Policy Research WORKING PAPERS Catalog The World Bank FILE COPY November 1991 WPS 135 (Update) Policy Research Working Papers Catalog of Numbers 401 to 800 Policy Research Working Papers disseminate the findings of work in progress and encourage theexchange of ideas amongBank staff and all others interested in developmentissues. Thesepapers, distributedby theResearchAdvisory Staff, carry thenames oftheauthors,reflect only theirviews, andshouldbeused and cited accordingly. The findings, interpretations, and conclusions arethe 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 Catalog WPS 135 (Update) Copies of this catalog only are available free from the World Bank Bookstore, 1818 H Street NW, Washington, DC 20433. Order stock #31326. To obtain copies of individual working papers listed in the catalog, please call or write to the contact person listed in the last paragraph of each abstract. Policy Research Working Papers disseminate the findings of work under way in the Bank. An objective of the series is to get these findings 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 by the Policy Research Dissemination Center Index WPS # Author Working Paper Title Page Agricultural Policies 420 Gerald T. O'Mara Making Bank Irrigation Investments More Sustainable 11 429 Merrill J. Bateman, Alexander Meeraus, Ghana's Cocoa Pricing Policy 15 David M. Newbery, William Asenso Okyere, and Gerald T. O'Mara 430 Peter B. Hazell and Steven Haggblade Rural-Urban Growth Linkages in India 16 446 Gerald T. O'Mara and Merlinda Ingco MEXAGMKTS: A Model of Crop and Livestock Markets 23 in Mexico 447 Gerald T. O'Mara Analyzing the Effects of U.S. Agricultural Policy on Mexican 23 Agricultural Markets Using the MEXAGMKTS Model 448 Richard E. Just A Model of U.S. Corn, Sorghum, and Soybean Markets 24 and the Role of Government Programs (USAGMKTS) 449 Richard E. Just Analyzing the Effects of U.S. Macroeconomic Policy 24 on U.S. Agriculture Using the USAGMKTS Model 471 Gershon Feder, Lawrence J. Lau, The Determinants of Farm Investment 33 Justin Lin, and Xiaopeng Luo and Residential Construction in Post-Reform China 529 Monika Huppi and Martin Ravallion The Sectoral Structure of Poverty During An Adjustment 64 Period: Evidence for Indonesia in the Mid-1980s 538 Avishay Braverman and J. Luis Guasch Agricultural Reform in Developing Countries: 68 Reflections for Eastern Europe 564 Avishay Braverman, Ravi Kanbur, Costs and Benefits of Agricultural Price Stabilization 80 Antonio Salazar P. Brandao, Jeffrey in Brazil Hammer, Mauro de Rezende Lopes, and Alexandra Tan 568 Martin Ravallion, Gaurav Datt, Higher Wages for Relief Work Can Make Many 82 and Shubham Chaudhuri of the Poor Worse Off: Recent Evidence from Maharashtra's "Employment Guarantee Scheme" 571 Gershon Feder, Lawrence J. Lau, Credit's Effect on Productivity in Chinese Agriculture: 83 Justin Y. Lin, and Xiaopeng Luo A Microeconomic Model of Disequilibrium 640 William Jaeger The Impact of Policy in African Agriculture: 117 An Empirical Investigation 650 Karen Brooks Administrative Valuation of Soviet Agricultural Land: 122 Results Using Lithuanian Production Data 666 Karen M. Brooks, Jos6 Luis Guasch, Agriculture and the Transition to the Market 129 Avishay Braverman, and Csaba Csaki 670 Yaaqov Goldschmidt and Jacob Yaron Inflation Adjustments of Financial Statements: 130 Application of International Accounting Standard 29 680 Martin Ravallion On Hunger and Public Action 135 793 Karen M. Brooks Decollectivization and the Agricultural Transition in 189 Eastern and Central Europe II Index WPS # Author Working Paper Title Page Country Operations 424 Sweder van Wijnbergen Mexico's External Debt Restructuring in 1989-90 13 433 Francois Ettori The Pervasive Effects of High Taxation of Capital Goods 17 in India: Findings and Conclusions from a Sample of Projects 488 Per Eklund and Knut Stavem Prepaid Financing of Primary Health Care in Guinea- 40 Bissau: An Assessment of 18 Village Health Posts 489 Donald S. Shepard, Taryn Vian, Health Insurance in Zaire 40 and Eckhard F. Kleinau 498 Mark Augenblick and B. Scott Custer, Jr. The Build, Operate, and Transfer ("BOT") Approach 45 to Infrastructure Projects in Developing Countries 512 Patricio Arrau Social Security Reform: The Capital Accumulation 56 and Intergenerational Distribution Effect 520 Sweder van Wijnbergen Trade Reform, Policy Uncertainty, and the Current Account 59 532 Sven B. lqellstr6m Privatization in Turkey 65 553 Marcelo Giugale and Hinh T. Dinh Money, Inflation, and Deficit in Egypt 75 590 Premachandra Athukorala The Domestic Financial Market and the Trade 93 and Sarath Rajapatirana Liberalization Outcome: The Evidence from Sri Lanka 668 Hinh T. Dinh and Marcelo Giugale Inflation Tax and Deficit Financing in Egypt 129 679 Santiago Levy Poverty Alleviation in Mexico 134 702 Sweder van Wijnbergen Should Price Reform Proceed Gradually or in a "Big Bang" 147 719 Ramon Lopez, Ridwan Ali, and Bjorn Larsen How Trade and Economic Policies Affect Agriculture: 154 A Framework for Analysis Applied to Tanzania and Malawi 727 Mansoor Dailami and E. Han Kim The Effects of Debt Subsidies on Corporate Investment 158 Behavior 729 Ridwan Ali, Jeffrey Alwang, and Paul B. Is Export Diversification the Best Way to Achieve Export 159 Siegel Growth and Stability? A Look at Three African Countries 761 Gerhard Pohl and Dubravko Mihaljek Uncertainty and the Discrepancy between Rate-of-Return 174 Estimates at Project Appraisal and Project Completion 764 Jorge Culagovski, Victor Gabor, African Financing Needs in the 1990s 175 Maria Cristina Germany, and Charles P. Humphreys 767 Colin A. Bruce and David Ndii Framework for Macroeconomic Analysis 177 (Applied to Kenya) 768 Manuel Hinds and Gerhard Poh1 Going to Market: Privatization in Central 177 and Eastern Europe 786 Sadiq Ahmed Fiscal Policy for Managing Indonesia's Environment 187 Index lil WPS # Author Working Paper Title Page Debt and International Finance 408 Stijn Claessens and Ishac Diwan Methodological Issues in Evaluating Debt-Reducing Deals 6 441 Kenneth M. Kletzer Inefficient Private Renegotiation of Sovereign Debt 21 450 Daniel Oks Portfolio Effects of Debt-Equity Swaps and Debt 24 Exchanges with Some Applications to Latin America 497 Carlos Elbirt The Measurement of Budgetary Operations in Highly 44 Distorted Economies: The Case of Angola 527 Ishac Diwan and Ken Kletzer Voluntary Choices in Concerted Deals: Mechanics 63 and Attributes of the Menu Approach 530 Asli DemirgfiV-Kunt and Ishac Diwan The Menu Approach to Developing Country External 64 Debt: An Analysis of Commercial Banks' Choice Behavior 541 Stijn Claessens and Sweder van Wijnbergen Pricing Average Price Options for the 1990 Mexican 70 and Venezuelan Recapture Clauses 549 Patricio Arrau Intertemporal Substitution in a Monetary Framework: 73 Evidence from Chile and Mexico 570 Raquel Fernandez and Sule Ozler Debt Concentration and Secondary Market Prices 83 572 Edward J. Kane, Haluk Unal, Capital Positions of Japanese Banks 84 and Ash Demirgdg-Kunt 585 Patricio Arrau and Jos6 De Gregorio Financial Innovation and Money Demand: Theory 91 and Empirical Implementation 592 Ash Demirgdg-Kunt and Harry Huizinga Official Credits to Developing Countries: Implicit 94 Transfers to the Banks 593 Stijn Claessens and Ying Qian Risk Management in Sub-Saharan Africa 94 603 Ash Demirgtig-Kunt and Refik Erzan The Role of Officially Supported Export Credits 101 in Sub-Saharan Africa!s External Financing 619 Laurence Cockcroft and Roger C. Riddell Foreign Direct Investment in Sub-Saharan Africa 108 620 Sule Ozler Have Commercial Banks Ignored History? 108 621 Enrica Detragiache Sensible Debt Buybacks for Highly Indebted Countries 108 622 Sule Ozler and Harry Huizinga How Factors in Creditor Countries Affect Secondary 109 Market Prices for Developing Country Debt 646 Tony Killick The Developmental Effectiveness of Aid to Africa 120 657 Ishac Diwan and Thierry Verdier Distributional Aspects of Debt Adjustment 125 661 Richard E. Feinberg The Bretton Woods Agencies and Sub-Saharan Africa 126 in the 1990s: Facing the Tough Questions 675 Ishac Diwan and Mark M. Spiegel Are Buybacks Back? Menu-Driven Debt-Reduction 133 Schemes with Heterogenous Creditors Iv Index WPS # Author Working Paper Title Page 682 Patricio Arrau and Sweder van Wijnbergen Intertemporal Substitution, Risk Aversion, 136 and Private Savings in Mexico 691 Jacques Morisset Can Debt-Reduction Policies Restore Investment and 140 Economic Growth in Highly Indebted Countries? A Macroeconomic Framework Applied to Argentina 695 Ishac Diwan and Fernando Saldanha Long Term Prospects in Eastern Europe: The Role of 142 External Finance in an Era of Change 712 Thomas L. Brewer Foreign Direct Investment in Developing Countries: 151 Patterns, Policies, and Prospects 717 Jacques Morisset Does Financial Liberalization Really Improve Private 154 Investment in Developing Countries? 718 Andrea Gubitz Impact of Investment Policies on German Direct 154 Investment in Developing Countries: An Empirical Investigation 720 Ellen Johnson Sirleaf and Francis Nyirjesy The Outlook for Commercial Bank Lending to Sub- 155 Saharan Africa 721 Patricio Arrau, Jos6 De Gregorio, Carmen The Demand for Money in Developing Countries: 155 Reinhart, and Peter Wickham Assessing the Role of Financial Innovation 749 Stijn Claessens and Jonathan Coleman Hedging Commodity Price Risks in Papua New Guinea 169 762 Daniel Cohen and Thierry Verdier Debt, Debt Relief, and Growth: A Bargaining Approach 174 763 Daniel Cohen A Valuation Formula for LDC Debt 175 765 Harry Huizinga Withholding Taxes and International Bank Credit Terms 175 778 Eduardo Fernandez-Arias A Dynamic Bargaining Model of Sovereign Debt 183 785 Ishrat Husain How did the Asian Countries Avoid the Debt Crisis? 186 Development Economics 418 Ajay Chhibber and Nemat Shafik Does Devaluation Hurt Private Investment? 10 The Indonesian Case 427 Ajay Chbibber and Nemat Shafik Exchange Reform, Parallel Markets, and Inflation 14 in Africa: The Case of Ghana 428 Bela Balassa Perestroyka and Its Implications for European 15 Socialist Countries 432 Bela Balassa Policy Choices in the Newly Industrializing Countries 17 437 Cheryl W. Gray, Lynn S. Khadiagala, Institutional Development Work in the Bank: 19 and Richard J. Moore A Review of 84 Bank Projects 439 Bela Balassa Indicative Planning in Developing Countries 20 454 Toshiya Masuoka Asset and Liability Management in the Developing 26 Countries: Modern Financial Techniques - A Primer Index v WPS # Author Working Paper Title Page 466 Lawrence Haddad and Ravi Kanbur Is There An Intra-Household Kuznets Curve? 