables). This paper is a product of the Debt Indonesia and International Finance Division, In- ternational Economics Department. Martin Ravallion and Dominique van de Walle 342. Human Capital and Please contact Sheilah King-Watson, Endogenous Growth in a Large- room S8-025, extension 31047 (42 pages This model shows that in a neighborhood Scale Life-Cycle Model with figures and tables). on the poverty line, an urban-rural cost- of-living difference of about 10 percent is Patricio Arrau 343. Policy Determinants of closer to the truth than the values (as high as 66 percent) used in past work on Life-cycle models of growth can yield a Growth: Survey of Theory and Indonesia. The relative cost of urban negative relation between population Evidence living increases with income. growth and income per capita growth, where the direction ofcausality goes from William R. Easterly and Deborah L. Wetzel It is commonly assumed that the cost of the exogenous rate of population growth living is much higher in cities than in the to the endogenous rate of income growth. The efficiency of investment is as impor- - country because housing rents are higher Tax policy can affect the proportion of tant as the level of investment in deter- in urban areas and food staples cost more. human and physical capital in house- mining growth performance. Policies that This assumption has important implica- hold portfolios. Tax policy that favors make investment more efficient and re- tions for sectoral comparisons of welfare human capital over physical capital pro- duce distortions in resource allocation levels and distributions. duces higher growth in per capita income. generally encourage growth. Ravallion and van de Walle sus- pected that comparisons of housing rent Most models of economic growth are infi- After exploring the literature on economic and food prices overstate the cost-of-liv- nite horizon models that neglect the role growth, Easterly and Wetzel arrive at ing differential. For one thing, the qual- of human capital in shaping life-cycle two broad conclusions: ity of dwelling stock is better on the whole variables. Arrau introduces training de- * The efficiency of investment is as in urban areas, reflecting income differ- cisions in a life-cycle model (the Auer- important as the level of investment in ences. For another, the urban consumer bach-Kotlikoff simulation model) to study determining growth performance. is able to stubstitute in favor of other the role of human capital both in life- * Keeping to a minimum the distor- goods and services which do not cost any cycle behavior and as an engine of growth. tion of resource allocation by government Policy, Research, and External Affairs Working Paper Series 145 policies makes saving and investment the steady-state rate of growth. ized in production is, and how high the more efficient and promotes long-term Easterly's model gives output as a distortions are initially. Small changes economic growth. Policies that contrib- linear function of total capital, but a de- in either very low or very high levels of ute to the efficiency of investment and creasing function of each of two types of initial distortions have a minimal effect that lower distortions in resource alloca- capital. The distortion is defined as a on growth. tion will thus generally encourage growth. policy intervention that increases the cost This paper is a product of the Macro- Policies that promote investment, of using one of the types of capita. The economic Adjustment and Growth Divi- liberalize trade restrictions, and remove relationship between this distortion and sion, Country Economics Department. distortions in financial markets are likely steady-state growth is negative but highly Please contact Raquel Luz, room N11- to raise a country's long-run rate of nonlinear. At very low and very high 057, extension 61588 (44 pages with fig- growth. But more research is needed to levels of distortion, the effect on growth ures and tables). formulate structural models of growth of changing the distortion is close to zero. that give clear guidance on the effect of Changes in structural parameters of yarious policy measures. the economy - the elasticity of substitu- 345. Private Transfers and Public Most of the empirical work on growth tion between the two types of capital and Policy in Developing Countries: does not address the issue of transitions the share of nondistorted capital in pro- A Case Study for Peru to higher long-run growth paths that duction - will significantly affect the -would result from policy changes. We impact of the policy distortion on growth. Donald Cox and Emmanuel Jimenez cannot easily dismiss transitional effects Easterly extends the model to an as irrelevant, analysis of the relationship between the Private transfers within households are Much work has been done on the de- size of government and growth by treat- affected by such public subsidy programs terminants of long-run growth but the ing the distortion strictly as a tax on one as social security and health coverage. It mostimportantissues remain unresolved. form of capital. The tax revenue is used is important to monitor this relationship This paper is a product of the Macro- to finance the acquisition of productive since the impact of these programs, as economic Adjustment and Growth Divi- government capital. There is then a well as who benefits from them, are also sion, Country Economics Department. tradeoff between two forms of distortion affected. Please contact Raquel Luz, room N11- - one resulting from distortionary taxa- 057, extension 61588 (36 pages with tion and the other from insufficient pub- Private interhousehold cash transfers are tables). lic capital. an important source of income in many Increasing the tax from zero has a developing countries. Cox and Jimenez' positive effect on growth, but with fur- review of the lieterature indicates that 344. Policy Distortions, Size of ther tax increases the relationship will the percentage of households receiving Government, and Growth eventually turn negative. Tax revenue private transfers in a sample of five de- ("size of government") as a function of veloping countries ranges from 19 to 47 the tax rate will be given by a Laffer percent. The amounts transferred are William R. Easterly curve. Growth still remains above a cer- not trivial - they constitute from 2 to 20 tain minimum as the tax rate gets arbi- percent of income among all households, The dialogue that advocates ofliberaliza- trarily large. and 10 to 46 percent of income among tion have with policymakers would im- The relationship between tax reve- recipient households. prove if more were made of the structural nue and growth for alternative tax rates Although precise transfer patterns factors that influence the effect of reduc- can be positive, negative, or zero. The are only beginning to be researched, Cox ing distortions on growth. same is true of the relationship between and Jimenez review the preliminary evi- public and private investment. Changes dence from other studies and conduct Easterly analyzes the structural relation- in the share of tax revenue devoted to original analysis based on the recent Peru ship between policies that distort resource capital accumulation ("government say- Living Standards Survey. The paper allocation and long-term growth. ing") will affect the results. reveals that private transfers are being He reviews briefly the Solow model The results suggest that simple lin- directed toward vulnerable groups in in which steady-state growth depends ear relationships between distortions and society. The poor, the elderly, the very only on exogenous technological change. growth, or between size of government young, the disabled, the unemployed, and Policy distortions do affect the rate of and growth, are untenable. The dialogue female-headed households all receive growth in the transition to the steady between advocates of liberalization and disproportionately more transfers than state in the Solow model. But growth policymakers could be enriched by recog- their share in the population. The re- falls off so rapidly in the Solow transition nizing the structural factors that influ- sults can be dramatic and can do more as to make it unsatisfactory as a model of ence the effect of lowering distortions on for the poor than public transfer pro- long-term growth, even over periods as growth. grams. For example, in Peru, the lowest short as a decade. Easterly's model shows that reduc- income quintile's share in total income is Easterly proposes an increasing-re- ing the distortions does not have an equal increased by 14 percent as a result of turns model in the spirit of the new lit- effect on growth in all circumstances. The private transfers. In contrast, public erature on economic growth. With in- effect depends on how flexible the econ- transfers (mostly social security pay- creasing returns, endogenous economic omy is (the elasticity ofsubstitution), how ments) increase that quintile's income variables - and thus policy - will affect large the share of the factor being penal- share by only 4 percent. 146 Policy, Research, and External Affairs Working Paper Series These transfers are important to To increase trade, India must tie into In most developing countries, relatively consider when making policy that is di- this highly organized international trade little mortgage credit is supplied volun- rected toward certain groups. Increased logistics network - but it has been to- tarily, mainly because of the high trans- public spending on, say, pensions or tally unprepared to cope with the de- action costs associated with enforcing con- health benefits, could lower private manding arrangements common among tracts. spending. For example, altruistically its major trade partners. Peters recom- In most countries, the supply of minded middle-aged households may not mends the following agenda for reform: mortgage credit is restrained more by give as much to their elderly parents if * Prepare a strategy for tying into the cost of post-contract governance than they know that the state would take care international trade and transport logis- by the cost of producing contracts. of them. The program could have the un- tics, particularly through containeriza- This distinction is important because intended effect of transferring purchas- tion. This means organizing India's frag- before-contract costs are dictated by tech- ing power to the private donor. Also, the mented systems planning, control, and nological conditions - that is, the na- value of the public program's benefits management, and involving the private ture of the production function - so little accruing to intended beneficiaries would sector in organizing logistics networks. can be done to change them. The costs of be lower than the amount of the public * Create a joint public-private sec- governance, on the other hand, are more transfer. Cox and Jimenez provide a tor task force to establish an agenda for amenable to change. If there are signifi- conceptual framework to show that these market surveys and system analyses to cant gains from reducing these costs, in- displacement effects become less impor- identify system shortcomings and needs. stitutional reforms may help realize them. tant if households are also motivated by * Develop and manage efficient In the lowest-income countries, the the expectation that they will get some- subsystems for shipping, railway, road, before-contract transaction costs of pro- thing in exchange, rather than by pure and air transport sectors as well as port viding housing finance are probably high altruism. and warehouse systems. enough per loan dollar that low levels of Although such private adjustments * Lift import duties on vital equip- demand explain the relative smallness of do offset the impact of public programs, ment and spares. the housing sector. the empirical evidence indicates that it * Revise the regulatory and control In most other developing countries, would not completely eliminate them. For net that now strangles transport. Above housing finance systems could grow more example, in Peru, Cox and Jimenez esti- all, simplify customs procedures. spontaneously and rapidly if there were mate the amount that private transfers * Adapt trade-related banking and more effective post-contract enforcement from young to old would be raised if so- insurance arrangements. procedures. This growth would improve cial security payments were eliminated. * Promote the national freight for- the efficiency of financial systems and The answer? Private transfers would warding industry by relaxing regulations reduce distortions in the economy - so rise by about 20 percent, but would not that govern it. the economic benefits of reducing hous- completely compensate for the elimina- * Encourage the participation of the ing transaction costs are likely to be sig- tion of social security payments. The private sector, particularly through equip- nificant. displacement effect of private transfers ment leasing and privatization of such This paper, a background paper for is less than that predicted by the purely facility operations as container terminals. the 1989 World Development Report, is a altruistic model. This paper- a product of the Trans- product of the Office of the Vice Presi- This paper is a product of the Public port Division, Infrastructure and Urban dent, Development Economics. Please Economics Division, Country Economics Development Department - is part of a contact the World Development Report Department. Please contact Ann Bhalla, larger effort in PPR to establish an effec- office, room S13-060, extension 31393 (34 room N10-059, extension 37699(98 pages tive framework for helping developing pages with figures and tables). with figures and tables). countries adjust to changing distribution logistics practices in international trade markets. Please contact Teresa Lim, 348. Recent Trends and Prospects 346. India's Growing Conflict room S10-029, extension 31078 (49 pages for Agricultural Commodity between Trade and Transport: with tables). Exports In Sub-Saharan Africa Issues and Options Takamasa Akiyama and Donald F. Larson Hans Jrgen Peters 347. Housing Finance in Developing Countries: Sub-Saharan Africa's export dependence India's trade performance will deterio- A Transaction Cost Approach on coffee and cocoa has increased, but' rate if it does not adapt to the changing without policy changes to boost these and environment in international trade and Robert M. Buckley other agricultural exports, the region can distribution logistics. expect only slow growth in its agricul- Reducing transaction costs in the hous- tural income terms of trade. Containerization and multimodal trans- ing sector would make financial systems port arrangements are key features of more efficient and reduce economic dis- Sub-Saharan African countries have seen the radical restructuring of transport tortions in most developing countries. sharp declines in their shares of agricul- logistics in international trade in recent tural export markets. But their export years. dependence on the most important crops Policy, Research, and External Affairs Working Paper Series 147 - coffee and cocoa - has increased. coordinated with other policies aimed at Westerners often complain that laws are Comparisons in the region and with coun- managing the balance of payments -in not enforced in developing countries. tries outside the region show the impor- particular, policies on interest rates. "Good"laws are on the books, but in real- tance of appropriate exchange rates and In the short term, monetary policy ity individuals and firms evade them with producer pricing policies, as well as sup- can be used to protect domestic interest impunity. For example, taxes are uncol- port for technological advancement, for rates from the destabilizing influence of lected, bankruptcy laws unenforced, en- good performance in these sectors. Some speculative capital flight. In the long vironmental controls ignored, and trade countries have successfully introduced run, monetary policy can help lower do- restrictions evaded. Furthermore, cor- changes in these policy areas. Changes mestic nominal interest rates by main- ruption often flourishes in government are also needed in domestic marketing taining low inflation and dampening ex- despite repeated condemnation by public systems to enable flexible responses to pectations about depreciation. The po- leaders. How can these patterns be ex- market demands in such areas as qual- tential forreducing interest rates through plained? Are the legal systems of these ity. monetary expansion is limited. countries in chaos? Or do they just work For their major agricultural export Domestic inflation is partly a mone- in other ways, more obscure to Western products - coffee, cocoa, cotton, ground- tary phenomenon but structural factors eyes? nut oil, palm oil, sugar and tobacco - also affect it. The main structural vari- This paper tries to unravel the na- prospects for world market growth and ables are the domestic price of imports ture oflegal processes in developing coun- for increases in Sub-Saharan Africa's and the price of rice (used as a proxy for tries and explain how and why they may market shares are generally only fair. wage adjustments). The effects of inter- differ from legal processes in more ad- So, without further policy changes to national inflation are immediate and vanced nations. Gray identifies three improve performance, the regions' agri- strong; the effects of wage pushes are broad functions of a legal system and cultural income terms of trade for these smaller and less immediate. introduces the central theme of the pa- commodities is expected to recover only Inflation can be reduced to some per - how risk and information costs slowly from the sharp decline after 1985. extent by slowing the growth of money - affect many of the characteristics of the This paper is a product of the Inter- which strengthens the secondary influ- legal process. national Economics Department, Inter- ence of a slower crawling exchange rate. She next proposes two opposing national Commodity Markets Division. A managed float is appropriate for models - the "formal" and the "infor- Please contact Dawn Gustafson, room S7- maintaining a competitive exchange rate, mal" - to illustrate different means by 044, extension 33714 (58 pages with fig- given the gap between world and domes- which legal functions can be handled. ures and tables). tic inflation caused by structural and While these models are presented as monetary factors. Real depreciation of contrasting alternatives for purposes of the exchange rate will be necessary to exposition, neither pure prototype exists 349. How Indonesia's Monetary compensate for unanticipated decline in in practice. Real life is always some Policy Affects Key Variables oil income (from lower than expected oil mixture of the two, with the balance shift- prices). ing from country to country. Sadiq Ahmed and Basant K. Kapur This paper - a product of the Coun- Gray then describes formal and in- try Operations Division, Asia Regional formal legal processes in Indonesia, us- Office, Country Department V - seeks ing the Indonesian tax system as a case Because of unrestricted capital move- to determine the appropriate manage- study. ments, interest rate parity conditions pre- ment of macroeconomic policies and their This paper, a product of the Office of vail in Indonesia. To some extent, infla- impact on key macroeconomic variables the Vice President, Development Econom- tion can be reduced by slowing the growth in developing countries. Please contact ics, is part of a larger effort in PPR to of money. A managed float is appropri- Joyce Rompas, room A10-023, extension understand the regulatory and legal ate for maintaining a competitive ex- 73723 (26 pages with graphs and tables). framework underlying market systems change rate. And real depreciation is in developing countries. Please contact needed to compensate for unanticipated Bilkiss Dhomun, room S9-037, extension decline in oil income. 