31 559 Ajay Chhibber and Mansoor Dailami Fiscal Policy and Private Investment in Developing 78 Countries: Recent Evidence on Key Selected Issues 577 Ajay Chhibber Africa's Rising Inflation: Causes, Consequences, and Cures 86 616 Ravi Kanbur, Michael Keen, Optimal Nonlinear Income Taxation for the Alleviation 107 and Matti Tuomala of Poverty 617 Sudhir Anand and Ravi Kanbur International Poverty Projections 107 618 Ravi Kanbur Poverty and Development: The Human Development 107 Report and The World Development Report, 1990 635 Bela Balassa Exchange Rates and Foreign Trade in Korea 114 636 Bela Balassa Economic Integration in Eastern Europe 115 684 Lawrence Haddad and Ravi Kanbur The Value of Intra-household Survey Data for Age-Based 137 Nutritional Targeting 685 Ravi Kanbur Children and Intra-household Inequality: 137 A Theoretical Analysis 738 Ravi Kanbur and Michael Keen Tax Competition and Tax Coordination: When Countries 163 Differ in Size 789 Lawrence Haddad and Ravi Kanbur Intrahousehold Inequality and the Theory of Targeting 187 Education and Employment 464 Shoshana Neuman and Adrian Ziderman Does A Woman's Education Affect Her Husband's 30 Earnings? Results for Israel in a Dual Labor Market 472 Elizabeth M. King and Rosemary Bellew Gains in the Education of Peruvian Women, 1940 to 1980 33 510 Antoine Schwartz and Gail Stevenson Public Expenditure Reviews for Education: 55 The Bank's Experience 525 Marlaine E. Lockheed and Barbara Bruns School Effects on Achievement in Secondary Mathematics 62 and Portuguese in Brazil 535 Eliakim Katz and Adrian Ziderman Shared Investment in General Training: The Role 66 of Information 583 Marlaine E. Lockheed and Alastair G. Rodd World Bank Lending for Education Research, 1982-89 89 676 Viswanathan Selvaratnam Higher Education in the Republic of Yemen: 133 and Omporn L. Regel The University of Sana'a 683 Shoshana Neuman and Adrian Ziderman Vocational Schooling, Occupational Matching, 136 and Labor Market Earnings in Israel 686 Adriaan Verspoor Lending for Learning: Twenty Years of World Bank 138 Support for Basic Education 701 Andrew Noss Education and Adjustment: A Review of the Literature 147 VI Index WPS # Author Working Paper Title Page 704 Rosemary Bellew and Joseph DeStefano Costs and Finance of Higher Education in Pakistan 148 705 Abby Rubin Riddell and Levi Martin What Causes Differences in Achievement in Zimbabwe's 148 Nyagura Secondary Schools? 715 Rosemary Bellew and Elizabeth M. King Promoting Girls' and Women's Education: Lessons 153 from the Past 716 Christopher Dougherty and Jee-Peng Tan Financing Training: Issues and Options 153 730 Luis A. Riveros Wage and Employment Policies in Czechoslovakia 159 731 Luis A. Riveros and Lawrence Bouton Efficiency Wage Theory, Labor Markets, and Adjustment 159 734 Aaron Benavot Curricular Content, Educational Expansion, and 161 Economic Growth Financial Policy and Systems 409 Mansoor Dailami Financial Policy and Corporate Investment in Imperfect 6 Markets 421 Christophe Chamley and Patrick Honohan Taxation of Financial Intermediation: Measurement 11 Principles and Application to Five African Countries 515 Mansoor Dailami and Michael Atkin Stock Markets in Developing Countries: Key Issues 58 and a Research Agenda 528 Gerard Caprio, Jr. and Patrick Honohan Monetary Policy Instruments for Developing Countries 63 540 Silvia Sagari and Gabriela Guidotti Venture Capital Operations and Their Potential Role 69 in LDC Markets 548 Samuel H. Talley and Ignacio Mas Deposit Insurance in Developing Countries 73 595 Mario I. Blejer and Silvia B. Sagari Hungary: Financial Sector Reform in a Socialist Economy 95 605 Dimitri Vittas and Michael Skully Overview of Contractual Savings Institutions 102 654 Mansoor Dailami and Marcelo Giugale Reflections on Credit Policy in Developing Countries: 123 Its Effect on Private Investment 655 Mansoor Dailami and Hinh T. Dinh Interest Rate Policy in Egypt: Its Role in Stabilization 124 and Adjustment 663 Samuel H. Talley Bank Holding Companies: A Better Structure 127 for Conducting Universal Banking? 711 Millard Long and Silvia B. Sagari Financial Reform in Socialist Economies in Transition 151 746 Dimitri Vittas The Impact of Regulation on Financial Intermediation 167 747 Dimitri Vittas and Bo Wang Credt Policies in Japan and Korea: A Review of the 168 Literature 796 Gerard Caprio, Jr. and Patrick Honohan Excess Liquidity and Monetary Overhangs 191 Index Vil WPS # Author Working Paper Title Page International Commodity Markets 431 Panos Varangis, Takamasa Akiyama, Recent Developments in Marketing and Pricing Systems 16 and Elton Thigpen for Agricultural Export Commodities in Sub-Saharan Africa 435 Boum-Jong Choe Rational Expectations and Commodity Price Forecasts 18 436 Boum-Jong Choe Commodity Price Forecasts and Futures Prices 18 453 Ying Qian Do Steel Prices Move Together? A Cointegration Test 25 465 Panos Varangis How Integrated Are Tropical Timber Markets? 30 506 Merlinda D. Ingco Changes in Food Consumption Patterns in the Republic 53 of Korea Infrastructure and Urban Development 733 Syed S. Kirmani and Warren C. Baum The Consulting Profession in Developing Countries: 160 A Strategy for Development International Economic Analysis and Prospects 452 Nemat Shafik Modeling Investment Behavior in Developing Countries: 25 An Application to Egypt 534 Menahem Prywes Risk Facing U.S. Commercial Banks 66 547 Andrea Boltho and Robert King Does High Technology Matter? An Application 73 to United States Regional Growth 641 Karsten N. Pedersen Intertemporal Substitution in Consumption: 117 Evidence for Some High- and Middle-Income Countries 669 Nemat Shafik and Jalaleddin Jalali Are High Real Interest Rates Bad for World Economic 130 Growth? International Economic Relations 524 Nural Abdulhadi The Kuwaiti NGOs: Their Role in Aid Flows 61 to Developing Countries International Trade 455 Junichi Goto A Formal Estimation of the Effect of the MFA 26 on Clothing Exports from LDCs 458 Kenji Takeuchi Does Japanese Direct Foreign Investment Promote 27 Japanese Imports from Developing Countries? 470 Alexander J. Yeats What Do Alternative Measures of Comparative 33 Advantage Reveal About the Composition of Developing Countries' Exports? vill Index WPS # Author Working Paper Title Page 483 Refik Erzan and Paula Holmes An Evaluation of the Main Elements in the Leading 38 Proposals to Phase Out the Multi-Fibre Arrangement 502 Julio Nogu6s Patents and Pharmaceutical Drugs: Understanding 51 the Pressures on Developing Countries 522 Brent Borrell and Ronald C. Duncan A Survey of the Costs of World Sugar Policies 60 523 Brent Borrell and Maw-Cheng Yang EC Bananarama 1992 61 542 Boum-Jong Choe The Metals Price Boom of 1987-89: The Role of Supply 70 Disruptions and Stock Changes 558 Kenneth M. Kletzer, David M. Newbery, Alternative Instruments for Smoothing the Consumption 77 and Brian D. Wright of Primary Commodity Exporters 580 Alexander J. Yeats Do Natural Resource-Based Industrialization Strategies 88 Convey Important (Unrecognized) Price Benefits for Commodity-Exporting Developing Countries? 584 Alfred Tovias and Sam Laird Whither Hungary and the European Communities? 90 596 Brent Borrell The Mexican Sugar Industry: Problems and Prospects 95 597 Refik Erzan, Kala Krishna, Rent Sharing in the Multi-Fibre Arrangement: Theory 96 and Ling Hui Tan and Evidence from U.S. Apparel Imports from Hong Kong 607 Donald F. Larson, Simon Glance, Abolishing Green Rates: The Effects on Cereals, Sugar, 103 Brent Borrell, Merlinda Ingeo, and Oilseeds in West Germany and Jonathan Coleman 610 Alexander J. Yeats Can Preshipment Inspection Offset Noncompetitive 104 Pricing of Developing Countries' Imports? The Evidence from Madagascar 611 Jonathan R. Coleman and Donald F. Larson Tariff-based Commodity Price Stabilization Schemes 104 in Venezuela 642 Brent Borrell How a Change in Brazil's Sugar Policies Would Affect 118 the World Sugar Market 653 Donald F. Larson and Jonathan Coleman The Effects of Option-Hedging on the Costs of Domestic 123 Price Stabilization Schemes 722 Merlinda D. Ingco Is Rice Becoming an Inferior Good? Food Demand in 155 the Philippines 739 Jonathan R. Coleman and Ying Qian Managing Financial Risks in Papua New Guinea: 163 An Optimal External Debt Portfolio 755 Stijn Claessens and Panos Varangis Hedging Crude Oil Imports in Developing Countries 171 758 Theodosios B. Palaskas and Is There Excess Co-Movement of Primary Commodity Prices? 173 Panos N. Varangis A Co-Integration Test 760 Alexander J. Yeats How Confliciting Definitions of "Manufactures" Distort 174 Output and Trade Statistics Index Ix WPS # Author Working Paper Title Page 798 Will Martin and Peter G. Warr Agriculture's Decline in Indonesia: 192 Supply or Demand Determined? Macroeconomic Adjustment and Growth 404 Luis A. Riveros Chile's Labor Markets in an Era of Adjustment 4 412 W. Max Corden Exchange Rate Policy in Developing Countries 7 417 William Easterly, E. C. Hwa, Piyabha Modeling the Macroeconomic Requirements 9 Kongsamut, and Jan Zizek of Policy Reforms 440 William Easterly and Patrick Honohan Financial Sector Policy in Thailand: A Macroeconomic 20 Perspective 443 Miguel A. Kiguel and Nissan Liviatan The Inflation-Stabilization Cycles in Argentina and Brazil 22 444 Stephan Haggard and Robert Kaufman The Political Economy of Inflation and Stabilization 22 in Middle-Income Countries 474 Anne Maasland Methods for Measuring the Effect of Adjustment Policies 34 on Income Distribution 484 Ross Levine Stock Markets, Growth, and Policy 38 486 Luc Everaert, Fernando Garcia-Pinto, A RMSM-X Model for Turkey 39 and Jaume Ventura 508 Luis Serven A RMSM-X Model for Chile 54 511 Fred Jaspersen and Karim Shariff The Macroeconomic Underpinnings of Adjustment Lending 56 513 Miguel A. Kiguel and Nissan Liviatan The Business Cycle Associated with Exchange-Rate- 57 Based Stabilization 546 Stephan Haggard, Byung-Kook Kim, The Transition to Export-Led Growth in South Korea, 72 and Chung-in Moon 1954-66 555 Simon Commander and Fabrizio Coricelli The Macroeconomics of Price Reform in Socialist Countries: 76 A Dynamic Framework 562 Luis Serven Anticipated Real Exchange-Rate Changes 79 and the Dynamics of Investment 563 Martin Rama Empirical