33765 (39 pages). 350. Legal Process and Economic The movement toward greater trade lib- Development: A Case Study of eralization in Indonesia has generated Indonesia 351. The Savings and Loan debate about the effect of monetary pol- Problem In the United States icy on interest, inflation, and exchange Cheryl W. Gray rates. Stanley C. Silverberg Admitting the limits of using a short- Risk and information costs affect many run model, Ahmed and Kapur report the characteristics of the legal process in de- The institutional arrangements for U.S. following findings of their econometric veloping countries. Two opposing models savings and loan institutions were a dis- analysis: -formal and informal- show how these aster waiting to happen. Recent economic Unlike many developing countries, countries use different means to handle events and government policies made it a Indonesia has an open capital account. legal functions. big disaster. Developing countries can Its monetary policy must therefore be learn some important lessons from this experience. 148 Policy, Research, and External Affairs Working Paper Series Before the late 1970s, U.S. savings and 352. Voluntary Export Restraints 353. How Should Tariffs Be loan institutions (S&Ls) were primarily and Resource Allocation in Structured? mutually-owned institutions with limited Exporting Countries management capabilities, limited invest- Arvind Panagariya ment options, and virtually unlimited Jaime de Melo and L. Alan Winters interest rate exposure. Should all imports be taxed at uniform The industry was closely tied to real By reducing the marginal revenue of the rates? Should intermediate inputs be estate so conflicts of interest and concen- factors of production, a voluntary export subject to import duties? If so, should trations of credit were accepted. The restraint (VER) causes an exporting duty drawbacks play a role in exports? regulatory-supervisory system was also country's industry to contract. Efficiency closely tied to the industry so it had losses depend on whether sales can be Basing his analysis on intuitive argu- trouble identifying problems and impos- diverted from restricted to unrestricted ments, supported by the literature and ing appropriate discipline. markets. A VER is likely to produce a When interest rates escalated beyond welfare loss if demand is relatively elas- simple diagrams, Panagariya argues that: * The introduction of tariffs on in- imagined levels, this borrow-short, lend- tic and supply is not. termediate inputs complemented by duty long industry suffered great operating drawbacks is welfare-improving. losses, which depleted modest capital Most literature on voluntary export re- * If the objective is to protect the . levels in many S&Ls. Interest rates and straints (VERs) analyzes the welfare costs import-competing sector, uniform tariffs asset prices varied greatly, and S&Ls of VERs to consumers in the importing will minimize the distortion in produc- were constrained in their ability to diver- country. De Melo and Winters propose a tion but not in consumption. If the objec- sify and hedge against risk. Prudential method for measuring the effects of a tive is revenue, uniform tariffs will in supervision and regulation were inade- VER on the productivity of factors em- general fail to minimize distortion in ei- quate and were subject to pressures to ployed in the exporting industry. ther production or consumption. liberalize the activities of institutions in- Their model measures how a VER * The existence of smuggling, im- experienced in the new activities. affects both revenues and efficiency perfect competition, and economies of Parts of the industry were allowed (which may be affected by contraction of scale weaken the case for uniform tariffs. to continue operating and assuming new output) in an exporting industry. They The principal justification for uniform risks despite insolvency. It was difficult used the model to estimate the effects of tariffs is their transparency, administra- for the government and banking authori- the U.S. Orderly Marketing Agreement tive simplicity, and relatively low level of ties to acknowledge these losses and to (OMA) on Korean producers of leather unproductive profit-seeking activities. pursue policies that would bring an end footwear in 1977-81. * Considerations of efficiency con- to them, and their delay in doing so in- Their econometric estimates indicate flict with considerations of political econ- creased the costs and distortions in U.S. a limited ability to redirect sales to unre- omy. Ultimately the issue calls for more resource allocation. Losses borne by the stricted markets and a sharp fall in the systematic empirical study. economy will be paid for by the general marginal revenue product of factors This paper - a product of the Trade public. employed in the Korean leather footwear Policy Division, Country Economics De- Although the United States has a industry during the period the OMA was partment - is part of a larger effort in highly sophisticated and innovative mort- in effect. PRE to study the design of tariff reform. gage market that is not found in develop- They found that the marginal reve- Please contact Karla Cabana, room N10- ing countries, the lessons of its failures nue product of factors employed in leather 037, extension 37946 (29 pages with fig- in regulating and supervising the say- footwear declined as much as 9 percent ures). ings and loan industry are highly rele- because of the OMA. This estimate was vant for the many developing countries corroborated by time series on output, that suffer from widespread distress in employment, and wages in the Korean 354. How Commodity Prices their financial systems. footwear sector. This paper, a background paper for Based on illustrative counterfactual Respond to Macroeconomic News the 1989 World Development Report, is a simulations, de Melo and Winters show product of the Office of the Vice Presi- that a VER is likely to produce a welfare Dbaneshwar Ghura dent, Development Economics. Please loss if demand is relatively elastic and contact the World Development Report supply is not. How commodity prices react to news about office, room S13-060, extension 31393 (53 This paper - a product of the Trade macroeconomic variables depends partly pages with tables). Policy Division, Country Economics De- on where the economy is in the business partment - is part of a larger effort in cycle. The immediate impact ofsuch news PRE to study the effects of quantitative is often different from the one-day-lagged PRE o stdy he efecs ofquatitaive impact - and different for different com - restraints imposed by developed coun- modit a de f ir c tries on developing country exports (re- modity groups. search funded by RPO 672-40). Please contact Maria Ameal, room N10-035, ex- Ghura analyzed the immediate, delayed, tension 37947 (40 pages with figures and and group responses of 20 commodity tables). prices in four commodity groups (foods PoliCy, Research, and External Affairs Working Paper Series 149 and livestock, crops, energy, and metals) indices of real activity). He used autore- market was expanding. Data on renego- to macroeconomic "news" (unexpected an- gressions to measure shocks to commod- tiated loans were not used. The results nouncements) in the United States be- ity markets for variables (exchange rates are robust to a number of alternative tween 1985 and 1989. He found that: and interest rates) whose values are re- specifications. They are not a conse- Macroeconomic news generally af- alized on financial and credit markets.] quence of the behavior of spreads over fects commodities within groups in the This paper - a product of the Inter- calendar time, but are robust with alter- same direction - but there is no clear national Commodity Markets Division, native definitions of experience variables evidence that the prices of largely unre- International Economics Department - and alternative functional forms. lated commodity groups react in the same is part of a larger effort in PRE to de- This paper - a product of the Debt way to macroeconomic shocks. velop an understanding of the formation and International Finance Division, In- News about inflation indices and the of primary commodity prices, in particu- ternational Economics Department - is money supply did not have a major effect lar their response to changes in macro- part of a larger effort in PPR to investi- on commodity prices. economic variables. Please contact Sarah gate the determinants of the terms, con- The business cycle must be carefully Lipscomb, room S7-062, extension 33718 ditions, and volume of private-source considered in analyzing the impact of (67 pages with figures and tables). international financial flows to develop- macroeconomic news on commodity ing countries. Other related work under prices. Over the long haul, news about way includes a review of the determi- macroeconomic variables was unimpor- 355. The Evolution of Credit nants of the volume and destination of tant - but many commodities reacted Terms: An Empirical Study of foreign direct investment from Germany significantly to news when the economy Commercial Bank Lending to and Japan, a study of portfolio invest- was coming out of a local recession (Octo- Developing Countries ment in developing countries, and a study ber 1 to December 31, 1987). When indi- of the determinants of commercial bank ces of real activity were sending out Sifle Ozler decisions in menu-based rescheduling and "noisy" signals, most commodities did not debt reduction exercises. Please contact respond significantly to news. The spreads on bank loans to developing Sheilah King-Watson, room S8-025, ex- During the recession, unexpected countries between 1968 and 1981 were tension 31047 (31 pages with figures and movements in exchange rates appeared far higher for countries with no loan ex- tables). to affect the behavior of metal prices, perience than for countries with good non- both immediately and after a delay. defaultrecords. The cost and difficulty of The prices of metals and foods and assessing risk with new borrowers sug- 356. A Framework for Analyzing livestock commodities fell after exchange gests a greater fact-finding and fact-dis- Financial Performance of the rate appreciation, while prices on most semination role for international organi- Transport Sector energy products and all crops appreci- zations. ated. Most of the significant immediate Ian G. Heggie and Michael Quick impacts of exchange rate shocks were Ozler studied changes in spreads on bank positive, loans to developing countries during Here is a framework for analyzing the It was a different story with the one- 1968-81. current financial state ofa country's trans- day-lagged effect ofexchange rate shocks. She found that a borrower's experi- port sector, identifying and measuring The delayed effect was positive for met- ence had a significant impact on spreads. the seriousness offinancial problems, and als, foods and livestock, crops and Spreads started at high values at low identifying options for improving finan- oilseeds, but negative for energy prod- levels of loan experience and decreased cial performance and mobilizing revenues uctsThe significant immediate impact of as experience increased. Spreads at ini- for maintenance of transport infrastruc- tial-experience levels were about 30 per- ture. interest rate shocks was positive, as ex- cent above benchmark rates and declined pegt ve, e oe-d aetals fo efc wa to the benchmark, with experience. The Heggie and Quick present a methodo- was positive. impact of experience became negligible logical framework for reviewing the fi- News about real activity was impor- with 30 prior loans. nancial performance of government agen- tant, especially during the local reces- Ozler suggests a greater role for in- cies responsible for transport. sion. Several commodities were sluggish ternational organizations in collecting They apply this framework in a de- in their reaction to such news, however and disseminating information about tailed case study in Tanzania (the trans- Most crops and energy products reacted potential borrowers - because of the high port infrastructure - particularly the with a one-day lag - but the response of initial fixed cost of collecting information road network -of which is seriously run soybeans, soybean products, and wheat about borrowers and the lenders' inabil- down) and on desk studies in 14 other was positive and the response of energy ity to distinguish different types of bor- countries. Their findings: products was negative. rowers in advance. Indeed, international * Revenue administration in Tan- [Method: Ghura used survey data to institutions have been doing more of this zania was weak. Only half of the airport measure the effect of news about macro- fact-finding since the onset of the debt user fees and road user charges were economic variables that are announced crisis. collected. periodically (money stock, inflation, and The study was based on loan-level The structure of user charges was data for 1968-81, when the Eurocurrency unduly complicated. 150 Policy, Research, and External Affairs Working Paper Series * Expenses were not well controlled. SGM results are comparable to results Most earlier studies of the long-term * Fuel prices were out of line with from an earlier study that used the trend in the net barter terms of trade those in adjoining countries, encourag- translog functional form to estimate the between primary commodities and manu- ing smuggling and inefficient use of fuel. demand elasticities of metals with re- factures have suffered from statistical * Transport enterprises were oper- gard to price. shortcomings, argue Ardeni and Wright. ating without clear financial objectives. The procedure is also able to distin- In their analysis, they use a fairly * The financial affairs of these en- guish between direct elasticities for par- new statistical approach called structural terprises were being supervised by a ticular metals and overall elasticities for time series, which, they claim, overcomes ministry that lacked the expertise and metals as a group under the separability those shortcomings. authority to do so effectively. assumption adopted for the metals sub- The tests they ran indicate that the Heggie and Quick outline the steps group. deflated commodity price index is a sta- recommended to strengthen financial Qian provides empirical evidence of tionary series with a unit root. The de- performance and describe how their structural change in U.S. industry. A rived structural model outperforms methodology can be used to prepare mul- jump in the own-price elasticities of en- ARIMA models in terms of fit and fore- tiyear forward programs that can be ergy during the sample period coincided casting. They argue against the idea of- linked to the net cash flow to/(from) gov- with a sharp increase in oil prices. "structural breaks" in the data which ernment. The SGM flexible functional form Sapsford, and Cuddington and Urzua This paper-a product of the Trans- found aluminum and steel to be comple- found. portation Division, Infrastructure and mentary in four out of five industries but Their results support the conclusion Urban Development Department - is suggests that they are substitutes in the that the net barter terms of trade has part of a larger effort in PPR to improve technically-compensated sense: when declined an estimated 0.6 percent a year policies on pricing, cost recovery, and ef- total metals use is constant, an increase - a result consistent with that of Grilli ficient resource use in transport. A com- in the price of one metal reduces con- and Yang. panion report on public expenditure re- sumption of that metal and increases This paper - a product of the Inter- views in transport is due to be published consumption of the other. national Commodity Markets Division, shortly. Please