Investment Equations in Developing Countries 80 574 Vittorio Corbo and Klaus Schmidt-Hebbel Public Policies and Saving in Developing Countries 85 575 Klaus Schmidt-Hebbel, Steven B. Webb, Household Saving in Developing Countries: 85 and Giancarlo Corsetti First Cross-Country Evidence 579 Vittorio Corbo and Andr4s Solimano Chile's Experience with Stabilization, Revisited 87 582 Vittorio Corbo and Stanley Fischer Adjustment Programs and Bank Support: 89 Rationale and Main Results x Index WPS # Author Working Paper Title Page 606 Luis Serven and Andr6s Solimano Adjustment Policies and Investment Performance 103 in Developing Countries: Theory, Country Experiences, and Policy Implications 608 Ross Levine and David Renelt Cross-Country Studies of Growth and Policy: 104 Methodological, Conceptual, and Statistical Problems 609 Ross Levine and David Renelt A Sensitivity Analysis of Cross-Country Growth 104 Regressions 623 Vittorio Corbo and Patricio Rojas World Bank-Supported Adjustment Programs: 109 Country Performance and Effectiveness 626 William Easterly The Macroeconomics of the Public Sector Deficit: 111 The Case of Colombia 631 Riccardo Faini The Macroeconomics of the Public Sector Deficit: 112 The Case of Morocco 632 Carlos Alfredo Rodriguez The Macroeconomics of the Public Sector Deficit: 113 The Case of Argentina 633 Virabongse Ramangkura The Macroeconomics of the Public Sector Deficit: 113 and Bhanupongse Nidhiprabha The Case of Thailand 658 Christophe Chamley and Hafez Ghanem Fiscal Policy with Fixed Nominal Exchange Rates: 125 C6te d'Ivoire 659 Andr6s Solimano Inflation and Growth in the Transition from Socialism: 125 The Case of Bulgaria 671 Miguel A. Kiguel and Nissan Liviatan Lessons from the Heterodox Stabilization Programs 131 672 Roumeen Islam and Deborah L. Wetzel The Macroeconomics of Public Sector Deficits: 131 The Case of Ghana 673 Nadeem U. Haque and Peter Montiel The Macroeconomics of Public Sector Deficits: 132 The Case of Pakistan 677 Andr6s Solimano On Economic Transformation in East-Central Europe: 134 A Historical and International Perspective 678 David Renelt Economic Growth: A Review of the Theoretical 134 and Empirical Literature 688 Felipe Morande and Klaus Schmidt-Hebbel Macroeconomics of Public Sector Deficits: 139 The Case of Zimbabwe 693 Vittorio Corbo Report on Adjustment Lending II: Lessons for Eastern 141 Europe 696 Jorge Marshall and Klaus Schmidt-Hebbel Macroeconomics of Public Sector Deficits: The Case 142 of Chile 697 Paul D. McNelis and Klaus Schmidt-Hebbel Volatility Reversal from Interest Rates to the Real 142 Exchange Rate: Financial Liberalization in Chile, 1975-82 Index xl WPS # Author Working Paper Title Page 709 Luis Serven and Andres Solimano An Empirical Macroeconomic Model for Policy Design: 150 The Case of Chile 732 Fabrizio Coricelli and Roberto de Rezende Stabilization Programs in Eastern Europe: 160 Rocha A Comparative Analysis of the Polish and Yugoslav Programs of 1990 752 Roberto de Rezende Rocha Inflation and Stabilization in Yugoslavia 170 771 Ibrahim Elbadawi and Macroeconomic Structure and Policy in Zimbabwe 179 Klaus Schmidt-Hebbel Analysis and Empirical Model (1965-88) 772 Ibrahim Elbadawi and Macroeconomic Adjustment to Oil Shocks and Fiscal Reform: 179 Klaus Schmidt-Hebbel Simulations for Zimbabwe, 1988-95 775 William Easterly and The Macroeconomic of Public Sector Deficits: A Synthesis 181 Klaus Schmidt-Hebbel 787 Klaus Schmidt-Hebbel and Tobias Muller Private Investment Under Macroeconomic Adjustment 187 in Morocco 788 Francesco Daveri How Expectations Affect Reform Dynamics 187 in Developing Countries 794 William Easterly, Robert King, Ross Levine, How Do National Policies Affect Long-Run Growth? 190 and Sergio Rebelo A Research Agenda 795 William Easterly Economic Stagnation, Fixed Factors, and Policy Thresholds 191 799 Sergio Rebelo Growth in Open Economies 192 National Economic Management 613 Simon Commander and Fabrizio Coricelli Price-Wage Dynamics and the Transmission of Inflation 106 in Socialist Economics: Empirical Models for Hungary and Poland 713 Simon Commander and Karsten Staehr The Determination of Wages in Socialist Economies: 152 Some Microfoundations 736 Simon Commander, Fabrizio Coricelli, Wages and Employment in the Transition to a Market 162 and Karsten Staehr Economy Policy and Review 644 Constantine Michalopoulos and David Tarr Trade Payments Arrangements in Post-CMEA 119 Eastern and Central Europe Population, Health, and Nutrition 413 L. M. Howard Supporting Safe Motherhood: A Review of Financial 8 Trends - Full Report 414 L. M. Howard Supporting Safe Motherhood: A Review of Financial 8 Trends - Summary xii Index WPS # Author Working Paper Title Page 456 S. D. Foster Improving the Supply and Use of Essential Drugs 27 in Sub-Saharan Africa 457 Germano Mwabu Financing Health Services in Africa: An Assessment 27 of Alternative Approaches 476 Ronald J. Vogel Health Insurance in Sub-Saharan Africa: A Survey 35 and Analysis 478 John Marcotte and John B. Casterline Interrelations Among Child Mortality, Breastfeeding, 36 and Fertility in Egypt, 1975-80 500 Eduard Bos and Rodolfo A. Bulatao Projecting Fertility for All Countries 46 531 Fred T. Sai and Lauren A. Chester The World Bank's Role in Shaping Third World 65 Population Policy 539 Chris Naschak Feifer Maternal Health in Jamaica: Health Needs, Services, 68 and Utilization 545 Nancy Birdsall Health and Development: What Can Research Contribute? 72 589 Jeffrey S. Hammer To Prescribe or Not to Prescribe: On the Regulation 93 of Pharmaceuticals in Developing Countries 591 Rae Galloway Global Indicators of Nutritional Risk 93 598 Patience W. Stephens, Eduard Bos, Africa Region Population Projections, 1990-91 Edition 96 My T. Vu, and Rodolfo A. Bulatao 599 Eduard Bos, Patience W. Stephens, Asia Region Population Projections, 1990-91 Edition 96 My T. Vu, and Rodolfo A. Bulatao 600 My T. Vu, Eduard Bos, Patience W. Latin America and the Caribbean Region Population 97 Stephens, and Rodolfo A. Bulatao Projections, 1990-91 Edition 601 Eduard Bos, Patience W. Stephens, Europe, Middle East, and North Africa Region Population 101 My T. Vu, and Rodolfo A. Bulatao Projections, 1990-91 Edition 628 Dov Chernichovsky, Henry Pardoko, The Indonesian Family Planning Program: 111 David De Leeuw, Pudjo Rahardjo, An Economic Perspective and Charles Lerman 649 Margaret E. Grosh, Kristin Fox, An Observation on the Bias in Clinic-based Estimates 122 and Maria Jackson of Malnutrition Rates 692 J. Brunet-Jailly Health Financing in the Poor Countries: Cost 140 Recovery or Cost Reduction? 706 Eileen Kennedy Successful Nutrition Programs in Africa: What Makes 148 Them Work? 707 Population, Health, and Nutrition Division, Population, Health and Nutrition: Fiscal 1990 Sector 149 Population and Human Resources Review Department 708 Jocelyn DeJong Nongovernmental Organizations and Health Delivery 149 in Sub-Saharan Africa Index xiil WPS # Author Working Paper Title Page 723 Olayinka Abosede and Judith S. McGuire Improving Women's and Children's Nutrition in 156 Sub-Saharan Africa: An Issues Paper 728 Susan Cochran and Laura Gibney Does Better Access to Contraceptives Increase their Use? 158 Key Policy and Methodological Issues 735 Jocelyn DeJong Traditional Medicine in Sub-Saharan Africa: 161 Its Importance and Potential Policy Options 740 Bernard H. Liese, John Wilson, Bruce The Onchocerciasis Control Program in West Africa: 164 Benton, and Douglas Marr A Long-term Commitment to Success 742 A.J. Mills The Cost of the District Hospital: A Case Study from 165 Malawi 759 Jesus Amadeo, Dov Chernichovsky, and The Profamilia Family Planning Program, Colombia: 173 Gabriel Ojeda An Economic Perspective 760 Alexander J. Yeats How Conflicting Definitions of "Manufactures" Distort 174 Output and Trade Statistics 766 Francois Diop, Kenneth Hill, and Economic Crisis, Structural Adjustment, and 176 Ismail Sirageldin Health in Africa 779 Janet Nassim Special Programme of Research, Development and 183 Research Training in Human Reproduction 797 Richard Heaver Using Field Visits to Improve the Quality of Family 191 Planning, Health, and Nutrition Programs: A Supervisor's Manual Public Economics 410 Alan Auerbach The Cost of Capital and Investment in Developing Countries 6 425 William A. McCleary and Evamaria Earmarking Government Revenues in Colombia 13 Uribe Tobon 434 Anwar Shah and Joel Slemrod Tax Sensitivity of Foreign Direct Investment: 17 An Empirical Assessment 462 Anwar Shah and John Whalley An Alternative View of Tax Incidence Analysis 29 for Developing Countries 490 Pradeep Mitra The Coordinated Reform of Tariffs and Domestic 41 Indirect Taxes 493 Zmarak Shalizi and Wayne Thirsk Tax Reform in Malawi 43 496 Robert Conrad, Zmarak Shalizi, Issues in Evaluating Tax and Payment Arrangements 44 and Janet Syme for Publicly Owned Minerals 499 Chad Leechor and Jack M. Mintz Taxing Foreign Income in Capital-Importing Countries: 46 Thailand's Perspective 504 Henrik Dahl and Pradeep Mitra Applying Tax Policy Models in Country Economic Work: 52 Bangladesh, China, and India xiv Index WPS # Author Working Paper Title Page 519 Irene Trela and John Whalley Taxes, Outward Orientation, and Growth Performance 59 in Korea 533 Alberto Giovannini and Martha de Melo Government Revenue from Financial Repression 66 556 John Baffes and Anwar Shah Taxing Choices in Deficit Reduction 77 557 Anwar Shah The New Fiscal Federalism in Brazil 77 567 Antulio N. Bomfim and Anwar Shah Macroeconomic Management and the Division 82 of Powers in Brazil: Perspectives for the Nineties 576 Wayne Thirsk Lessons from Tax Reform: An Overview 85 615 Heng-fu Zou Socialist Economic Growth and Political Investment 106 Cycles 624 Gunnar S. Eskeland and Emmanuel Jimenez Choosing Policy Instruments for Pollution Control: 110 A Review 630 Heng-fu Zou The Spirit of Capitalism and Long-run Growth 112 651 Christophe Chamley Taxation of Financial Assets in Developing Countries 122 689 Anwar Shah and John Baffes Do Tax Policies Stimulate Investment in Physical 139 and Research and Development Capital? 698 Andrew Feltenstein and Anwar Shah Tax Policy Options to Promote Private Capital Formation 143 in Pakistan 703 Sebastian Edwards and Guido Tabellini The Political Economy of Fiscal Policy and Inflation in 147 Developing Countries: An Empirical Analysis 726 Anwar Shah Perspectives on the Design of Intergovernmental Fiscal 157 Relations 737 Delfin S. Go External Shocks, Adjustment Policies, and Investment: 162 Illustrations from a Forward-looking CGE Model of the Philippines 777 Shantayanan Devarajan and Dani Rodrik Do the Benefits of Fixed Exchange Rates Outweigh 182 Their Costs? The Franc Zone in Africa PublC Sector Management and Private Sector Development 407 Ahmed Galal Public Enterprise Reform: A Challenge for the World Bank 5 411 Lawrence Salmen Institutional Dimensions of Poverty Reduction 7 419 Brian Levy The Design and Sequencing of Trade and Investment 10 Policy Reform: An Institutional Analysis 422 Barbara Nunberg and John Nellis Civil Service Reform and the World Bank 12 475 Ahmed Galal Does Divestiture Matter? A Framework for Learning 35 from Experience Index xv WPS # Author Working Paper Title Page 491 Nirmala Murthy, Indira Hirway, How Well Do India's Social Service Programs 41 P. R. Panchmukhi, and J. K. Satia Serve the Poor? 495 Arturo Israel The Changing Role of the State: Institutional Dimensions 44 578 Beatrice Buyck The Bank's Use of Technical Assistance for Institutional 87 Development 588 Brian Levy Obstacles to Developing Small and Medium-Sized 92 Enterprises: An Empirical Assessment 614 Samuel Paul Accountability in Public Services: Exit, Voice, and Capture 106 664 Barbara W. Lee Should Employee Participation Be Part of Privatization? 128 699 Ralph Bradburd and David R. Ross Regulation and Deregulation in Industrial Countries: 143 Some Lessons for LDCs 757 Eric Rice Managing the Transition: Enhancing the Efficiency of 172 Eastern European Governments Review and Analysis 521 Helena Ribe and Soniya Carvalho World Bank Treatment of the Social Impact 60 of Adjustment Programs 552 Nancy Gillespie Selected World Bank Poverty Studies: A Summary 75 of Approaches, Coverage, and Findings Socialist Economies Reform 406 William Byrd and Alan Gelb Township, Village, and Private Industry in China's 5 Economic Reform 438 Milan Vodopivec How Redistribution Hurts Productivity 19 in a Socialist Economy (Yugoslavia) 501 Cheryl W. Gray Tax Systems in the Reforming Socialist Economies of Europe 51 505 Arye L. Hillman and Adi Schnytzer Creating the Reform-Resistant Dependent Economy: 53 The CMEA International Trading Relationship 560 Milan Vodopivec The Persistence of Job Security in Reforming Socialist 78 Economies 561 Milan Vodopivec The Labor Market and the Transition of Socialist Economies 79 565 Stanley Fischer and Alan Gelb Issues in Socialist Economy Reform 81 690 Gabor Oblath and David Tarr The Terms-of Trade Effects from the Elimination of State 139 Trading in Soviet-Hungarian Trade 751 Charles E. McLure, Jr. A Consumption-Based Direct Tax for Countries in 170 Transition from Socialism 753 Martin Schrenk The CMEA System of Trade and Payments: The Legacy 170 and the Aftermath of Its Termination xvi Index WPS # Author Working Paper Title Page 770 Farid Dhanji and Branko Milanovic Privatization in Eastern and Central Europe: 178 Objectives, Constraints, and Models of Divestiture 800 Cheryl W. Gray, Rebecca J. Hanson, The Legal Framework for Private Sector Development 192 Michael A. Heller, Peter Ianachkov, in a Transitional Economy: The Case of Poland Daniel T. Ostas, and Youssef Djehane Socioeconomic Data 479 Michael Hee Conversion Factors: A Discussion of Alternate Rates 36 and Corresponding Weights Strategic Planning 415 Norman Hicks and Michel Vaugeois How Good (or Bad) are Country Projections? 9 Studies and Training Design 554 Dipak Mazumdar Korea's Labor Markets Under Structural Adjustment 76 573 Dipak Mazumdar Malaysian Labor Markets Under Structural Adjustment 84 694 Susan Horton, Ravi Kanbur, and Dipak Labor Markets in an Era of Adjustment: An Overview 141 Mazumdar Trade Policy 401 J. Michael Finger and Tracy Murray Policing Unfair Imports: The U.S. Example 3 402 J. Michael Finger The GATT as International Discipline Over Trade 3 Restrictions: A Public Choice Approach 426 Riccardo Faini, Jaime de Melo, Abdel Growth-Oriented Adjustment Programs: A Statistical 14 Senhadji-Semlali, and Julie Stanton Analysis 451 Ann E. Harrison Productivity, Imperfect Competition, and Trade 25 Liberalization in Cbte d'Ivoire 463 Odin Knudsen and John Nash, with Redefining Government's Role in Agriculture 29 contributions by James Bovard, Bruce in the Nineties Gardner, and L. Alan Winters 473 Riccardo Faini and Jaime de Melo Adjustment, Investment, and the Real Exchange 34 Rate in Developing Countries 480 Jaime de Melo and David Roland-Holst An Evaluation of Neutral Trade Policy Incentives 37 Under Increasing Returns to Scale 481 James Tybout, Jaime de Melo, The Effects of Trade Reforms on Scale and Technical 37 and Vittorio Corbo Efficiency: New Evidence from Chile 482 Shantayanan Devarajan and Jaime de Melo Membership in the CFA Zone: Odyssean Journey 37 or Trojan Horse? Index xvil WPS # Author Working Paper Title Page 485 Ram6n Lopez and Luis Riveros Do Labor Market Distortions Cause Overvaluation 39 and Rigidity of the Real Exchange Rate? 487 Timothy Condon and Jaime de Melo Industrial Organization Implications of QR Trade Regimes: 39 Evidence and Welfare Costs 516 Jaime de Melo and David Roland-Holst International Capital Mobility and the Costs 58 of U.S. Import Restraints 517 Jaime de Melo and David Tarr Do Wage Distortions Justify Protection 58 in the U.S. Auto and Steel Industries? 518 Jaime de Melo and David Roland-Hoist Industrial Organization and Trade Liberalization: 59 Evidence from Korea 536 Maurice Schiff and Alberto Vald6s The Link Between Poverty and Malnutrition: 67 A Household Theoretic Approach 537 Arvind Panagariya and Maurice Schiff Commodity Exports and Real Income in Africa 67 543 Donald B. Keesing and Andrew Singer Development Assistance Gone Wrong: Why Support 70 Services Have Failed to Expand Exports 544 Donald B. Keesing and Andrew Singer How Support Services Can Expand Manufactured Exports: 71 New Methods of Assistance 551 Gary Banks Australia!s Antidumping Experience 74 566 Lant Pritchett Measuring Outward Orientation in Developing Countries: 81 Can It Be Done? 569 Wendy E. Takacs Domestic Purchase Requirements for Import License 83 Allocations in Mali 581 Patrick Conway How Successful is World Bank Lending for Structural 88 Adjustment? 594 Mark J. Roberts and James R. Tybout Size Rationalization and Trade Exposure in Developing 94 Countries 602 Mark A. Dutz Firm Output Adjustment to Trade Liberalization: 101 Theory with Application to the Moroccan Experience 604 Faezeh Foroutan Foreign Trade and Its Relation to Competition 102 and Productivity in Turkish Industry 625 Ram6n L6pez How Trade and Macroeconomic Policies Affect Economic 110 Growth and Capital Accumulation in Developing Countries 629 Patrick Conway An Atheoretic Evaluation of Success in Structural 112 Adjustment 638 James Tybout Researching the Trade-Productivity Link: New Directions 115 639 Wendy E. Takacs The High Cost of Protecting Uruguay's Automotive Industry 116 643 Andras Inotai Regional Integration among Developing Countries, 118 Revisited xyiiI Index WPS # Author Working Paper Title Page 660 Jos6 A. Mendez The Development of the Colombian Cut Flower Industry 126 665 Ram6n L6pez Microeconomic Distortions: Static Losses and their Effect 128 on the Efficiency of Investment 667 Jaime de Melo and David Tarr VERs Under Imperfect Competition and Foreign Direct 129 Investment: A Case Study of the U.S.-Japan Auto VER 674 Francois Bourguignon, Jaime de Melo, Distributional Effects of Adjustment Policies: Simulations 132 and Akiko Suwa for Two Archetype Economies 681 Arvind Panagariya and Dani Rodrik Political-Economy Arguments for Uniform Tariff 136 687 Carlos Alberto Primo Braga Brazilian Frozen Concentrated Orange Juice: 138 and Simao Davi Silber The Folly of Unfair Trade Cases 700 Oleh Havrylyshyn and David Tarr Trade Liberalization and the Transition to a Market 143 Economy 724 Riccardo Faini and Jaime de Melo Fiscal Issues in Adjustment: An Introduction 156 741 David Tarr When Does Rest-Seeking Augment the Benefits of 164 Price and Trade Reform on Rationed Commodities? Autos and Color TVs in Poland 743 Angelika Eymann and Ludger Schuknecht Antidumping Enforcement in the European Community 165 744 Gunnar Fors Stainless Steel in Sweden: Antidumping Attacks Good 166 International Citizenship 745 J. Michael Finger The Meaning of "Unfair" in U.S. Import Policy 166 748 Oleh Havrylyshyn and Lant Pritchett European Trade Patterns After the Transition 168 754 James R. Tybout and M. Daniel Westbrook Estimating Returns to Scale with Large Imperfect Panels 171 756 Arvind Panagariya and Maurice Schiff Taxes Versus Quotas: The Case of Cocoa Exports 172 769 Lili Liu Entry-Exit, Learning, and Productivity Change: 178 Evidence from Chile 776 Mark A. Dutz Enforcement of Canadian "Unfair" Trade Laws: The Case 181 for Competition Policies as an Antidote for Protection 781 Taeho Bark The Korean Consumer Electronics Industry: 184 Reaction to Antidumping Actions 782 Patrick Conway and Sumana Dhar The Economic Effects of Widespread Application of 185 Antidumping Duties to Import Pricing 783 J. Michael Finger The Origins and Evolution of Antidumping Regulation 185 784 Andrzej Olechowski Chemicals from Poland: A Tempest in a Teacup 186 791 Lant Pritchett Measuring Real Exchange Rate Instability in Developing 188 Countries: Empirical Evidence and Implications Index x/x WPS # Author Working Paper Title Page Urban Development 405 Carl Bartone, Janis Bernstein, Investments in Solid Waste Management: Opportunities 4 and Frederick Wright for Environmental Improvement 445 Rachel E. Kranton Pricing, Cost Recovery, and Production Efficiency 23 in Transport: A Critique 492 Asif Faiz, Kumares Sinha, Automotive Air Pollution: Issues and Options 42 Michael Walsh, and Amiy Varma for Developing Countries 514 Alan S. Harding Restrictive Labor Practices in Seaports 57 710 William Dillinger Urban Property Tax Reform: Guidelines and 150 Recommendations 750 Esra Bennathan, Jeffrey Gutman, and Reforming and Privatizing Poland's Road Freight Industry 169 Louis Thompson 773 Reuben Gronau Are Ghana's Roads Paying Their Way? Assessing Road 180 Use Cost and User Charges in Ghana 774 Mark Gersovitz Agricultural Pricing Systems and Transportation 180 Policy in Africa 780 Ian G. Heggie and Vincy Fon Optimal User Charges and Cost Recovery for Roads 183 in Developing Countries 790 Esra Bennathan, Jeffrey Gutman Reforming and Privatizing Hungary's Road Haulage 188 and Louis Thompson 792 Jan Svejnar and Katherine Terrell Reducing Labor Redundancy in State-Owned Enterprises 189 Water and Sanitation 477 Thelma A. Triche Private Participation in the Delivery of Guinea's 36 Water Supply Services Welfare and Human Resources 416 Paul Glewwe Improving Data on Poverty in the Third World: 9 The World Bank's Living Standards Measurement Study 460 Victor Lavy Does Food Aid Depress Food Production? 