contact Wendy Wright, Use of the bootstrapping technique International Economics Department - room S10-055, extension 33744 (30 pages provided insights into the stability of the is part of a larger effort in PRE to under- with tables plus 32 pages of an annex). elasticity estimates. The results are stand the short- and long-run behavior of promising at the aggregate level when primary commodity prices and the impli- the number of free parameters is not large cations of movements in these prices for 357. Application of Flexible compared to the sample size. Bootstrap- the developing countries. Please contact Functional Forms to ping also clarifies the problem at the dis- Audrey Kitson-Walters, room S7-053, Substitutability among Metals aggregated level where most elasticities extension 33712 (54 pages with figures in U.S. Industries are not significantly different from zero. and tables). This paper - a product of the Inter- Ying Qian natonal Commodity Markets Division, International Economics Department - 359. A Survey of Recent Estimates A new functional form - the Symmetric is part of a larger effort in PRE to inves- of Price Elasticities of Demand for Generalized Mcfadden Cost Function tigate the decline since the mid-1970s in Transport (SGM) - is used to estimate substituta- the intensity of use of metals in the in- bility among metals in five U.S. indus- dustrial countries. Whether or not this Tae H. Oum, W. G. Waters, II, tries. change in industrial countries' demand and Jong Say Yong for metals is permanent is of great im- portance for the developing country pro- Qian reports on the use of a new func- p Since transportation is a derived demand, tional form - the Symmetric General- ducers of the raw materials. Please con- tioal orm- te Smmerw eneal- tact Sarah Lipscomb, room S7-082, ex- it tends to be inelastic. Exceptions are ized Mcfadden Cost Function (SGM) - tension 33718 (41 pages with figures and discretionary travel and some freight ship- to estimate substitutability among met- tes) ments subject to intermodal competition. als in five U.S. industries. The SGM tables). specification has the advantage of impos- Oum, Waters, and Jong review 70 esti- ing curvature conditions globally on the mates of the price elasticity of demand cost function, thus ensuring that the re- 358. The Long-Term Behavior Of for transport published in recent journal sults satisfy basic, widely believed eco- Commodity Prices articles, estimates covering many differ- nomic theory. ent transport modes and market situ- Pier Giorgio Ardeni and Brian Wright ations and employing various statistical For the first time, this study assumes methods and data bases. separability in estimating an SGM sys- The long-term net barter terms of trade The authors present figures sepa- tem, and experiments with a "bootstrap- between primary commodities and manu- rately for passenger and freight trans- ping" technique to estimate the standard factures has been declining 0.6 percent a port and include estimates of both own- errors of parameters derived from flex- year. price and mode choice elasticities - in ible functional forms. In many cases, the the form of a range and a "most likely" Policy, Research, and External Affairs Working Paper Series 151 estimate. They also present some elas- tions between these two distinct sets of time? Do urban policies that aim at or- ticity estimates on demand for gasoline, policies have led to serious distortions in derly physical planning and the protec- together with selected cross-price elas- the urban investment process. The Ko- tion of scarce farmland compound prob- ticities (the impact on demand for one rean urban economy has absorbed large lems? Could different financial policies mode of transport resulting from a change populations quickly, but too great a share produce better outcomes not only for hous- in the price of another). In addition, they of housing investment has gone to pay for ing but for the rest of the economy? How include a brief exposition on the different rapidly rising prices rather than addi- do housing and financial policies inter- concepts of elasticity - compensated, un- tional physical units. Inequality of ac- act? compensated, price, cross-price, and mode cess to housing and related real estate Is underinvestment in the urban choice - and discuss the relations be- assets by various income groups has sector the price to be paid for achieving tween them. emerged. Similar unexpected distortions high growth rates? Renaud only raises The authors show that, since trans- of urban investment resulting from unco- the issue. To determine what alterna- portation is a derived demand, it tends to ordinated policy decisions in these two tive intersectoral allocation patterns be inelastic. Exceptions are discretion- policy areas are often present in other might have been feasible - at the same ary travel and some freight shipments economies. They deserve much more at- time maintaining high growth - one subject to intermodal competition. Al- tention than they have so far received, must analyze national economic growth though the review is confined to esti- particularly in Asia. overall. Cross-country comparisons of mates of price elasticities, it notes that Asian countries would also be valuable. quality variables are often more impor- Policies of directed credit aim to acceler- This paper is a product of the Urban tant than price, particularly in the air, ate economic growth, but inflation can Development Division, Infrastructure and motor freight, and container markets. transform such policies into financial re- Urban Development Department. Please Finally, most of the estimates relate to pression. Does financial repression drive contact Sriyani Cumine, room S10-133, developed countries, reflecting the availa- household savings into the housing mar- extension 33735. bility of data, research resources, and ket - contrary to the intent of poli- domicile of the researchers. The elastic- cymakers - thereby accelerating the rate ity estimates are nevertheless thought to at which housing appreciates? 361. Housing and Labor Market be relevant to developing countries as Renaud's analysis progresses from Distortions in Poland: Linkages well. But since intermodal competition economic growth policies and directed and Policy Implications is generally less intense in developing credit to urban outcomes - the key link countries, this tends to make transport being the behavior of Korean households. Stephen K. Mayo and James I. Stein demand more inelastic, although the The urban performance in Korea has lower income levels in such countries may been remarkable compared to many other Poland's housing problem is not limited partly offset this effect. countries: cities have absorbed large to housing. Government policies that af- This paper- aproductof the Trans- populations quickly and at improving fect housing markets also distort labor portation Division, Infrastructure and standards. However, there is evidence of markets - at potentially major macro- Urban Development Department - underinvestment in urban housing re- economic costs. forms part of an ongoing project in PPR sulting in part from the fact that an im- on Pricing, Cost Recovery, and Efficient portant proportion of investment funds Poland's housing and macroeconomic Resource Use in Transport. It assembles went to pay for rapidly rising unit prices policies have kept investments in hous- empirical evidence on the broad order of rather than additional new units. Lack- ing and urban infrastructure well below magnitude of the price elasticities of ing an effective housing finance system, typical European levels. Waits of 15 to demand for transport on the assumption an asset-based demand (using the sys- 20 years for government housing are not that optimal departures from marginal tem of "chonse") rather than a loan-based uncommon and the stock of housing is 20 cost prices are set in relation to the in- demand for housing has also skewed the percent below housing needs. verse of these elasticities. Please contact size-distribution ofoutput in favor of large Shortages of this magnitude cause Wendy Wright, room 810-055, extension new units with increasing crowding at distortions that extend well beyond the 33744 (34 pages with figures, tables, and the bottom of the urban markets. The housing sector, affecting savings, con- appendices, plus 22 pages of an annex), present period is important for the devel- sumption, prices, and the functioning of opment of housing finance, but liberali- labor markets - all of which can have zation of housing finance without a si- major macroeconomic implications. 360. Compounding Financial multaneous improvement in urban regu- Mayo and Stein focus on how hous- Repression with Rigid Urban lations could easily lead a capitalization ing market distortions affect labor mar- Regulations: Lessons of the of the gains from greater financial effi- kets - how they affect rates of migra- Korean Housing Market ciency into higher housing and real es- tion, relative wage levels among regions, tate prices, and, by implication, the productivity of Bertrand Renaud Focusing on the interactions between the Polish workforce. Their analysis sup- financial policies and housing policies, ports the conclusion that labor markets Attempts to restrict the flow of institu- Renaud raises several questions: With are distorted by housing market distor- tional finance to the housing sector in what kind of economic indicator could tions, at potentially major macroeconomic Korea have been compounded by rigid one track policy improvements and gauge costs. urban physical regulations. The interac- the extent of investment distortions over They conclude with recommenda- 152 Policy, Research, and External Affairs Working Paper Series tions for policy reform. * To compensate for a shortage of age facilities. Their thesis is relevant not only in property evaluation skills, Brazil has a Many of the households that pur- other centrally planned economies but in simplified form of mass appraisal based chase water from tanker trucks resell it any economy where government housing on a few easily observable property char- by the bucket to individuals who cannot market interventions such as rent con- acteristics. afford large storage tanks or who cannot trol or restrictive land use and building * Brazil uses construction cost data be reached by tanker truck. Literally regulations prevent housing markets to calculate unit costs for buildings, which thousands of small water vendors sell from reaching a competitive equilibrium. are often understated to evade transfer directly to individuals and also to other This paper - a product of the Ur- taxes. water vendors - who carry two 4-gallon ban Development Division, Infrastructure * Brazil uses indexing to counter the tins on their shoulders with a pole and and Urban Development Department - effect of inflation, deliver water directly to a customer. is part of a larger effort in PRE to evalu- * In Brazil, tax liability effectively During the dry season, households ate the macroeconomic linkages of the extends to the occupant of a property obtain about 2.96 million gallons a day housing sector and, in particular, the because of the difficulty of identifying (mgd) from the water vending system, macroeconomic benefits of housing pol- the legal owner. for which they pay about $28,000. In icy reform. Please contact Steve Mayo, * CIATA, a nationwide program of 1987 the public water utility supplied room S10-135, extension 31013(31 pages technical assistance in evaluation of the about 1.5 mgd during the dry season, with tables). tax base, is highly successful. Because of only half the amount supplied by the it, total valuations are higher, but its water vendors - for which it collected impact on actual revenues is mixed. In- only $1,100 in revenues. During the dry 362. Urban Property Taxation: creased valuations are often offset by season the private water vending system Lessons from Brazil lower effective tax rates or declining col- thus collected about 24 times as much lection efficiency. As a result, the cost of revenue as the water utility. In the rainy William Dillinger administering the tax is often dispropor- season, water vendors still collected 10 tionate to yields. times the revenue of the water utility. Brazil has had more luck increasing total This paper is a product of the Urban For half of what households in Onitsha property tax valuations than in increas- Development Division, Infrastructure and are paying annually to water vendors, ing property tax revenues. The most ef- Urban Development Department. Please they could support the operation and fective instrument for improving tax col- contact Luisa Victorio, room 810-131, maintenance of a piped system. lection has no effect on taxpayers who do extension 31009. Studies like this are very inexpen- not intend to transfer their titles. sive relative to the capital costs of urban water projects and should be a standard Fiscal constraints and efforts toincrease 363. Paying for Urban Services: A part of water supply project design and local accountability have prompted an Study of Water Vending and planning in developing countries. interest in increasing revenues from ur- Willingness to Pay for Water in This paper - a product of the Ur- ban property taxes. Although these taxes Onitsha, Nigeria ban Development Division, Infrastructure are the most widely used municipal tax and Urban Development Department - instrument in the developing world, they Dale Whittington, Donald T. Lauria, is part of a larger effort in PRE to de- typically account for less than half of and Xinming Mu velop methodologies for estimating house- current municipal revenues, holds' willingness to pay for improved Tax yields can be increased by rais- A rapid survey of activities in Onitsha, water services. Special emphasis is being ing rates or reducing losses from evasion Nigeria, yielded unexpected insights for given in this research program to testing and maladministration. Improving col- water supply planning. For half of what the usefulness and reliability of contin- lection not only increases revenues but is households in Onitsha pay private water gent valuation techniques in developing fairer to those who pay their fair share. vendors each year - to deliver water by countries. Please contact Vino David, Brazil's experience yields several gener- tanker truck and bucket - they could room S10-119, extension 33736 (34 pages alizable lessons on administration and support a piped system. with figures). reform: * One way to keep up with rapidly This case study of water vending in changing property data is cross-referenc- Onitsha, Nigeria, provided surprising in- 364. Financing Urban Services in ing between agencies. In Brazil, the reg- sights into water supply policy and plan- Latin America: Spatial Distribution istrar of deeds will not recognize a trans- ning. Most of the 700,000 citizens of issues action without a certificate showing that Onitsha - an important West African the assessor knows of the sale. This is market town - get their water from an Gian Carlo Guarda the only consistently effective enforce- elaborate, well-organized water vending ment mechanism in a country where the system that the private sector created The Bank's approach to urban lending in judicial process for collecting civil debts and operates. About 275 tanker trucks adjusting economies should be geared to is slow and expensive - but it does not purchase water from about 20 private a review of allocation, distribution, and work with taxpayers who have no inten- boreholes and then sell it to households stabilization policies that directly affect tion of transferring title. and businesses equipped with water stor- fiscal performance. Policy, Research, and External Affairs Working Paper Series 153 During a period of severe fiscal con- 365. Cost and Benefits of Rent courage private housing investment. But straints, rising popular expectations have Control In Kumasi, Ghana they argue that building a political con- made the provision of local services and sensus for decontrol is more important infrastructure into a major problem for Stephen Malpezzi, A. Graham Tipple, than the choice of method for relaxing Latin American economies. Rapid urban and Kenneth G. Willis controls. growth and political democratization This paper - a product of the Ur- caused some 20 percent of general gov- This study ofKumasi finds that rent con- ban Development Division, Infrastructure ernment outlays (8 percent of GDP) to be trol benefits long-term tenants (not al- and Urban Development Department - spent by municipal and regional govern- ways the neediest) at the expense of land- is part of a larger effort in PRE to study ments, even at the peak of the 1980s lords and recent movers. Benefits are the effects of regulations on key urban crisis. Most of these expenditures are small relative to their costs. And although markets. This work is part of Bank re- supported by central government trans- most tenants pay less under rent control, search project, "Rent Control in Develop- fers or account for sizable shares of the they also live in smaller units with fewer ing Countries (RPO 674-01)." Please outstanding public sector deficits. services than they might expect in a well- contact Luisa Victorio, room S10-131, ex- The main theme of the report is that, functioning market. tension 31015. in countries undergoing adjustment, the Bank's approach to urban lending should In this study of the housing market in be geared to a review of the national Kumasi - the second largest city in 366. Inflation, Monetary Balances, allocation, distribution, and stabilization Ghana - Malpezzi, Tipple, and Willis and the Aggregate Production policies that directly affect the fiscal per- argue that the housing market is con- Function: The Case of Colombia formance of local economies. Such a re- strained not only by rent control but by view should consider the territorial dis- regulations affecting land, finance, and Robert Buckley and Anupam Dokeniya tribution of fiscal and financial resources choice of building design and materials. to different jurisdictions and the impact Rent control has kept housing very A system of quasi-monetary balances of the implicit subsidies. inexpensive for most tenants but land- indexed for inflation has helped Colom- Bank operations in the urban sector lords have lost returns on their property. bia's financial system grow. Indexed are gradually moving away from "wind- As a result, they have withdrawn stock mortgages -whichprovided higher yields fall" project loans - which called for ad from the rental market for use by their on deposits than commercial deposits did hoc counterpart allocations to selected own families and reduced maintenance - helped make Colombia's financial sys- cities - and are acquiring a more sys- - and rent on new (and some old) rent- tem more competitive. The effects of these temic character by linking external credit als has increased. financial policies on economic growth are to national and regional policies of reve- Net benefits from rent control are examined. nue sharing. Most countries are now largely unrelated to need. There is some revising the regulatory frameworks for tendency for lower income tenants to get Buckley and Dokeniya studied the role of such policies, and this offers a promising larger net benefits, but they are small real money balances in an aggregate opportunity of dialogue with borrowers, compared to their cost. Mainly, long- production function of Colombia. on which a new rationale could be estab- term tenants benefit most at the expense Colombia is a good choice for analy- lished for regional and urban develop- of recent movers and landlords. sis because it is one of the most exten- ment assistance. Without rent control, long-term rents sively studied developing countries in the The leading focus of this new ap- of typical existing units would be roughly world - so data are abundant. Indeed, proach is to ensure that acceptable levels double what they were in 1986, the au- for most developing countries it is not of welfare and efficiency are achieved in thors estimate - but households would possible to do an empirical study of the all communities, while sustaining local also demand more housing services. As effects of financial policy on economic motivation in mobilizing additional re- it is, most tenants pay less for their units, growth. sources. Worldwide trends toward po- but live in smaller units with fewer serv- Although Colombia has experienced litical and administrative decentraliza- ices than they would have in a well-func- high and variable rates of inflation, it tion make the Latin American experi- tioning market. Overall, for many ten- has introduced a competitive system of ence in this respect especially significant. ants the welfare loss from lower quality quasi-monetary balances indexed for in- The report contains a wealth of coun- housing more or less cancels out most of flation. The success of this system has try-specific, cross-tabulated information the benefits of lower rents. been important to the continued expan- including comparisons with industrial Among other options they study with sion of Colombia's financial system. market economies. A few case studies of a present value model, Malpezzi, Tipple, Indexed mortgages play a role in this innovative Bank operations and summary and Willis recommend floating up and system. Rather than deregulate the in- reviews of topical subjects are presented out of rent control on old units over five terest rate on deposits and simply permit in form of boxes. years, immediately decontrolling new and a more competitive market for broadly This paper is a product of the Urban upgraded units, relaxing other inappro- defined monetary balances, Colombia in- Development Division, Infrastructure and priate regulations such as building codes duced more competition. Urban Development Department. Please and standards, and taking other neces- It introduced indexed mortgages, contact Armi Lim-Felix, room S10-138, sary steps to improve the supply of land, which provide higher yields on deposits extension 33734 (135 pages with tables). finance, and building materials to en- than those available at commercial banks. 154 Policy, Research, and External Affairs Working Paper Series In a sense this was like introducing a the exchange rate or the exporter's cost 368. Reforming State Enterprises competitive "Trojan Horse" into the fi- of production). In Socialist Economies: nancial system. Other depository insti- They concluded that: Guidelines for Leasing Them to tutions had to compete with indexed * The magnitude of elasticity of the Entrepreneurs mortgage lenders for deposits. pass-through depends on the elasticity of According to Buckley and Dokeniya, import demand, the convexity of the Guttorm Schjelderup the effects of finance on the composition import demand curve, and the elasticity of investment patterns was not what of the marginal cost of production with When state-owned enterprises in socialist mattered. Rather, growth was stimu- regard to output. economies are reformed by leasing them lated by not only permitting but induc- * In a competitive pricing market to entrepreneurs - when the state cannot ing the financial system to be able to the pass-through is equal to 1 only if manage its own enterprise efficiently - minimize the effects of high and variable marginal costs are constant (supply is how can the state evaluate the effective- inflation rates on the cost of monetary perfectly elastic). ness of reform? By measuring the firm's balances. Household access to credit for * If marginal costs are increasing, profit level. low-priority" investments played an the pass-through is less than 1. important part in the process of inducing * The pass-through can be greater Schjelderup discusses the reform of state- a cost-reducing, more competitive finan- than 1 for both competitive and noncom- owned enterprises in socialist economies cial technology, and this technology, in petitive pricing markets if marginal costs by leasing them to entrepreneurs. He turn, contributed to economic growth. are declining and the import demand recommends lease payments to the state The forced investment schemes that curve is very convex. based on fee schedules from the princi- still litter the financial system may not * Ifmarginal costs are declining fast pal-agent literature. have made the best use of the resources enough when production is increasing, The aim of the principal (the state) mobilized by the more competitive de- the pass-through can be greater than 1 in this literature is to get the agent (en- posit system. Still, one can only specu- even if the demand curve is not convex. trepreneur/lessee) to act in the state's late what might have happened if the * The yen-dollar exchange rate is interest. The state does so by rewarding resources had not been in the financial not fully passed through in steel prices. the agents for observed actions and out- system at all. When the exchange rate changes, both comes. This paper - a product of the Ur- U.S. and Japanese steel prices change, What is the process of evaluation, ban Development Division, Infrastructure but whereas U.S. steel producers adjust however, when the reform process is and Urban Development Department - prices immediately, Japanese steel pro- based on the fact that the state is unable is part of a larger effort in PRE to exam- ducers are conservative in pricing deci- to manage its own enterprise efficiently? ine the possible broader economic effects sions. For a while, they absorb much of Clearly, the state has to rely only on of policies designed to improve the effi- the dollar depreciation as reduced profits observed outcomes. ciency of resource mobilization in the before increasing their prices in U.S. dol- Despite the state's inability to evalu- urban sector. Please contact Sriyani lars. Changes in Japanese steel prices ate actions, outcomes can be judged by a Cumine, room S10-137, extension 33735 lag six months behind changes in U.S. simple measure: the firm's profit level. (43 pages with tables). prices. Using the firm's profit level as a basis One implication of this analysis is for sharing rules between the lessee and that devaluation may lead to a shift of lessor, Schjelderup offers advice on how 367. The Response of Japanese resources within the export sector, from to structure and implement fee sched- and U.S. Steel Prices to Changes sectors with higher pass-through to sec- ules and on the institutional framework in the Yen-Dollar Exchange Rate tors with lower pass-through. The lower they require. the exchange rate pass-through, the lower This paper - a product of the Public Panos Varangis and Ronald C. Duncan the import response may be, as well. Economics Division, Country Economics These results cannot distinguish Department-is part ofa larger effortin The yen-dollar exchange rate is not fully between a perfectly and an imperfectly PRE to understand the transitional prob- passed through in steel prices. Changes competitive market situation. To do so lem of state-owned enterprises in social- in Japanese steel prices lag six months would require a priori information such ist economies and to suggest reforms con- behind changes in U.S. prices, as percentage mark-up over time. sistent with movement towards a mar- This paper - a product of the Inter- ket economy. Please contact Ann Bhalla, ,mport prices in the United States have national Commodity Markets Division, room N10-059, extension 37699 (33 not responded as expected to large flue- International Economics Department - pages). tuations in the exchange rate in recent is part of a larger effort in PRE to under- vsars. stand the short- and long-run behavior of In this study, Varangis and Duncan primary commodity prices and the im- analyzed the response of Japanese and pact of movements in these prices on the U.S. steel prices to changes in the yen- developing countries. Please contact dollar exchange rate (the exchange rate Dawn Gustafson, room S7-044, extension pass-through, or the percentage change 33714. in import prices as a result of changes in Policy, Research, and External Affairs Working Paper Series 155 369. Cost Recovery Strategy for Development Division, Infrastructure and growth in the Middle East made a nega- Rural Water Delivery In Nigeria Urban Development Department - is tive contribution to Turkey's 1980-87 part of a larger effort in PRE to develop export boom. And although there was a Dale Whittington, Apia Okorafor, methodologies for estimating households' switch from underinvoicing to overinvo- Augustine Okore, and Alexander Mcphail willingness to pay for improved water icing, this accounting trick was nowhere services. Special emphasis is being given near enough to explain the export mir- Kiosk systems with metered private con- in this research program to testing the acle. nections for some households appear to usefulness and reliability of contingent After extraneous factors such as the be the most promising way to recover costs valuation techniques in developing coun- oil boom in the Middle East are accounted and meet consumers'cash flow needs (and tries. Please contact Vino David, room for, Turkey's export miracle was more counter their reluctance to pay in advance S10-119, extension 33736 (36 pages with than a response to explicit export incen- for a service they are not sure the govern- figures and tables). tives. It was a result of macroeconomic ment will deliver). Kiosk systems can policies and trade reform that allowed a provide cheaper, better, and more reli- steady real depreciation of the Turkish able water than water vendors do. 370. Turkey: Export Miracle or lira. Accounting Trick? This paper is a product of the Coun- -What economic and polical factors have try Operations Division, Latin America made cost recovery for rural water sys- Ismail Arslan and Sweder van Wijnbergen and the Caribbean Regional Office, Coun- tems so difficult in the Nsuuka district of try Department II. Please contact Mar- Anambra State, Nigeria? Through in- Was Turkey's recovery from debt crisis an garet Stroude, room 18-163, extension depth interviews with 395 households in export miracle, as some contend? A con- 38831 (15 pages with figures). three rural communities, Whittington, sequence of its proximity to the Middle Okorafor, Okore, and McPhail learned East? Or just an accounting trick - the thathouseholdsin the region do not want result of a shift from underinvoicing to 371. Tariff Valuation Bases and to pay for water in advance or commit overinvoicing? Or a response to sound Trade Among Developing themselves to a fixed monthly payment export incentives and exchange rate pol- Countries ... Do Developing for water. They want the freedom to buy icy? Countries Discriminate Against water only when they use it - partly Their Own Trade? because they do not want to buy water in Alone among major debtor countries, the rainy season and partly because they Turkey substantially lowered its debt- Refik Erzan and Alexander Yeats want control of their cash flow in the export ratio - by more than a third be- event of more pressing needs. Equally tween 1980 and 1987. But the driving Assessing tariffs on a free-on-board (f o.b.) important, they do not trust government force behind the Turkish export miracle basis instead of the common cost-insur- to provide a reliable public water supply. -indeed, its very existence -have been ance-freight (c.i.f) basis would remove a They do not want to pay in advance for a a matter of debate. built-in bias against trade between devel- service they are not sure they will ever Some contend that Turkey's export oping countries. Such a shift would also get. boom had little to do with export incen- reduce the general level of tariff protec- If required to pay a fixed fee every tives or exchange rate policy but was tion. month, households are willing to pay only mostly a consequence of Turkey's prox- relatively small amounts for improved imity to the Middle East. Others claim In establishing the value of imports for services - even less than they are cur- that export growth reflected a shift from tariff assessment, most countries apply rently paying water vendors. Current underinvoicing before 1980 toward over- duties either to the cost-insurance-freight arrangements for cost recovery - fixed invoicing afterward - a product of ac- (c.i.f.) or the free-on-board (f.o.b.) value monthly fees for both public taps and counting tricks in response to changing of the traded good. unmetered private connections - are in- incentives to be truthful about export One effect of using the far more appropriate. Kiosk systems - or kiosk receipts. common c.i.f. base is to place a dispropor- systems with metered private connections If what happened to Turkey is spill- tionate burden on countries that have for some households - are the most prom- over from its proximity to the Middle higher freight and insurance costs. Dis- ising way to improve cost recovery and East, there is little other countries can tant countries - or countries that have meet consumers' cash flow needs. Kiosk learn from the experience. And if export higher shipping costs for other reasons systems can provide less expensive, more subsidies were behind Turkey's export - not only pay higher transport costs reliable, and better quality water than growth, are GATT and free trade maybe but are further penalized by dispropor- water vendors do. being overpromoted? What pulled Tur- tionate tariff costs that worsen their It is not yet possible to generalize key out of debt? competitive disadvantage. these results to other parts of Nigeria or Using an econometric model, Arslan The f.o.b. valuation procedure does other developing countries, but the ad- and van Wijnbergen assessed the contri- not penalize exporters for their location, vantages of kiosk systems and metered butions of various factors to the Turkish but applies a nominal tariff rate directly private connections are likely to be export miracle, whose existence they to the export costs of each country. equally valid in many other places. confirm. Using tariff and transport cost infor- This paper - a product of the Urban Surprisingly, they learn that import mation for six Latin American countries 156 Policy, Research, and External Affairs Working Paper Series (Argentina, Brazil, Chile, Mexico, Peru, high and low growth in the developing cial flows the developing countries can and Uruguay), Erzan and Yeats examine world. expect, the degree of their own success in the influence of the two procedures on Fardoust and Dhareshwar argue that, at implementing policy reforms and struc- the level and incidence of tariff protec- the broad level of global analysis, there tural adjustments, and the strength of tion. are good reasons to be optimistic about world trade and the extent of openness of They conclude that transport and the 1990s. First, there are favorable the industrial-country markets to devel- insurance costs generally put developing supply-side developments in many of the oping-country exports. countries at a disadvantage (compared high-income countries. Per capita real Given the inevitability of economic with developed countries) on inter- income growth rates in the 1990s are shocks, adaptability and economic resil- regional trade and that the relatively high expected to be higher than in the 1980s: ience will be essential for satisfactory Latin American tariffs on c.i.f. prices higher by about 0.5 percent per year for performance of the developing countries further worsen their competitive position. the industrial countries, and higher by in the 1990s. With international prices Thus, despite numerous efforts to as much as 1 percent per year for devel- and market structures changing radi- establish preferential South-South trade, oping countries, on average. If there are cally, countries that lag behind in