28 The Disincentive Dilemma in the African Context 467 Nanak Kakwani, Elene Makonnen, Structural Adjustment and Living Conditions 31 and Jacques van der Gaag in Developing Countries 494 Victor Lavy Alleviating Transitory Food Crisis in Africa: 43 International Altruism and Trade 509 Odile Frank The Childbearing Family in Sub-Saharan Africa: 54 Structure, Fertility, and the Future 526 Nanak Kakwani and Kalinidhi Subbarao Rural Poverty in India, 1973-86 62 xx Index WPS # Author Working Paper Title Page 550 John L. Newman, Victor Lavy, Firms' Responses to Relative Price Changes in C6te d'Ivoire: 74 Raoul Salomon, and Philippe de Vreyer The Implications for Export Subsidies and Devaluations 647 Nanak Kakwani Growth Rates and Aggregate Welfare: An International 121 Comparison 656 Oded Stark and J. Edward Taylor Relative Deprivation and Migration: Theory, Evidence, 124 and Policy Implications 662 Jacques van der Gaag, Elene Makonnen, Trends in Social Indicators and Social Sector Financing 127 and Pierre Englebert Women In Development 403 S. Tjip Walker Innovative Agricultural Extension for Women: 3 A Case Study in Cameroon 442 Meera Chatterjee Indian Women, Health, and Productivity 21 461 Shahidur R. Khandker Labor Market Participation, Returns to Education, 29 and Male-Female Wage Differences in Peru 468 Indermit Gill Does the Structure of Production Affect 31 Demand for Schooling in Peru? 469 J. Barry Smith and Morton Stelcner Modeling Economic Behavior in Peru's Informal 32 Urban Retail Sector 503 John Dagsvik and Rolf Aaberge Household Production, Time Allocation, and Welfare 52 in Peru 714 Ravinder Kaur Women in Forestry in India 152 725 Indermit S. Gill and Shahidur R. Khandker How Structure of Production Determines the Demand for 157 Human Capital 1988 World Development Report Background Paper 423 M. Shahbaz Khan Relative Price Changes and the Growth of the Public Sector 12 1990 World Development Report Background Papers 507 Branko Milanovic Poverty in Poland, Hungary, and Yugoslavia 54 in the Years of Crisis, 1978-87 586 Martin Ravallion The Challenging Arithmetic of Poverty in Bangladesh 91 587 Martin Ravallion, Gaurav Datt, Quantifying the Magnitude and Severity of Absolute 91 Dominique van de Walle, and Elaine Chan Poverty in the Developing World in the Mid-1980s 612 Lawrence J. Lau, Dean T. Jamison, Education and Productivity in Developing Countries: 105 and Frederic F. Louat An Aggregate Production Function Approach 627 Sharon L. Holt The Role of Institutions in Poverty Reduction: 111 A Focus on the Productive Sectors Index xxi WPS # Author Working Paper Title Page 637 Branko Milanovic Poverty in Poland, 1978-88 115 645 Ben Polak and Jeffrey G. Williamson Poverty, Policy, and Industrialization: Lessons from the 119 Distant Past 648 M. Louise Fox and Samuel A. Morley Who Paid the Bill? Adjustment and Poverty in Brazil, 121 1980-95 652 Kenneth Hill Demographic Response to Economic Shock 123 1991 World Development Report Background Paper 634 Bela Balassa Trends in Developing Country Exports, 1963-88 114 459 Stanley Fischer and Vinod Thomas Policies for Economic Development 28 Volume V Numbers 401 - 500 w Policy Research Working Paper Series 3 401. Policing Unfair imports: 402. The GATT as International Simply put, the institutions that The U.S. Example Discipline Over Trade Restrictions: shape the relevant public choices do not A Public Choice Approach bring out the appropriate economic inter- J. Michael Finger and Tracy Murray ests, and the resulting policy choices are J. Michael Finger not those that promote economic efficiency. Unfair trade cases are where the action is This paper - a product of the Trade because they are broad enough to handle Postwar institutions held at bay the domi- Policy Division, Country Economics De- all the action. nance of producer interests over consumer partment - is part of a larger effort in interests. But producer pressures toward PRE to understand the economics of the Finger and Murray dug out the numbers protection are now dominant and even emergence of "fairness" as a standard for on U.S. unfairimports cases-how many, with the emergence of market-opening in- regulating international trade and its -against which countries, with what result struments like "301" the forecast for free implications for the continued openness - to find out how the United States uses trade is pessimistic: a buildup of trade of the international trading system and antidumping and countervailing duty ac- restrictions and fewer breezes to disperse its continued functioning as an important tions to regulate imports. them. vehicle for development. Copies of the Theydescribe the proceduresfollowed paper are available free. Please contact by the Commerce Department and the The General Agreement on Tariffs and Nellie Artis, room N10-013, extension International Trade Commission, survey Trade (GATT) was built on a mercantilist 38010 (27 pages). cases and outcomes in the 1980s, and sense of economic welfare and a mercan- analyze what drives the unfair trade laws. tilist sense that domestic producers had a The pattern of petitions and results, higher claim than foreign producers to 403. Innovative Agricultural they conclude, suggests strongly that in- the domestic market. Extension for Women: jury to U.S. producers beset by import The trade negotiations process did A Case Study in Cameroon competition is what the antidumping and not attack this claim. It gave producers in countervailing duty laws are about. each country an opportunity to increase S. Tjip Walker That is why the pattern ofantidump- its value through mutually beneficial ex- ing casesis not particularly differentfrom changes with producers in other coun- In Cameroon's poor Northwest Province, the pattern of antisubsidy cases - and tries. agricultural extension was extended to why the frequency of cases against politi- The process worked as long as insti- women for practical, not ideological, rea- cally powerful countries is the same as tutions forced all producers in a country sons -in a sustainable, replicable experi- the frequency of cases against politically (import competingandexporting)toreach ment that increased production and weaker ones. a collective decision on trade policy - as women's income. The political strength of the export- long as the trade remedies were subju- ing country does influence the form of gated by strategic and diplomatic con- Women are responsible for 70 percent of import restriction the U.S. government cerns so that they did not give import staple food production in Africa, but agri- will use. competing interests an alternative. cultural extension is still geared to men. A powerful country will receive the Pressure from import competing pro- The North-West Development Project in courtesy ofa negotiated settlement. Aless ducers, whose interests are netted out in Cameroon demonstrates that this sce- powerful country will in due course re- the trade negotiations process, eventu- nario of neglect is avoidable. ceive determinations through normal ad- ally expanded the trade remedies into a The project design team that set out ministrative procedures. policymakinginstitution thatnow eclipses toimprove agriculture in Cameroon's poor In short, unfair trade cases are where the trade negotiations. NorthwestProvince did not extend exten- the actionis because theyarebroadenough Another mutation of GATT institu- sion and credit to women for ideological to handle all the action. tions has begun with the development in reasons. Food crops were a primary con- This paper - a product of the Trade the United States of "301" - which pro- cern, and women were growing them. Policy Division, Country Economics De- vides a way for exporting producers to Despite stiff academic requirements, partment - is part of a larger effort in advance their interests without bearing the ratio of female extension workers in- PRE to understand the economics of the the burden of suppressing or buying off creased to 18 percent for workers and 14 emergence of "fairness" as a standard for importcompetinginterests. Indeed,"301" percent for supervisors. Before the proj- regulating international trade and its attacks foreign restrictions not with the ect, the few female workers had been implications for the continued openness possibility of fewer U.S. restrictions, but restricted to home economics and kitchen of the international trading system and with the threat of more. Trade remedy gardens. After three months of intensive its continued functioning as an important processes have been installed in many training, female agents did as well as vehicle for development. Please contact countries, so "301s" should not be far men. Nellie Artis, room N10-013, extension behind. The project worked more through 38010 (25 pages with tables). The GATT system was devised to contact groups than contact farmers. The promote global security and free trade. It advantages: cost-effectiveness, the bene- has been altered until, in the present fits ofgroup dynamics, and the shared use system, export interests will generate of expensive equipment. And groups al- trade conflicts and import competing in- low sociallyacceptable contactswith male terests will generate trade restrictions. agents, a supportive environment, a 4 Policy Research Working Paper Series chance to develop leadership and man- Expenditure-switching and expendi- The World Bank has financed MSWM agement skills, and the use of more effec- ture-reduction policies are important in improvements throughfreestandingsolid tive communication methods. interpreting the observed performance of waste projects andcomponents inbroader Maize credit was given to producer labor market variables. Riveros econom- projects. But the total costs of solid waste groups whose membership is 90 percent etrically estimates an analytical model to components in 71 projects during FY74- female. The members have collective li- studytheimpactofthose policies on wages, 88 was about $532 million, or only 0.3 ability for the