eco-- existing tariffs (for items that do not en- no major policy mistakes and the inter- nomic reform and in making the invest- joy regional preferences) actually dis- national financial markets remain rea- ments needed for growth are likely to criminate against it! sonably stable, the remarkable rebound suffer a significant decline in their rela, To correct the bias against trade in investment rates observed during the tive standards of living during the 1990s. between developing countries, Erzan and past few years should promote a period According to Fardoust and Yeats recommend adopting the f.o.b. valu- of relatively rapid and noninflationary Dhareshwa, the expected pattern of in- ation procedure used by Australia, Can- growth in these countries. Second, con- ternational trade and investment flows ada, New Zealand, and the United States. siderable scope exists for a recovery of in the 1990s is likely to perpetuate two This change would also reduce tariff bar- private consumption and investment in tracks of growth in the developing world. riers considerably. the debt-stricken developing countries, While growth may be expected to be high This paper - a product of the Inter- as well as in Eastern Europe and the in many Asian industrializing economies, national Trade Division, International USSR. Therefore, while concerns about relatively high population growth and low Economics Department - is part of a financial volatility and about current private investment will probably continue larger effort in PRE to assist trade liber- economic slowdown in some of the major to depress living standards in many coun- alization and reform in developing coun- industrial countries cloud the world eco- tries in Latin America and Sub-Saharan tries. This study shows that the shift nomic outlook in the short run, the long- Africa. The substantial differences in from commonly used cost-insurance- term prospects for the industrial and investment rates of the 1980s between freight (c.i.f.) to free-on-board (f.o.b.) tar- leading developing countries are quite the higher-income and other developing iff valuation procedures will result in a favorable. countries will, if not reversed, tend to substantial liberalization of tariffs in The 1990s will see a continuation of widen the productivity and technology developing countries and will also remove the process of economic integration cur- gap between them. an important bias against trade between rently under way, encompassing mainly This paper is a product of the Long- these nations. Please contact Jean Epps, the industrialized and the newly indus- Term Outlook Project in the International room S8-037, extension 33710 (27 pages trializing economies, propelled by rapid Economic Analysis and Prospects Divi- with tables). technological progress and increased com- sion (IECAP), International Economics petition in international markets, and Department. The quantification, analy- taking place against a backdrop of policy sis, and projections in this paper reflect reforms, economic restructuring, and work mainly completed in mid-1989 and 372. Long-Term Outlook for the political liberalization that has been gath- draw upon results of the 1988 Unified World Economy: Issues and ering momentum since the early 1980s. Survey of Bank Country Economists and Projections for the 1990S Several ongoing economic and political various analyses prepared by IECAP. events - principally Project 1992, which Please contact Jackie Queen, room S7- Shahrokh Fardoust and Ashok Dhareshwar aims for a deeper integration of the Eu- 212, extension 33740 (96 pages with ropean Community, the ongoing changes charts and tables plus 7 pages of an- Deregulation and liberalization of prod- in Eastern Europe and the USSR, and nexes). uct, labor, and financial markets - to- successful completion of the Uruguay gether with higher levels of investment Round of trade negotiations - may also and rapid technological advances in in- act as growth impulses in the 1990s. 373. Are Better-off Households dustrial and services sectors - should In marked contrast to the generally More Unequal or Less Unequal? make the 1990s a period of rapid growth upbeat outlook for the developed world, in the high-income OECD countries and the prospects are less certain for the Lawrence Haddad and Ravi Kanbur a number of leading developing countries. developing regions, where performance But the pattern of international financial is more diverse. The major sources of un- Within the framework of intrahousehold flows is likely to perpetuate two tracks of certainty are the level and cost of finan- bargaining, it is argued that (1) targeting Policy, Research, and External Affairs Working Paper Series 157 of transfers to disadvantaged members of 026, extension 31021 (20 pages with fig- will remove biases in existing models used the household is important, (2) structural ures). to simulate the effects of these restric- adjustment that favors cash crops over tions. The modifications will improve food crops may end up worsening in- present capacities to design and evalu- trahousehold inequality, and (3) as house- 374. Two Sources of Bias in ate proposals for trade liberalization and holds become better-off intrahousehold Standard Partial Equilibrium Trade reform. Please contact Jean Epps, room inequality may first increase and then Models S8-037, extension 33710 (19 pages with decrease (in other words, there may exist tables). a Kuznets curve for intrahousehold ine- Samuel Laird and Alexander J. Yeats quality). 375. Regional Disparities, In many parts of the world, resources In projecting the trade effects of tariff Targeting, and Poverty in India within a household are apparently not cuts, standard partial equilibrium mod- distributed according to need. els generally fail to account for the price- Gaurav Datt and Martin Ravallion Using a model of intrahousehold bar- raising effects of nontariff barriers and to gaining, Haddad and Kanbur first try to consider the influence of supply con- To have an impact on national poverty, answer the question: As households be- straints. The magnitude of the bias may attempts to redistribute resources from come better-off, does intrahousehold in- be several hundred percent or more. richer to poorer states or sectors must be crease or decrease? This is the house- supplemented by interventions to reach hold-level counterpart to a classic ques- The methodological problems associated the poor within regions or sectors - to re- tion Kuznets (1955) posed at the level of with standard partial equilibrium mod- duce the costs borne by the poor in donor the economy as a whole. They find that els may impart a significantbias in their regions and enhance benefits to the poor under certain conditions intrahousehold projections of the trade effects of tariff in recipient regions. inequality first increases and then de- cuts. creases, in other words, a Kuznets-type First, these models fail to account How much can India reduce poverty na- "inverse-U" curve. for the price-raising effects of nontariff tionwide by manipulating the distribu- The debate on intrahousehold ine- barriers (NTBs) that shift the supply tion of income between regions or sec- quality is entwined with policy questions curve for imports. This causes the per- tors? about the efficacy of targeting individual centage price change associated with any What is the overall effect on the poor disadvantaged members of a household, cut in import duties to be overstated, of targeting resources toward the poorer as opposed to poor households in gen- which in turn produces an upward bias states of India-or toward the generally eral. Haddad and Kanbur found that an in projections of new trade resulting from poorer rural sector? intrahousehold bargaining view (more those cuts. (For NTBs that operate on The answer to these questions is far than a household welfare maximization the demand scedule for imports, the bias from obvious, report Datt and Ravallion. perspective) tends to support targeting is reversed.) Given real constraints on policy changes, to disadvantaged members of the house- Second, this problem of the interac- it can be argued that the costs (to donor hold, because ofbargaining power effects. tion of tariffs and NTBs, and the failure regions) and the benefits (to recipient re- The bargaining framework also gives to consider the influence of supply con- gions) of regional policies will tend to be support for the concern that some ob- straints, can cause major upward biases borne widely within regions. servers have expressed about the impact in simulations of trade diversion due to Some benefits are likely to leak to of structural adjustment on intra-house- preferential tariffs. the nonpoor in recipient regions, and some hold inequality. When cash crops are Using representative estimates of costs to the poor in donor regions. And predominantly under male control and supply elasticities and NTB ad valorem with benefits targeted to the agricultural food crops are primarily a female pre- equivalents, Laird and Yeats show that sector, the costs to the urban poor may be serve, improving the relative price of cash the magnitude of this bias may reach higher than the benefits to the rural poor crops can worsen intrahousehold inequal- several hundred percent or more. can justify. ity. They suggest procedures for remov- Datt and Ravallion's simulations According to Haddad and Kanbur, ing biases in models used to simulate the suggest that the quantitative potential the policy implications of applying in- effects of tariffs and nontariff barriers in for alleviating national poverty through trahousehold bargaining theory to social international trade. purely regional redistributive policies is policy questions are important enought This paper - a product of the Inter- small. Even assuming no political prob- that this work should continue at an ac- national Trade Division, International lems, the maximum impact on poverty is celerated pace. Economics Department - is part of a no more than could be achieved simply This paper - a product of the Re- larger effort in PRE to assist developing by giving everyone a uniform (untargeted) search Administrator's Office - is part and developed countries evaluate the ef- windfall gain equal to about 1.5 percent of a larger effort in PRE to understand fects of tariffs and nontariff barriers on of India's mean consumption. And other the design of poverty alleviation policies, their own economies and international considerations - including increased Please contact Jane Sweeney, room S3- trade. The paper develops methods that migration to areas of higher benefits - 158 Policy, Research, and External Affairs Working Paper Series make it unlikely that the maximum im- closed, less trade intensive, with a lower up to world trade (in which case, the pact will be attained in practice. growth path. In this scenario, world dynamic economies benefit directly from Greater alleviation of poverty re- export growth is more sensitive to de- increased growth in the socialist coun- quires supplementary interventions that creases in openness (as measured by the tries). reach the poor within regions, by reduc- import-GDP ratio) than to decreases in This paper - a product of the Stra- ing the costs borne by the poor in donor projected GDP growth rates. Policy con- tegic Planning Division, Strategic Plan- regions and enhancing benefits to the clusion: sustaining the import capacity ning and Review Department - is part poor in recipient regions. and openness of the 36 countries in the of a larger effort in PRE to identify key This paper - a product of the Agri- three OECD and nine NIC blocs is cru- development questions and to anticipate cultural Policies Division, Agriculture and cial to sustaining world trade growth. future prospects and potential issues. Rural Development Department-is part * The hi-open (global growth) sce- Please contact Carole Evangelista, room of a larger effort in PRE to better under- nario - more open, higher growth, more S13-137, extension 32645 (35 pages with stand the real world constraints facing global trade patterns. Simultaneous tables plus 13 pages of appendix). policymakers in attempting to alleviate expansion of the 12 major blocs would poverty in developing countries, with a assure export growth. Favorable export view to designing and implementing more growth prospects are vital to the growth 377. After the Cold War: Security effective policies in the future. Please pattern on which this strategy depends, for Development contact Cicely Spooner, room N8-039, in which imports grow faster than GDP. extension 30464 (41 pages with figures Unlike the expansion of surplus John Stremlau and tables). economies (Germany, Japan) as a means of correcting the U.S. deficit, the hi-open, How the multilateral financial institu- global growth strategy moves toward tions decide to respond to the forces for 376. The World Economy In the improved trade balances in all blocs as reform in Eastern Europe - and to ad- Mid-1990s: Alternative Patterns of exports and imports increase together. vance peace- building processes in Africa, Trade and Growth The hi-open strategy moves toward South Asia, Indo-China, and Central better balance among industrial coun- America - could be as important to the Colin I. Bradford, Jr. tries, adaptation of the rest of the OECD advancement of world order as their sup- to further integration of the European portfor West European reconstruction and Powerful economic arguments can be Community, incorporation of the social- development was 40 years ago. With made for more open trade among the ist economies into world trade, and ame- major donor countries focused on Europe, OECD, socialist, and developing coun- lioration of the world debt problem. and the passing of Cold War ideological tries. Non-OECD economies - socialist The hi-open scenario generates tensions, the Bretton Woods institutions and newly industrializing countries - US$2.4 trillion more world GDP in 10 need more than ever to represent Third are increasingly important to OECD trade years (1985-95) than the lo-closed sce- World interests. and growth prospects. nario, and US$1.4 trillion more in ex- ports. It generates US$1.6 trillion more If the Cold War era is ending, the para- The rise of newly industrializing coun- GDP than the base case scenario, and digm that has framed national security tries (NICs) and potential NICs in sev- US$870 billion more in exports. agendas for over 40 years must change. eral regions of the world has given the Under the hi-open strategy, if East- Threats to the environment, instant world economy a new structure which ern Europe and the Soviet Union fail to global communications, access to chang- must be considered in anticipating fu- expand and open their economies, export ing science and technology, and deepen- ture trends. growth rates in 1985-95 will be damp- ing economic interdependence are rap- In this multipolar world economy, ened in eight of the 12 core blocs. This is idly eroding national sovereignty and more openness to trade and more expan- a powerful argument for opening world blurring distinctions between foreign and sionary policies in more key countries - trade to the Soviet bloc so that the Soviet domestic policy. including developing and socialist econo- bloc will open up to the rest of the world. How the multilateral financial insti- mies - can significantly affect the mag- Bradford's simulations quantita- tutions decide to respond to the forces for nitude and rates of growth of world GDP tively show how important it is for the economic reform in Eastern Europe - and trade. EC to open up to the rest of the world, to and to advance peace building processes In this report, Bradford analyzes compensate for the inevitable deflection under way or imminent in Africa, South three scenarios of (strategies for) world of EC demand (under EC 92) from non- Asia, Indo-China, and Central America trade: European markets to other EC econo- .- could be as important to the advance- * The base case scenario - the cur- mies. ment of world order as their support for rent (intra-OECD) policy, which is on a The growth prospects of the lower West European reconstruction and de- trajectory of moderate growth. The model income countries neither affect nor are velopment was 40 years ago. for this scenario produces continuing affected by the 36 motor economies. There In conflict-plagued regions of the trade imbalances, especially for the is no automatic trickle-down of growth Third World, multilateral financial insti- United States and Japan, but also for through trade. Nor is there a self-inter- tutions will have important new oppor- other non-OECD blocs. ested economic rationale as there is if the tunities to support incipient peace proc- * The lo-closed scenario - more Soviet Union and Eastern Europe open esses. Such efforts could significantly Policy, Research, and External Affairs Working Paper Series 159 improve economic growth and reduce pov- tion of the world's vital atmospheric, Arrau used a neoclassical (life-cycle) erty in seriously affected countries, could marine tropical, water, and biological model instead of the simpler Ricardian advance the trend of improving East-West resources. (infinite-horizon) model of growth because relations, and could strengthen the multi- This paper - a product of the Stra- Ricardian models have recently failed to laterals' authority to bridge security and tegic Planning Division, Strategic Plan- be supported by the data when their development issues. ning and Review Department - is part implications were tested against the life- These institutions can help "ripen" of a larger effort in PRE to identify key cycle model. The Ricardian model also peace processes with timely assessments development questions and to anticipate imposes a theoretical limit for issues at of the economic gains from national rec- future prospects and potential issues. stake here. The neoclassical model is onciliation; help reinforce peace processes Please contact Carole Evangelista, room more flexible because long-run equilibria and reduce the risk of reversibility; and S13-137, extension 32645 (42 pages). depend on the cumulative effects of the perhaps act as "broker and balancer" by transition caused by policy choices. Its allocating resources to facilitate the posi- main limit is its assumption of ex- tive-sum bargains needed to stabilize a 378. How Does the Debt Crisis ogenously supplied labor. nation or region. Affect Investment and Growth? A This paper - a product of the Debt In Eastern Europe, support by the Neoclassical Growth Model and International Finnce Division, Inter- -international financial institutions for Applied to Mexico national Economics Department-is part market-oriented reforms, economic mod- of a larger effort in PRE to examine the ernization, trade expansion, human re- Patricio Arrau interrelationship between external debt source development and other ventures and economic growth. A subset of that will be much more effective if they are A large-scale neoclassical growth model work deals with the theoretical and em- designed and executed within a long- can provide interesting quantitative pol- pirical underpinning of the debt over- range strategic framework that encom- icy implications. Growth-oriented reforms hang hypothesis. That hypothesis ar- passes all of Europe, including the Soviet can increase the present value of repay- gues that a large external debt discour- Union. The international financial insti- ment, and the relative impact on growth ages investment and adjustment and, tutions can also help manage any prob- from alternative government fInancing ultimately, harms creditors. Please con- lems that could emerge if expanding ex- can be evaluated. tact Sheilah King-Watson, room S8-025, ports from Eastern Europe are granted extension 31047 (46 pages with figures preference over products from develop- Most economists and specialists in inter- and tables). ing countries or otherwise disrupt their national finance believe that the debt markets. crisis hurts macroeconomic performance, Finally, multilateral finance and de- particularly discouraging investment and 379. Some Implications of Policy velopment institutions can ease the tran- growth-oriented structural reforms. Games for High Inflation sition to a new post-bipolar global secu- Identifying the link between the for- Economies rity regime beneficial to developing coun- eign debt overhang and macroeconomic tries. They can: performance is essential for assessing Miguel A. Kiguel and Nissan Liviatan * Prepare "watching briefs" on re- what creditors and debtors have to gain gional and civil conflicts to aid long-range from alternative debt solutions. Having Programs based on tight fiscal and mone- planning and prepare for introducing set up a neoclassical growth model to tary policies (the orthodox approach) are financial and other assistance for study the impact of the debt crisis on slow at reducing inflation in high-infla- peacekeeping and peace-building efforts. investment and growth, Arrau concludes: tion countries. Why? The policy-game * Promote greater regional coopera- * The best case for growth is given approach sheds light on the credibility tion in trade, environmental manage- by inflation financing; the worst case, by problems that raise the public's inflation- ment, communications, education, and national debt financing. In between are ary expectations. other economically significant links. different combinations of income taxa- Today these issues are increasingly being tion and capital income taxation. (This Kiguel and Liviatan used the policy-game perceived by potential partners as essen- result is interesting because inflation has approach to gain insight into a problem tially matters of national and regional been a primary source of financing early that has puzzled analysts of high infla- security. Most successful regional or- in the crisis - but it is not robust be- tion economies. ganizations - including the European cause the model does not include any in- Why are programs based on tight Economic Community - have come to- flation disincentive to invest.) fiscal and monetary policies (the ortho- gether and stayed together for reasons of * Growth-oriented reforms (in the dox approach) slow at reducing inflation collective security. model, tax reforms in favor of capital in high-inflation countries? * Integrate the democratizing na- formation) can increase the present value They conclude that lack of credibilty tions of Eastern Europe into the world ofrepayment by several percentage points generates disinflation costs. economy, a process that might eventu- of GDP. If these reforms are negotiated One question relates to the apparent ally engage the Soviet Union. in the context of a debt reduction agree- delinking of inflation from the long-term * Design long-range approaches to ment, the secondary market discount for requirements of deficit finance. Distin- involve developing countries in interna- the remaining debt can be substantially guishing between regimes of rule and tional efforts to deal with the degrada- reduced. discretion, Kiguel and Liviatan explain 160 Policy, Research, and External Affairs Working Paper Series that governments that cannot abide by 380. Techniques for Railway tion of the first three plans. The focus policy rules and tend to use surprise in- Restructuring should be to ensure that the roles and re- flation in a discretionary manner to sponsibilities defined will actually be achieve short-term goals - to erode the Lee W. Huff and Louis S. Thompson realized in law or enforceable agreement. real wage, for example, or the real value This paper-a product of the Trans- of domestic debt - raise the rational This document addresses how, not port Division, Infrastructure and Urban public's inflationary expectations. whether, to restructure a railway. Development Department - is part of a A given level of real seigniorage, in larger effort in PRE to understand and particular, can correspond to a much This report was sponsored by the Union facilitate the process of institutional re- higher long-term rate of inflation - es- of African Railways, as part of a Sub- form and enterprise development. Please pecially in high-inflation economies with Saharan Africa Transport Project task contact Sabine Shive, room S10-046, ex- a limited ability to abide by the rules, aimed at defining what is involved in tension 33761 (29 pages). The results are different in countries with restructuring railways so that they be- a credible rule about money supply. have more like market-driven enter- If policymakers can convince the prises. 381. Trade in Banking Services: public that (even though they intend to Problems with railway management issues for Multilateral Negotiations rely on money finance) they will not re- are generally related to the policy and in- sort to surprise inflation tactics, the long- stitutional framework within which the Alan Gelb and Silvia Sagari term level of inflation may be reduced railway operates - the behavior of the considerably. Then they are advised to "enterprise" itself - rather than to ac- The response of developing countries to limit the deviations from the prean- cess to technology or capital. the U.S. proposal to liberalize trade in fi- nounced target of their nominal anchor, The question addressed in this docu- nancial services ranges from cautious to whether a monetary or exchange rate. ment is not whether the railway should hostile. Opening borders to foreign com- Another problem is how should poli- be restructured, but how. petition - like the wide-ranging domes- cymakers who are genuinely interested The report recommends four types of tic reforms needed in most developing in disinflation react to adverse public action to be employed in the process of countries - must proceed, but at a mod- expectations? The policymakers are faced institutional reform: erate pace. with the dilemma of sticking to their an- * A strategic plan, which defines the nounced policy and paying immediate environment in which the railway will When the General Agreement on Tariffs costs in terms of unemployment and capi- function and focuses on the crucial policy and Trade was instituted in 1948, its tal flight, or compromising their initial issues that will guide or influence the mandate excluded such industries as targets at the cost of renewed inflation- railway's planning and actions. The ob- banking, insurance, and telecommunica- ary expectations. jective: to generate a thorough public tions. If the source of a credibility problem discussion of the role the railway should These service sectors were highly is the inability of "weak" policymakers to play and the costs and benefits of alter- regulated and protected in most coun- honor their commitment, strong poli- native choices. Emphasis is initially on tries, partly because of their sensitivity cymakers may need to compromise to policy, and as the process proceeds on to national security and cultural iden- some extent. broad understanding and commitment to tity. Under U.S. pressure, the Uruguay What if the source of a credibility the process of change. Round talks have included financial serv- problem lies in different attitudes of poli- * A contract plan, which defines the ices, particularly banking. cymakers toward the relative importance roles and responsibilities of the railway The response of developing countries of price stability versus distortion in the and its owner (the government). The to the U.S. proposal to liberalize trade in real sector (overvaluation, unemploy- contract plan flows from the strategic financial services ranges from cautious ment) - and in the incentives for high- plan, and should not be developed in iso- to hostile. Partly this reflects concern inflation policymakers to mimic low-in- lation from related policy and funding about the perceived comparative advan- flation policymakers? Then a case can be objectives of the government and rail- tage of industrial countries and the de- made for overadjusting in the initial way. sire of strong vested interests (including stages of adjustment - for example, cre- * A management plan, an internal governments) to continue to use the fi- ating a fiscal surplus after a long history plan that clarifies the objectives of the nancial system as an instrument of pub- of deficits - to improve the government's senior railway executives and their roles lic policy. credibility and responsibilities in relation to the It also reflects the weak situation of This paper - a product of the Macro- executive director. The targets of the the banking industry in many develop- economic Adjustment and Growth Divi- three plans should not be confused. Op- ing countries. In some there is no real sion, Country Economics Department - erating targets, for example, should not banking industry; in many the banking is part of a larger effort in PRE to exam- appear in the contract plan, inviting po- sector is technically insolvent and needs ine stabilization policies. It was funded litical interference in management op- costly restructuring and reform. by the research project "Stopping High erations. Opening borders to foreign competi- Inflation" (RPO 674-24). Please contact * An enabling actions plan, which tion is essential to liberalization. But Raquel Luz, room N11-057, extension lists most of the initiatives that must be this process must proceed at the pace 39059 (32 pages). taken in conjunction with implementa- appropriate to the wide-ranging domes- Policy, Research, and External Affairs Working Paper Series 161 tic reforms essential in most developing just supplies as quickly as producers of invariant to both data sources and time/ countries, annual crops. commodity pooling. Gelb and Sagari discuss many of the The rapid expansion of vegetable oil This paper - a product of the Inter- issues involved. production may precipitate a domestic national Commodity Markets Division, This paper - a product of the Fi- crisis in the palm oil milling industry, as International Economics Department - nancial Systems and Policy Division, milling capacity is stretched. Should new is part of a larger effort in PRE to model Country Economics Department-is part investments in milling fail to material- the global markets for primary commodi- of a larger effort in PRE to analyze the ize, some production gains from existing ties and to use these models for forecast- process of liberalizing financial and other trees will be squandered. ing purposes as well as for policy analy- markets, the consequences of such liber- Should the export tax on vegetable sis. Please contact Dawn Gustafson, room alization, and complementary measures oils increase, export revenues will drop. S7-044, extension 33714 (30 pages with needed for its success. Please contact And some of the gains from tax revenues tables). Wilai Pitayatonakarn, room N9-017, ex- will be offset by reduced revenues from tension 37666 (33 pages). state-owned estates. This paper - a product of the Inter- 384. The Rational Expectations national Commodity Markets Division, Hypothesis in Models of Primary 382. The Indonesia Vegetable Oils International Economics Department - Commodity Prices Sector: Modeling the Impact of is part of a larger effort in PRE to de- Policy Changes velop a thorough understanding of pri- Christopher L. Gilbert mary commodity sectors in the develop- Donald F. Larson ing countries. This information is useful The standard linear model fails to ac- both for commodity outlook work as well count for primary commodity price move- Liberalizing vegetable oil production in as for policy analysis. Please contact ments in any significant area, so it is Indonesia would stimulate production, Dawn Gustafson, room S7-044, extension important to do more empirical work to which is already expanding, but without 33714 (61 pages with tables). learn to which commodities this nonlin- new milling capacity, palm oil produc- ear model applies. tion gains are useless. And increasing export taxes would reduce export reve- 383. On the Relevance of World Muth's Rational Expectations Hypothe- nues. Agricultural Prices sis (REH) revolutionized economic the- ory and modeling on price formation in a In two decades, Indonesia has become Yair Mundlak and Donald F. Larson simple agricultural market. Gilbert stud- the world's second largest producer of ied the results of the few econometric palm oil and coconut oil. But Indonesia Is it appropriate for market analysts to models of primary commodity markets remains a price-taking producer of per- use international agricultural prices as a that have incorporated the REH. ennial (tree) crops in a market dominated proxy for domestic prices when domestic In the medium to long term, primary by annual crops, particularly soybeans. prices are unavailable? A firm yes. commodity prices are determined by the Indonesia has expanded production intersection of the commodity's consump- despite a Byzantine collection of price In a free market, domestic prices on agri- tion (demand) and production (supply) and quantity restrictions that affect both cultural products could be expected to curves, but in the short term stockhold- consumers and producers. But the Gov- vary with world prices. But intervention ing tends to even out price movements. ernment of Indonesia appears ready to is so common with agricultural products In a commodity price model, it is liberalize trade and increase private par- that prices vary between countries and useful to distinguish between application ticipationin the sector -recognizingboth gaps exist between world and domestic of the REH to the "physical" production the limits of government financing and prices. and consumption relationships and its the importance of vegetable oils to the The International Commodity Mar- application to how intertemporal stock- development of the Outer Islands. kets Division is often forced to use inter- holding affects short-term price determi- Larson simulated the effects of trade national prices as a proxy for domestic nation. In practice, most econometric liberalization on the sector and the ef- prices. But it is often claimed that world work has concentrated on the implica- fects of an export tax on tax and export prices are irrelevant to agricultural de- tions of the REH for stock and price rela- revenues. His policy simulations show velopment in countries that intervene in tionships. that: agricultural pricing. The standard speculative stock de- Removing cumbersome government Mundlak and Larson examined the mand model (the one Muth originally regulations would stimulate production appropriateness of this substitution in used) relates stockholding to expected but would not guarantee consumer bene- measuring, say, the agricultural supply capital gains. One can estimate this re- fits, response to price changes - particularly lationship directly or can obtain the im- Whatever scenario is pursued, past in the long run. plied solved price equation which related investments in tree crops guarantee rapid They conclude that on the whole the current price to its lagged value and expansion of production. But increased world prices are indeed relevant. The to a specific function of current and fu- production does not give producers mar- results - for 18 countries and 17 com- ture values of the exogenous variables keting power as they are unable to ad- modities - are surprisingly robust, and and disturbances in the production and 162 Policy, Research, and External Affairs Working Paper Series consumption equations. Whatever the stockholding is not important. More work Real progress in understanding how precise specification adopted, the model in this area should be a high priority. targeting works best can be made only performs poorly. This paper - a product of the Inter- through country-specific research that Why? Actual stock data for primary national Commodity Markets Division, quantifies the costs and benefits of