loans and achieved virtu- unemployment, and investment. He con- percent of Bank lending. And component ally 100 percent repayment each year. cludes: design and performance have been largely The short-term strategy of "gender Segmentation of the Chilean labor disappointing. targeting" was often used. Groups were market, combined with an inadequate The low level of borrowing for the initially contacted by same-gender exten- institutional framework for the labor MSWM sector - considering high mu- sion agents. Once trust and credibility market and a distorted real exchange nicipal spending on MSWM -is attribut- were established and farmers knew the rate, have been at the root of the persis- able to the sector's labor-intensiveness system, the same-genderagentcouldturn tent open unemployment problem. (and relatively low foreign exchange po- an area over to an agent of the other Because ofexistinglabormarketseg- tential); most cities'failure to appreciate gender. mentation, macro policies have probably the true cost of MSWM services; the diffi- - These and other techniques used in increased the wage gap between the for- culty local governments have getting ac- Cameroon are widely replicable, provid- mal and informal labor markets. cess to capital; and the failure of many ing three principals are observed: focus- A more adequate regulatory frame- Bank projects to include an MSWM ex- ing on small farmers, redressing male work for the labor market was probably pert. biases, and recognizing women's roles. instrumental in achieving a more equi- Early Bank projects provided limited This paper -a product of the Women table and effective adjustment program. funds to procure collection-related equip- in Development Division, Population and This paper -a product of the Macro- ment. They had little impact on the qual- Human Resources Department - is part economic Adjustment and Growth Divi- ity or efficiency of service delivery. In the of a larger effort in PRE to document cost- sion, Country Economics Department - past five years, Bank lending for MSWM effective ways of raising the productivity is part of a larger effort in PRE to identify has increased and broadened - and the of women farmers in Africa. Please con- typical labor market policies in LDCs, potential for its effective expansion is tact PHRWD, room S9-133, extension specifically those affecting wage flexibil- evident. 33752 (53 pages with tables). ity and labor mobility. Please contact Bartone, Bernstein, and Wright rec- Raquel Luz, room N11-057, extension ommend that: 34303 (41 pages with tables). * The Bank adopt a comprehensive 404. Chile's Labor Markets policyframeworkfor designing solidwaste In an Era of Adjustment components or projects that focus more 405. Investments In Solid Waste attention on upgrading institutional ar- Luis A. Riveros Management: Opportunities rangements, including private sector de- for Environmental Improvement livery of services; the financing of capital A segmented labor market, an inadequate investments and recurring costs; pricing institutional framework for labor, and a Carl Bartone, Janis Bernstein, for better cost recovery; and environmen- distorted real exchange rate were at the and Frederick Wright tally safe disposal (including proper man- root of persistent open unemployment in agement of hazardous wastes). Chile. A better macroeconomic manage- Despite heavy municipal spendingon solid * Components finance plans ad- ment and a more adequate regulatory waste management, most cities fail to pro- dressing the full range ofsolid waste serv- framework for the labor market were criti- vide efficient, reliable, universal collec- ices and related management activities. cal to successful adjustment in the 1980s. tion services or environmentally safe dis- * The Bank help establish financial- posal - at high costs to public health and intermediaries (such as municipal devel- In the 1970s, Chile underwent profound the environment. Bank lending should opment banks) to support comprehensive structural changes in market regulation, emphasize strategic service planning, bet- MSWM activities, among other urban in- public sector policies, and foreign trade. ter institutional arrangements, more effi- vestments. These changes produced notable eco- cient management and finances, and en- * Forpublicly-providedservices,both nomic strain and high open unemploy- vironmental protection. primary and secondary collection opera- ment. After the financial crisis of the tions be supported, with special emphasis 1980s - by means of an export-led struc- Municipal solid waste management on vehicle selection and maintenance. For tural adjustment program that supported (MSWM) should protect the environment, low-income areas, they recommend sup- high real exchange rates and promoted safeguard health, and improve productiv- porting low-cost community-based tech- investment - the Chilean economy ad- ity. In most developing countries, how- nologies. justed successfully and resumed economic ever, solid waste services consume be- * Land acquisition - for disposal growth. tween 20 and 50 percent of operating sites and other facilities - should be a Riveros describes the important role budgets for municipal services yet are condition of loan effectiveness. So should labor markets played in the adjustment unreliable, do not reach everyone, and do use of only agreed-upon equipment and process. not provide safe disposal. vehicles. Policy Research Working Paper Series * Expansion of collection capacity be for relatively long periods. In some ways, whether to divest PEs or make them more balanced by investments in nonpolluting TVPs seem to resemble the so-called Z efficient are likely to intensify. The Bank disposal facilities. firms, rather than private or state enter- will increasingly be called upon for advice * Appropriate regulations be estab- prises. and financial support in managing the lished - few in number, transparent, Communityincentives for promoting transition period. Galairecommendsthat easily understood, equitable, and eco- TVPs are strong. But their community the Bank: nomically and physically sensible. orientation leads to certain problems, re- * Maintain its focus on rationalizing * Costs be recovered through man- sulting from the fragmentation of mar- the size of PEs, by liquidating nonMablo datory "benefit taxes" (in residential ar- kets for capital andlaborand the multiple, PEs and transfering their ownership or eas) and variable user charges (higher for sometimes conflicting, roles ofcommunity control to the private sector, if that wll better services) for commercial and in- governments. make them more efficient. Inhelpingeoun- -dustrial firms. Even if resources are used efficiently tries improve the efficiency of PEs that This paper - a product of the Urban within rural communities, the immobility remain public, the Bank should empha- DevelopmentDivision, Infrastructure and of factors of production can lead to in- size both policy framework and institu- Urban Development Department - is creasingly serious misallocations and tional set-up, and restructuring ofinai- part of a larger effort in PRE to develop a inequalities between communities. vidual enterprises. policy framework for the urban environ- A gradual opening of capital and la- * Extend its analysis of PEs to the ment. Please contact Sriyani Cumine, bor markets is a priority task in the next socialist economies, explore the relation- room S10-141, extension 33735(84 pages stage of reform. Weakening the involve- ship between PEs and the private sector, with tables). ment ofcommunity governments in man- and study how best to phase and sequence agementofruralindustrializationislikely PE reforms, to be gradual and take a long time. A * Refine PE reform components and 406. Township, Village, strongerlegal frameworkin which TVCEs tools, especially in terms of the phasing and Private Industry In China's and private firms can operate will be and sequencing ofprice liberalization and Economic Reform needed. competition; the budgetary impact ofPEs National government policy should (their costs versus their revenues - and William Byrd and Alan Gelb be to minimize discrimination by govern- here Galal discusses the "waterbed ef- ment, legal, and regulatory apparatus fect," how holding down costs in one area The rapid growth ofrural nonstate indus- against TVPs and, within the TVP sector, raises costs in another); and the valuation try - a sector of community-based firms against private enterprise. The long-term of PEs for divestiture. - has been the most striking recent eco- goal should be elimination of differential * Learn more systematically from nomic phenomenon in China, next to the treatment. experience by analyzing the outcomes of decollectivization of agriculture. For the This paper -a product of the Social- PE reforms; the performance of divested further development ofthe sector, defining ist Economies Division, Country Econom- PEs; the effects on efficiency of staff re- property rights and gradually opening ics Department-is part ofalarger effort ductions; and the effectiveness of pro- capital and labor markets are priority in PRE to study the reform processes at gram contracts on enterprise efficiency tasks. work in socialist economies. Please con- This paper - a product of the Public tact Kang Chen, room N6-039, extension Sector Management and Private Sector Next to the decollectivization of agricul- 38966 (40 pages with tables). Development Division, Country Econom- ture, the most striking economic transfor- ics Department - is part of a larger effort mation in China since 1978 has been the in PRE to: (i) review past efforts in inst- rapid growth of rural nonstate industry. 407. Public Enterprise Reform: tutional development, (ii) deter-mine Firms in this sector (referred to here A Challenge for the World Bank where these efforts have succeeded and as TVPs) are owned by a hierarchy oflocal where they have done poorly, and (iii) government units below the county level: Xhmed Galal suggest how the World Bank and itsbor- towns (or townships), villages, and pro- rowers can better create and strengthen duction teams (or, to a lesser extent, pri- How can the Bank refine its help to coun- an appropriate institutional framework vate individuals and groups). TVPs owned tries embarking on reform of public enter- for economic development. An earlier ver- by township or village governments (that prises? sion of this paper was presented at a is, notprivatelyowned)are termedTVCEs. conference on Institutional Development Important both to industry and the Public enterprises (PEs) - state-owned and the World Bank, held in Washington rural economy, TVPs have been at the or state-controlled productive entities DC in December 1989. Please contactGo- forefront of economic reform. They are whose output is sold mostly in the mar- ria Orraca-Tetteh, room N9-069, extean- market-oriented in terms of output and ketplace - earn an average 10 percent of sion 37646 (47 pages with tables). input and, because of their tiny home GDP in developing countries (17 percent markets, outward-oriented. in African countries, 12 percent in Latin There appears to be a close relation- Americancountries,and3percentinAsian ship betweenindividual incomes andfirm/ countries). community economic performance. Most Many governments are reexamining individuals expect to stay in their firms the role of the state, so questions about 6 Policy Research Working Paper Series 408. Methodological Issues its creditors. That will require a general preferred proxy for the theoretically ap- In Evaluating Debt-Reducing Deals equilibrium macroeconomic model to propriate - but unobserved - marginal analyze a country's investment, growth, q in explaining corporate investment be- Stijn Claessens and Ishac Diwan and repayments behavior when the coun- havior. The link between stock market try has a foreign credit constraint and a and real economic activity has been par- Here is a simple method for identifying debt overhang. It will also require a better ticularly evident in the 1980s, when rapid the best debt deals a country can bargain understandingofhowbanksmakeachoice growth of the market has been accompa- for with its creditors when debt reduction when presented with a menu of options. nied by vigorous economic growth and a and new money are the only options avail- This paper - a product of the Debt boom in corporate business investment. able. and International Finance Division, Third, corporations in Korea have International Economics Department - used low-cost debt to finance investments The novelty and complexity ofmenu-based is part of a larger effort in PRE to under- in financial assets as well as in physical - debt reduction deals under the Brady stand the responses of commercial credi- and productive assets. These financial Initiative make it difficult to see through tors to different debt restructuring deals, assets - liquid assets (cash, bank depos- the smoke and mirrors of financial engi- so as to design deals which are more its, and government securities), other neering. Claessens and Diwan explain favorable for the country. Please contact companies' shares, and accounts receiv- the essentials. Sheilah King-Watson, room S8-025, ex- able-areknowntoaccountforrelatively They explain the building blocks for tension 33730 (37 pages with graphs and more (42.6 percent) of total corporate as- analyzing debt deals, discuss common tables). sets in Korea than in the United States pitfalls, and introduce the concept of the (24.3 percent) or the United Kingdom debt value curve. They analyze in detail (37.8 percent). the main instruments available for debt 409. Financial Policy To the extent that external equity is reduction: buybacks; an exchange of for- and Corporate Investment the corporate sector's marginal source of eign debt against another foreign asset in Imperfect Capital Markets: funds, what is relevant in determining with different terms; and an exchange of The Case of Korea incentives for new investment is what foreign debt against a domestic asset (a determines the cost of equity (such as debt-equity swap). They describe how to Mansoor Dailami taxation of dividends and capital gains) put the different elements of a deal to- plus the procedure for pricing new share gether to arrive at a suitable balance The vigorous expansion of corporate real issues. between debtreduction andliquidity. And investment in Korea in the 1980s despite Policy should cater increasingly to they discuss the impact of senior lenders high real interest rates owes much to the the requirement of developing equity on debt deals. rapid growth of the stock market and its markets, including measures to change They emphasize two fallacies in vol- increasingly important role in supplying the method of pricing new share issues untary debt reduction deals: equity capital to the corporate sector. from the prevailing par- value based sys- * That voluntary market-based tem (or premiums thereof) to a system mechanisms are always good for all. The First, assuming that debt capitalhasbeen based on market forces. The existing par- advantage of market-based mechanisms subsidized through both taxation and valuepricingprocedurehasevidentlybeen is that they get around collective action regulatory interest rate policy, corpora- an important factor behind the high cost problems - but they don't necessarily tions have drawn on the stock market to of external equity capital in Korea and a benefit everyone. finance their marginal investment proj- potential source of speculation. * That the mere existence of a dis- ects. This paper - a product of the Finan- count on the secondary market is a suffi- This reliance on new share issues as cial Policy and Systems Division, Country cient condition for buybacks that are prof- the marginal source of financial capital is Economics Department - is part of a itable for a debtor. consistent with the observed relationship larger effort in PRE to understand the Drawing on applications in Mexico, between stock market price movements role of capital markets in the growth and CostaRica, and the Philippines, Claessens and corporate investment behavior. Italso adjustment process of developing coun- and Diwan present a simple method for explains Dailami's inability to establish a tries. Please contact Maria Raggambi, - identifying the best debt deals, in terms of statistically meaningful relationship be- room N9-041, extension 37657 (47 pages debt reduction and liquidity, a country tween corporate investments and profits with tables). can bargain for with its creditors when - which would have been the case had debt reduction and new money are the corporations funded their investments at options. They emphasize that the provi- the margin through retained earnings. 410. The Cost of Capital sion of new money is best viewed as a The marginal profitability of invest- and Investment In Developing concession by non-existing creditors in mentinKoreaishigh,orhasbeenshifting Countries exchange for the value increase of their upward. Otherwise it would be difficult to existing debt on account ofthe debt reduc- justify corporate reliance on relatively Alan Auerbach tion. costly external equity as a marginal source Now the challenge is to identify the of funds. A model for evaluating howpolicychanges deal that is best for the country (given its Second, the real aggregate stock mar- might affect incentives to invest in devel- preferences about liquidity versus debt ket price, rather than the average q, or oping countries. reduction) and that will be acceptable to even the average rate of profit, is the Policy Research Working Paper Series 7 Auerbach's model can be used to evaluate Department - is part of a larger effortin sultants (individually or through NGOs how current and new policies might affect PRE to promote sound public policies in or research institutions) - to understand incentives to invest in a developing the development of the private sector in grassroots realities that Bank staff have country. developing countries. Please contact Ann difficulty mastering in several two- or It takes into account factors that are Bhalla, room N10-059, extension 37699 three-week missions a year. Failure to often ignored in analyses ofinvestmentin (43 pages). understand local formal and informal in- more developed countries - such factors stitutions can mean an operation does not as risk, foreign tax provisions that affect take hold or is unsustainable. capital flows, the prevalence of trade dis- 411, Institutional Dimensions The Bank should more fully use tortions, the lack of domestic capital of Poverty Reduction country Bank offices to gather informa- markets, and the relative credibility of tion on local conditions and institutions. government policy changes. Lawrence Salmen Aresearch analyst postedin Bolivia for a The author reviews the literature on year, for example, came to understand investment and the cost of capital, show- Efforts to reduce poverty would be more the involvement of local institutions, par- ing how the effects of tax and nontax successful if they were energized more by ticularly NGOs, as mechanisms for out- government policies should be incorpo- demand than supply -by seeing the poor reach to the poor. rated in any analysis of investment be- less as beneficiaries of government larg- In staffing, there is no substitute for havior. esse and more as customers working their exposure to the poor if the goal is to The methodologyis more general than way out of poverty. understand poverty and what might be calculations of tax wedges and effective done about it. Some aspects of poverty tax rates. It should help developing coun- The Bank's central operating paradigm, defy objective analysis- forexample, the tries measure the efficacy of current writes Salmen, is the "miracle of the mar- fear of debt that arises from insecurity policies, predict how policy changes may ket"- those who need goods and services about unstable employment and earn- influence investment, and determine ap- offer prices that stimulate others to sup- ings, and the importance of the family in propriate directions for reform. ply them. The principle of demand orga- shaping school attendance rates and fam- This paper is the first in a series of nizes service delivery to the rich and pow- ily planning decisions. papers commissioned by the Tax Incen- erful, who use their purchasing power or Practical ways to provide this expo- tives for Industrial and Technological connections to stimulate those services sure include staff sabbaticals geared to Development Research Project of the that interest them. increasing Bank staffexposure to poverty Public Economics Division. Researchers But people-oriented service organi- conditions and activities, and allowing