tar- commodities apparently do not relate International Economics Department - geting using data that has increasingly mainly (or even substantially) to specu- is part of a larger effort in PRE to under- become available for many developing lative stockholdings. If stocks are speci- stand the short- and long-run behavior of countries - and research that is sensi- fled as the dependent variable, one needs primary commodity prices and the impli- tive to the political realities of reform. to model transactions and precautionary cations of movements in these prices for This paper - a product of the Re- stockholdings as well as speculative stock- the developing countries. Please contact search Administrator's Office - is part holdings. Aban Daruwala, room S7-040, extension of a larger effort in PRE to understand But the quality and character of the 33713 (64 pages). the design of poverty alleviation policies. stock data cannot explain why, in esti- Please contact Jane Sweeney, room S3- mating solved price models, investiga- 026, extension 31021 (35 pages). tors have failed to find the predicted 385. The Principles of Targeting dependence of the current price on ex- pected future supply and demand move- Timothy Besley and Ravi Kanbur 386. Argentina's Labor Markets In - ments. an Era of Adjustment Perhaps the simple equations Administrative and data-collection costs, adopted by the commodity modeler can- individual responses to targeted interven- Luis A. Riveros and Carlos E. Sanchez not reflect the markets looking ahead in tions, and considerations ofpolitical econ- the manner implied by the REH, but even omy make it difficult to establish work- so one should be able to find the negative ableprocedures forfine targeting ofspend- Changing Argentina's structure of pro- reaction of primary commodity prices to ing to alleviate poverty. Self-targeting duction requires fundamental reform of rises in interest rates implied by the REH. and targeting by indicators offer more the labor market with regard to wage The almost universal failure of modelers advantages than other approaches. policies and the extent ofgovernment inter- to find this effect suggests that the model vention. It will also require adequate fi- is incorrect. In response to calls for finer targeting of nancing during the transition period to The standard Muth stockholding spending to alleviate poverty in develop- compensate the potential losers from struc- model derives its simplicity from ignor- ing countries, Besley and Kanbur dis- tural adjustment who might otherwise ing the non-negativity constraint on cuss the principles of targeting. prevent its successful implementation. stocks. This results in linear solved stock The ideal solution - the benchmark and price equations, allows explicit solu- for discussion - is that all transfers go The current economic crisis in Argentina tion of price, and permits use of standard to the poor. The ideal solution is unreal- is only partly the result of inappropriate econometric methods - but can produce izable because of three factors: domestic policies to cope with recent ex- distortions. * The costs of administration and ternal shocks. Years of inappropriate Recent work based on Gustafson's data collection. policies have damaged Argentina's econ- contribution investigates commodity * Individual responses and incentive omy. Even if no external shocks had oc- stock behavior under the REH with the effects. curred, the country would still have to non-negativity constraint imposed on * Considerations of political econ- change the structure of production. stocks. This model implies weaker for- omy. Argentina has had trouble sustain- ward-looking behavior and price re- The best strategy will probably lie ing a program of structural adjustment. sponses to interest rate changes than somewhere between the two extremes - Its experiences provide policymakers with those implied by the linear model. The the ideal solution and universal inter- some lessons in designing a sustainable possibility of stockout clearly implies that vention - mediated by these three con- program to achieve price stability and the price will respond in a nonlinear siderations. change the incentive system: manner to supply and demand distur- Two types of targeting, although * Macroeconomic and trade policies bances. But the REH implies that this short of the ideal, may be useful in cer- must be consistent. Trade policy in par- nonlinearity will be fairly smooth since tain contexts. ticular must mesh with fiscal reforms, even if enough stocks are available cur- With statistical targeting (using in- because cuts in public spending exert rently, the fact that one could face stock- dicators), programs target key indicators downward pressure on the real exchange out eventually influences current behav- such as a region, occupation, or the crops rate. ior. grown. (It might be easier, for example, * Labor relations and labor market This nonlinear REH model seems to to target everyone in a low-income neigh- institutions must be changed. Ifresources provide a good explanation for sugar borhood, particularly when it is difficult are to shift among industries and regions prices, for which there is clear evidence to identify individual incomes.) and wage flexibility is going to allow for of nonlinearity in price responses. But it Self-targeting uses differences in an adequate labor market response, cer- is inappropriate for the aluminum indus- needs, tastes, or incomes as a device for tain institutional changes are necessary try, for which there is no evidence of achieving self-selection by only the poor -including the decentralization of wage nonlinearity and in which speculative into poverty alleviation programs. bargaining and the elimination of tradi- Policy, Research, and External Affairs Working Paper Series 163 tional wage policies and general govern- (the factor reallocation effect). an export subsidy and a reduced tariff on ment intervention. * Exporting heavy and light manu- imported input - so imports expand as a * Ifresources are to be shifted among factures (the export externality effect). share of total output, domestic sales of regions and industries, rigidities and * Importing capital goods (heavy output contract, and the use of imported restrictions on labor mobility must be manufactures) - the import externality inputs increases. But when they are eliminated. More labor mobility means effect. granted to an industry independent ofits less pervasive government intervention They implement the second model export performance, exemptions nolonger in the form of restrictive regulations and with data from an archetypal semi-in- serve as an export subsidy. spending patterns. It also means that dustrial country. The model accounts for * The more capital-intensive an in- the government must stop the use of de- the higher total factor productivity growth dustry, the more exemptions increase its liberate policies of employment absorp- observed in countries pursuing export- effective protection - because it is capi- tion. led growth strategies. It also captures - tal goods that are exempted from duty. * Prospective losers in adjustment better than do simpler neoclassical mod- Industrialization in Argentina is based programs can stop their implementation, els without disequilibrium features or on import substitution, a process that so it is important that adjustment pro- externalities - the pattern of structural favors capital-intensive industries. Tar- grams provide them with benefits. Pub- change that such countries experience. iff exemptions for capital goods worsen lic spending must be profoundly changed This paper - a product of the Trade the negative effect of distortionary trade to reduce social costs during the transi- Policy Division, Country Economics De- policies on employment. tion period. This will require external partment - is part of a larger effort in * Exemptions increase the demand financing and debt alleviation. PRE to study the effects of trade regimes for imports more than an export subsidy This paper - a product of the Macro- on productive efficiency. It was funded does, because output in the competing economic Adjustment and Growth Divi- from research project "Industrial Com- domestic input industry contracts. This sion, Country Economics Department - petition, Productive Efficiency, and Their might be desirable, if reducing produc- is part of a larger effort in PRE aimed at Relation to Trade Regime" (RPO 674-46). tion costs made domestic firms more identifying typical labor market policies Please contact Maria Ameal, room N10- competitive. in LDCs, specifically those affecting wage 031, extension 37947 (42 pages with But in Argentina exemptions are flexibility and the intersectoral labor tables). granted primarily for capital goods, the mobility. Please contact Raquel Luz, level of protection is nearly prohibitive room N11-061, extension 39059(48 pages for capital goods that are domestically with figures and tables). 388. The Distortionary Effects of produced, and capital goods for which Tariff Exemptions In Argentina there is no satisfactory domestic output are exempted from duty. This type of 387. Productivity and Faezeh Foroutan policy drives a wedge between the rela- Externalities: Models of Export- tive domestic and international prices of Led Growth the two types of capital goods and en- Argentina suffers from the indiscriminate courages more intensive use of the non- Jaime de Melo and Sherman Robinson use of tariff exemptions - exemptions competing type of capital goods in all granted to an industry no matter what its industries. A model for export-led growth that cap- export performance, or exemptions granted This paper - a product of the Trade tures structural change, growth in pro- only for specific inputs (often capital Policy Division, Country Economics De- ductivity, and growth in the share oftrade. gods). partment - is part of a larger effort in Like mPRE to study the design of tariff reform. In developing countries, industrialization okemany other countries, Argentina Please contact Sheila Fallon, room N10- for successful export-led growth has been offers exporters tariffexemptions, or duty 041, extension 38009 (22 pages with associated with rapid structural change drawbacks, as export incentives to re- tables). and growth in productivity. duce the anti-export bias that otherwise Standard neoclassical growth mod- exists in an import-protecting economy. els have difficulty explaining this change Like other countries, it also grants 389. Monetary Cooperation In the in performance. De Melo and Robinson tariff exemptions for the entire output of CFA Zone developed a simple analytical model in- particular industries or the regions in corporating export externalities that which those industries are located. For- Patrick Honohan capture the large increases in the share tan dee simple model to show of trade and total factor productivity that that the indiscriminate use of tariff ex- Although it has restrained inctation in are associated with export-led growth. emptions has several undesirable effects: member countries, the franc zone does not They developed a second model that * Like other fiscal incentives, it de- appear to have worked well to channel breaks growth into its various compo- prives the government of revenues. financial resources to efficient uses. nents, which include the effects of: * The more widespread they are, the * Factor accumulation. less effective tariff exemptions are in In considering the merits of joining a * Moving factors from areas of low promoting exports. When they are monetary union, small countries natu- productivity to areas of high productivity granted only to exports, they function as rally value the credible commitment to 164 Policy, Research, and External Affairs Working Paper Series exchange rate and price stability that extent certain generally accepted theory increases when agents behave ultrara- membership represents-and that would is confirmed by the data. tionally and their subjective valuation of be hard to sustain by unilaterally peg- As with most fixed exchange rate debt is higher than secondary market ging one's own currency. systems, the African currency unions prices. Membership offers other potential have a dominant or "core" member - Using this framework to examine advantages. Within a monetary union, France in the franc zone and the Repub- recent experience in Brazil, Chile, and capital might flow more freely to where it lic of South Africa in the rand zone. Mexico, he concludes that the surge in is most needed. If the distribution of Honohan focuses on the small members consumption-GNP ratios - along with union benefits is reasonable, this could at the periphery, for whom inflation and record levels of voluntary debt reduction benefit all members - even those who inte: est rates are assumed to be imported in Brazil, Chile, and Mexico in 1988 - is because of low capital productivity be- from the core. consistent with the hypotheses that pri- came net lenders within the union. On the whole, the facts support gen- vate agents have behaved ultraration- Moreover, the operation of monetary erally accepted theory: ally and have valued foreign sector lia- policy and the prudential supervision of Price levels converge, at least for bilities at more than redemption/secon- the banking system might be more effec- tradable goods. The pattern of consumer dary market prices. tive if the resources of several small coun- price inflation is determined largely by This paper - a product of the Debt tries were pooled in a strong and inde- core country inflation in the long run, and International Finance Division, pendent Central Bank. although convergence is slow. International Economics Department - Have these advantages been real- The limited evidence available sug- is part of a larger effort in PRE to assess ized in the CFA zone? gests that uncontrolled interest rates also the macroeconomic effects of voluntary Unfortunately, the experience has converge to core country levels. debt reduction in highly indebted devel- not been encouraging. Despite the fixed And in most cases expansion of do- oping countries. Please contact Sheilah exchange rate and an elaborate set of mestic credit in one small country spills King-Watson, room S8-025, extension rules for avoiding overexpansion of credit, over into its balance of payments rather 31047 (39 pages with tables). the CFA zone has almost foundered in than generating local inflation. widespread bank insolvency. This paper - a product of the Fi- The zone's institutional set-up seems nancial Policy and Systems Division, 392. Institutional Development in equitable, but in practice the burden of Country Economics Department - is part World Bank Projects: A Cross- paying for losses is likely to fall dispro- of a larger effort in PRE to explore re- Sectoral Review portionately on the poorer countries - gional integration in financial systems. whereas most of the nonperforming cred- Please contact Wilai Pitayatonakarn, Samuel Paul its have been made in some of the zone's room N9-003, extension 37666 (18 pages more prosperous countries. with figures and tables). Project sustainability and institutional This paper - a product of the Fi- development are positively correlated. The nancial Policy and Systems Division, widening scope of institutional develop- Country Economics Department-is part 391. Wealth Effects of Voluntary ment work in Bank projects, however, has of a larger effort in PRE to explore re- Debt Reduction in Latin America added to the complexity of institutional gional integration in financial systems. analysis and design. What are the les- Please contact Wilai Pitayatonakarn, Daniel Oks sons to be learned from the Bank's recent room N9-003, extension 37666 (18 pages work on institutional development? How with figures and tables). The impact of voluntary debt reduction can the Bank's capability in this field be on private wealth depends on how agents strengthened? subjectively value external liabilities and 390. Price and Monetary on how much they perceive public debt as As the scope of Bank work in institu- Convergence In Currency Unions: future discounted taxes. tional development (ID) widens, the de- The Franc and Rand Zones sign of ID in Bank projects needs to pay Oks has formulated a multisectoral ac- increased attention to several emerging Patrick Honohan counting framework to assess the poten- problems and inconsistencies: tial effects on perceived private wealth of * Without country-specific sector ID Inflation and interest rates in Africa's alternative schemes for voluntary debt strategies, there is no map or long-term currency unions tend to follow the pat- reduction. perspective to guide project design. terns set in the dominant countries, France Swaps of private equity for public * The uneven quality of institutional and South Africa. foreign debt increase private wealth when analysis and the limited attention to ID private agents behave ultrarationally, issues in economic and sector work can Theory suggests that a currency union that is, when they regard public foreign weaken the design process. will impose significant macroeconomic debt as discounted future taxes, and when * The focus of ID work on project disciplines on its members. Honohan their subjective valuation of foreign debt implementation tends to limit the con- examines the two main surviving cur- exceeds its redemption price. cern for project sustainability. rency zones - the franc and rand zones With direct buybacks and collateral- * The more complex, sectorwide ID in Africa - to learn whether and to what ized debt conversions, private wealth components call for more rather than less Policy, Research, and External Affairs Working Paper Series 165 supervision and a greater willingness to 393. Debt-for-Nature Swaps part of a larger effort in PRE to analyze make mid-course corrections. alternative forms of debt and debt serv- The task, Paul concludes, is not to Michael Occhiolini ice reduction operations available to de- broaden ID work but to deepen it, by veloping countries and to assess the po- shifting the focus more toward sustaina- If the spending priorities of the debtor tential costs and benefits of these opera- bility, allocating enough resources to country and donor are the same, thesc tions. Other analysis along these lines support more relevant upstream diag- swaps can help debtor countries. But includes studies of debt-equity swaps and nostic work, and upgrading the quality sometimes they do not make fiscal sense. of market-based voluntary debt reduc- of the staff who work on ID issues. And the future of these swaps may be tion exercises. Please contact Sheilah The factors that contribute to suc- limited by the Brady Plan's current em- King-Watson, room S8-025, extension cessful ID are well known; there is, how- phasis on debt reduction. 31047 (34 pages). ever, a wide gap between knowledge and practice. Of the three participants in debt-for-na- There is a positive correlation be- ture swaps, international environmental 394. Threshold Effects In tween project sustainability and institu- groups benefit the most. These swaps International Lending tional development. The increasing diffi- leverage the original donation amount culties in achieving ID objectives that by the difference between the secondary Mark M. Spiegel Bank projects face, however, is a cause market value and the redemption value for concern. This phenomenon cannot be of the debt. This dynamic model for international attributed solely to the macroeconomic As the difference between the re- lending predicts that when production in constraints at work in borrower coun- demption and secondary market value the debtor country exhibits increasing tries. There is also a clear mismatch declines over time, the environmental returns, new money is a rational response between the complexity of ID issues being group benefits less. by creditors to a debt crisis. addressed and the operational staff skills Without further changes in the tax to deal with them. Paul recommends: and regulatory environment, there is little Spiegel's dynamic model of international * Encouraging operational task reason - except good publicity - for borrowing subject to a credit constraint managers to supplement skills at their commercial banks to donate their debt to was developed for an economy with in- command by mobilizing experts within environmental groups. They can realize creasing returns to physical capital. the Bank to help with analysis and de- more by selling their debt on the secon- Increases in the capital stock within sign. dary market. the nonconvex range increase debtor * Increasing Bank expertise in this The debtor country subsidizes the borrowing opportunities. Conversely, a area. swap by the difference between the re- temporary liquidity shock may perma- * Using outside experts as needed, demption value and secondary market of nently lower the economy's growth path. which will help strengthen the skills of the debt. There is controversy about Introducing aggregate nonconvexi- operational staff. whether the debtor country benefits from ties also has different implications for * Exposing Bank staff to a range of buying back its debt at the secondary policy on debt overhangs. analytical frameworks to improve insti- market price - let alone at the higher In particular, the model allows for tutional analysis. redemption rate usually offered in debt- rational relending by creditors. It also * Makingjoint (Bank and borrower) for-nature swaps. predicts that new money (or interest institutional diagnosis and design a norm, From a fiscal standpoint, the debt- capitalization) is in the interest of credi- so borrowers have a greater sense of for-nature swap, unlike a straight dona- tors and will be part of a debt restructur- ownership - a good basis for sustaina- tion, can worsen the budget situation if ing strategy - as it was recently for bility. spending on the domestic environmental Mexico and the Philippines. This paper - a product of the Public bond exceeds the debt-service payments This paper - a product of the Debt Sector Management and Private Sector on the external debt that is exchanged in and International Finance Division, In- Development Division, Country Econom- the swap. ternational Economics Department - is ics Department - is part of a larger When resources are limited, spend- part of a larger effort in PRE to examine effort in PRE to understand and evalu- ing on debt-for-nature swAps reduces the the relationship between external debt ate the Bank's work on institutional de- resources available to other (even higher and economic growth in developing coun- velopment. This paper was presented at priority) projects. tries. This work includes theoretical and the conference on "Institutional Develop- The future of these and similar swaps empirical work on the possibility of a ment and the World Bank" held in De- my be limited by the Brady Plan's cur- debt overhang, the relationship between cember 1989. Please contact Ernestina rent emphasis on debt reduction. A debtor external debt and internal debt, and the Madrona, room N9-061, extension 37489 country would clearly prefer to have its sectoral and factor of production burden (50 pages with figures and tables). debt partially forgiven than to swap it for of adjustment to a debt crisis. Please a domestic liability created through a contact Sheilah King-Watson, room S8- debt-for-nature swap. 025, extension 31047 (39 pages). This paper - a product of the Debt and International Finance Division, In- ternational Economics Department - is 166 Policy, Research, and External Affairs Working Paper Series 395. How Gambians Save - and Gambians and others like them need 023, extension 39175 (32 pages with fig- What Their Strategies Imply for a balance between credit and saving, li- ures). International Aid quidity and illiquidity, individualism and group responsibility. Parker Shipton This paper - a product of the Agri- 397. Antidumping Regulations or cultural Policies Division, Agriculture and Procartel Law? The EC Chemical An interesting suggestion emerges from Rural Development Department-is part Cases this analysis of Gambian saving strate- of a larger effort in PRE to assess the gies: that aid agencies try subsidizing factors affecting the success (or causing Patrick A. Messerlin savings, not credit. failure) of credit programs addressed to smaller farmers. Please contact Cicely Antidumping regulations allow domestic International aid for Gambian farmers is Spooner, room N8-039, extension 30464 firms to participate in cartels to capture out of balance, concludes Parker Ship- (60 pages with tables). domestic markets. ton. Interventions in this small, impov- The paper considers the intricate rela- erished, West African country have been 396. Strategic Trade Policy: How tioa between dantidumpng actions, car- based mainly on credit (and thus on debt). New? How Sensible? Inion, and tcr, ations. Public and private lending institutions In 1982 and 1983, antidumping ac- have failed dramatically and debts are W. Max Corden tdons for two products - polyethylene mounting, but lenders continue extend- and polyvinyl chloride -were terminated ing loans into the countryside. C a s i u n t by measures that doubled the protection ing oansint thecoutrysde.Crucial assumptions underlying this granted to the European Community's Before suggesting better ways to help subset of theories from the "new interna- chemical industry. Six years later, anti- Gambians alleviate poverty, Shipton tional economics"turn out to be unrealis- cartel investigations revealed two active answers the question: How do Gambi- tc. eoocscatlivtgtonrvaedwocie ans save? tic. cartels in these products in 1983-85. Saving takes many forms other than Theesserlin argues several points in just money - including livestock, jew- "strategic trade policy" have been de- * Antidumping actions made it pos- elry, store crops, and resaleable house- scribed as part of a "new international sible for these cartels to exist. hold goods. Some forms are gender-spe- economics." * These cartels have imposed huge cific, some secret. Some farmers keep Corden shows how the new ideas are extra costs on EC users - roughly DM cash in sealed containers; some deposit it related to the established theory of trade 600 million, for markets with annual sales with trusted local "money-keepers;" some policy and on what kinds of assumptions of DM 6 billion. ask for deferred wage or share-contract the principal conclusions hinge. * Gains the EC firms got from the payments. He sets out the assumptions and antidumping protection were ten times Gambians do not prefer liquidity, logical steps - some from static game larger than the anticartel fines they had shelter it from the daily demands of theory - in some detail, with the aid of to pay. So cartels are likely to continue keltrin am nhedi s -ands r- diagrams. Crucial assumptions turn out lodging antidumping actions, even at the spouses, kin, and neighbors - and re- to be unrealistic. cost of antitrust fines. move it from their own temptation. These theories, Corden writes, were Cartels can capture existing anti- Some of the most important ways of developed in the United States, and as- dumping procedures so easily that they saving money (as in rotating credit and sume competition between firms belong- make disciplines on the antidumping saving associations) and other goods (as ing to large economies. Corden would actions a mockery. One-fourth of the in grain storage) combine principles of hesitate to grant that the new theories antidumping cases initiated by the Euro- individual property and group control have relevance in developed countries - pean Community involve the same prod- principles that could be emulated in in- much less developing countries. ucts and firms as one-fourth of the EC stitutional finance, and that underlie But the discussion is of interest to anticartel cases. some well-known innovative programs in policy-makers in developing countries The relief from foreign competition Africa, southern Asia, and Latin Amer- because the new theories may be used to that antidumping laws are supposed to ica. support protectionist ideas in developed provide is likely to entrench domestic Gambian farmers choosing savings countries. This could harm the world cartels, slow the adjustment of the cartel's optionse wrehetrut thinesan orn- trading system, including developing members, and generate a powerful de- nal interest rates or inflationary losses. countries. mand for more protection in the future. nalintres raes r iflaionry osss. This paper - a product of the Macro- Messerlin concludes that the EC anti- Some of their favorite ways of saving are economic Adjustment and Growth Divi- dumping regulations should be fully sub- expensive. sion, Country Economics Department - ordinated to the anticartel laws embod- There is room for new options. One is part of a larger effort in PRE to im- ied in Articles 85 and 86 of the Treaty of of these is for financial intermediaries to prove the understanding of the role of Rome. subsidize not credit - the standard ap- trade policy in economic development. This paper - a product of the Inter- proach - but savings. Please contact Max Corden, room N11- national Trade Division, International Policy, Research, and External Affairs Working Paper Series 167 Economics Department - is part of a trained, female home economists and policy issues associated with traditional larger effort in PRE to assist developed 'animatrices should be retrained and socialist economies and those undergo- and developing countries evaluate the redeployed, and female agents presently ing reform. impact of protectionist instruments. in the extension system should be used Those issues involve inflation, Please contact Salome Torrijos, room S8- as initial contacts with women farmers growth, money overhang, disequilibrium 033, extension 33709 (51 pages with fig- to familiarize them with the extension in goods and labor markets, and interac- ures and tables). system. It is also very important that tions between stabilization and growth. male extension agents be trained to work This paper -a product of the Macro- more effectively with women farmers. economic Adjustment and Growth Divi- 398. Agricultural Extension for The extension system should iden- sion, Country Economics Department - Women Farmers in Africa tify ways to extend services to women to is part of a larger effort in PRE to con- overcome constraints on their time and duct research on macroeconomic adjust- Katrine A. Saito and C. Jean Weidemann mobility and their limited education. ment in reforming socialist economies. Suggested approaches include mobile Please contact Emily Khine, room N11- Operational guidelines on how to provide training courses and wider use of such 062, extension 39361 (41 pages with fig- cost-effective agricultural extension serv- mass media as radio and video cassettes. ures and tables). ices to women farmers in Sub-Saharan More generally, there should be a sub- Africa. stantial increase in the number of female contact farmers to better reflect their 400. Macroeconomic Constraints Women are responsible for at least 70 significant role in the sector. The use of for Medium-Term Growth and percent of food staple production in Af- women's contact groups is a particularly Distribution: A Model for Chile rica. They are also important in food cost-effective way of providing extension. processing and marketing, cash cropping, Monitoring and evaluation should include Andr6s Solimano and animal husbandry. They are both gender-disagreggated indicators to bet- laborers and decisionmakers - and as ter assess the impact of extension on both A formal model that identifies the major more men migrate from the rural areas men and women farmers. macroeconomic constraints to maintain for work, an increasingly large number This paper - a product ofthe Women sustainable growth is specified and par- of women are managing farms on a day- in Development Division, Population and ameterized for the Chilean economy. The to-day basis. Human Resources Department -is part model is also used to explore the macro ef- Women farmers operate under of a larger effort in PRE to develop sec- fects of policies addressing poverty and greater constraints than men, constraints tor-specific guidelines on cost-effective income distribution issues. of which there is too little awareness. interventions to enhance the productiv- Women have less access to information, ity and well-being of women. These guide- technology, land, inputs, markets, and lines will reflect the best available opera- Solimano uses this model to examine credit. As primary caretakers of chil- tional experience. Please contact Mila policies geared to reducing poverty and dren, they have less time and mobility - Villar, room S9-133, extension 33752 (54 improving income distribution patterns and in Africa they are often illiterate. pages). in terms of their macroeconomic impact They need effective agricultural exten- on the Chilean economy. He concludes that in a capacity-constrained environ- sion services, but these services are still geared toward male farmers, both in 399. Macroeconomic Adjustment, ment: content and delivery method. Stabilization, and Growth In * An unbalanced increase in govern- Extension systems should be modi- Reforming Socialist Economies: ment spending (in the social sectors) of3 fled - with women farmers helping de- Analytical and Policy Issues terat of GDP wth by 1pr n sign changes - to better reach women reDigronterest payents farmers. The extension message should Andr6s Solimano abroad by 3 percent of GDP would accel- be more tailored to the needs of women farmers. To this end, the information This paper develops simple models, re- erate the rate of GDP growth by 1.7 per- and technology needs of women farmers views empirical evidence, and discusses cent, reduce the real exchange rate by should be identified more effectively, and policy issues relevant for socialist econo- 8.1 percent, and increase real wages 6.6 the links with agricultural research in- mies undergoing a process of economic percen cut in the mark-up rate of 4 stitutes strengthened so that they ad- reform. percentwouldincreasebothexternalcom- dress women's activities and constraints. Tools and machines appropriate for Cpetitiveness and real wages, allowing the oomen rmas sd r re gd Current attempts at reform in Eastern rate of capacity utilization to increase wdm e fare esld alsolable. dEuropean countries raise important is- 1.4 percent. Inflation would be reduced 4 and made momoreasily available, sues of macroeconomic management in percent on impact. To ensure more effective delivery of the transition from central planning to a * The balance of payments and fis- should be a concerted effort to increase market, or mixed, economy. cal budget can be considered binding if a the number of female extension agents. Solimano develops simple models, turnaround in copper prices takes place, te numbrer female extension agents. reviews empirical evidence, and discusses as many observers predict. Until more female extension agents are 168 Policy, Research, and External Affairs Working Paper Series * The level of productive capacity seems to be a main macroeconomic con- straint for expansionary demand policies, at least in the short to medium run. An increase in savings and investment is crucial to sustained growth. * Inflation is currently moderately low in Chile, but as the economy hovers around full capacity utilization and growth remains high, inflationary pres- sures may be mounting. This paper -a product of the Macro- economic Adjustment and Growth Divi- sion, Country Economics Department - is part of a larger effort in PRE to de- velop applied macroeconomic models to support the design of adjustment pro- grams. Please contact Emily Khine, room N11-062, extension 39361 (43 pages with figures and tables).