on this project have focused on the follow- zations are usually supply-driven provid- more exploratory time during project ing questions: ers that try to induce clients to consume identification to do reconnaissance work For each dollar of forgone tax reve- what is judged to be good for them. Expe- off the beaten path. nues, how much have tax incentives rience suggests that poverty-reduction This paper - a product of the Public stimulated investment? efforts would be more successful if they Sector Management and Private Sector Do taxes affect foreign investment in were energized more by demand than Development Division, Country Econom- developing countries? Do they influence supply. ics Department -is part of alarger effort foreignbusiness locations? Ifthey do, what The Bank should see the poor less as in PRE to assess the institutional aspects instruments best stimulate the most in- beneficiaries, passively receiving govern- of development, particularly regarding vestment per dollar of tax revenues lost to ment largesse, and more as customers public sector management. Please con- the host country? who they can help enable to pay the costs tact Ernestina Madrona, room N9-061, How do taxes affect industrial pro- - with their time, labor, and capital-for extension 37496 (38 pages). duction? How have tax instruments af- what they see will better their own lives. fected the use of labor? How have they Rather than gather only numbers, affected physical, research, and develop- the Bank and its borrowers should try to 412. Exchange Rate Policy ment capital? understand and support the informal in- In Developing Countries - How have business taxes and tax stitutions through which poor people act. expenditures (forgone revenues) affected It should take advantage of such qualita- W. Max Corden technological change, the expansion of tive techniques as focus group interviews, private output, and after-tax profits? social marketing, beneficiary assessment In general the best approach to exchange Are these tax-induced distortions interviews, and participant observations rate policy is the "real targets" approach, preventing firms from holding optimal (successful uses of which Salmen de- although the nominal anchor approach is levels of fixed factors? scribes). appropriate for certain situations. The ex- Given the empirical estimates ob- The Bank should encourage the de- change rate should follow rather than tained in this study on factor substitu- velopment of a "thickening social web" of lead, it should be linked with appropriate tion, a bias toward technical change, and nongovernment organizations (NGOs), noninflationary monetary policy, and ifit scale economies, what revenue-neutral including community associations, coop- must change, it should change quickly. alternative tax policy environment would eratives, church groups, peasant leagues, encourage growth and productivity? and the like. After comparing the "real targets7 and This paper - a product of the Public The Bank should use more local per- the "nominal anchor"* approaches to ex- Economics Division, Country Economics sonnel -includinglocal independentcon- change rate policy in developing coun- Policy Research Working Paper Series tries, Cordern offers four basic recommen- way of constraining domestic policies and in- previous year's total. This is due primar- dations: fluencing private sector reactions. But govern- ily to substantial increases in general in general the best approach to ex- ments can temporarily evade the exchange loans for health, population, and nutri- change rate policy is the "real targets" rate constraint through import restrictions or tion. New specific safe motherhood activi- approach. The exchange rate should fol- foreign borrowing. ties are beginning to emerge in the form of low rather than lead - taking into ac- This paper - a product of the Macro- care for the complications of pregnancy, count shocks or variables in fiscal and economic Adjustment and Growth Divi- better secondary and tertiary facilities, trade policyand changes in terms of trade. sion, Country Economics Department - training, and promotional workshops. Exchange rate policy shouldbe linked is part ofalarger effort in PRE to improve The magnitude and effectiveness of with appropriate noninflationary mone- the understanding of the role of exchange donor financing will require more atten- tary policy. Normally there must be a rate policy on economic adjustment. Please tion to two special problems: commitment to anti-inflation objectives if contact Max Corden, room N11-023, ex- * Strengtheningrecipient countries' inflation is to be avoided. Without such a tension 39175 (43 pages with figures). ability to articulate project demand - commitment, if monetary policy is infla- providing specific training, technical ad- tionary, exchange rate policy must still be visory assistance, and operational guide- aimed at the real target - the real ex- 413. Supporting Safe Motherhood: lines for mobilizing financial resources. change rate - unless there is reason to A Review of Financial Trends - * Improving the data on safe moth- believe that such a target would signifi- Full Report erhood financial trends - establishing a cantly reduce the commitment to anti- consensus on definitions; seeking a con- inflation. L. M. Howard sensusonfinanciallymeasurableprogram Because capital is so mobile, delayed or project categories of safe motherhood; exchange rate adjustments must be Almost 500,000 women a year from devel- defining methods for the systematic col- avoided. If the rate must change, it should opingcountries diefrompregnancy-related lection of donor and recipient country change quickly. causes. In 1987, an international confer- data on financial trends. The nominal anchor approach may ence in Nairobi, Kenya launched a global *At the 1987 Conference on Safe Motherhood be useful in two kinds of countries - at Safe Motherhood Initiative with World in Nairobi, Herz and Measham recommended opposite ends of the inflation spectrum. Bank co-sponsorship. By 1989, how were a core program for safe motherhood that in- e Countries that have long-estab- the donors responding to the Initiative? cluded reducing the number of pregnancies lished fixed exchange rate systems - through family planning education, promo- with occasional devaluations and with Financial trends for safe motherhood ini- tion, and community-based services; reducing relatively noninflationary records - may tiatives. Problems of definition and ac- the risks to pregnancy and childbirth; provid- be well advised to stay with such a sys- counting methods preclude an accurate ing prenatal care, supervised deliveries, tem, since their commitment will be cred- analysis of financial trends among do- screening, and referral for high-risk mothers; ible. One thinks especially of Thailand, nors. Global support for specific safemoth- and providing communication and transporta- perhaps Indonesia, and some African erhood activities is limited. For the 17 tion for complicated deliveries. countries in the franc zone. major bilateral sources, funding for se- This paper - a product of the Popu- o Countries with histories of high lected activities which contribute to safe lation, Health, and Nutrition Division, inflatdon that are nowready to stabilize - motherhoodis estimated tohave increased Population and Human Resources De- to commit themselves to radical policy (in current dollars) from $691.5 million in partment - is part of a larger effort in shifts (one thinks of Argentina, Brazil, 1986 to $818.8 million in 1988. About half PRE to promote policy and resource com- and Mexico) - may find a fixed exchange this amount was for so-called core* activi- mitment to the Safe Motherhood Initia- rate (or an active crawl) a valuable an- ties, including family planning services. tive. Please contact Otilia Nadora, room chor. it should constrain government The magnitude of support for prevention S6-065, extension 31091 (50 pages with - monetary policies and help achieve credi- of the complications of pregnancy is less figures and tables). bility -wth the markets, including the certain. General health, population, and labor market. But countries that choose a nutrition sector flows increased substan- fixed rate regime or an active crawl must tially over the same period. These trends 414. Supporting Safe Motherhood: recognizethatthereisakindof"exchange- were positive for 13 sources, unchanged A Review of Financial Trends - rate-adjusted Phillips curve" tradeoff: at for three, and negative for one. Summary least for a short time, misalignment of the Of the six major multilateral sources, real exchange rate is quite likely. totals for selected safe motherhood activi- L. M. Howard * The real targets approach, orthodox in the ties were estimated to be $477.7 million in World Bank, assumes that nominal exchange 1988, a 41.7 percent increase over 1987 Refer to WPS 413 for the abstract. rate changes have prolonged real effects and and a 17 percent increase over 1986, re- WPS 413 contains the full section on that the exchange rate should adapt to other flecting differences in the annual volume Interview Notes with different financing policies. Fiscal expansion, for example, may ofWorld Bankloan approvals. Halfof this sources. require depreciation or appreciation, depend- went for core services, primarily family This paper - a product of the Popu- ing on the circumstances. With the nominal planning. lation, Health, and Nutrition Division, anchor approach, the exchange rate is used as Estimated World Bank safe mother- Population and Human Resources De- an instrument of anti-inflation policy - as a hood expenditures in 1989 are triple the partment - is part of a larger effort in Potl" Rewsach Working Paper Series 9 PE to promote policy and resource com- greatest overestimation; World Bank launched in 1980. mitment to the Safe Motherhood Initia- * Resource gaps, or capital inflows, The main objective of LSMS surveys tive. Please contact Otilia Nadora, room were about what was expected; but is to provide household-level data for S6-065, extension 31091 (16 pages with * Investmentefficiency,measuredby evaluating the effect of various govern- figures). incrementalcapital-outputratiowasmuch ment policies on the population's living worse (6.8 percent versus 4.9 percent) conditions - in studies, for example, of than expected. the impact of education on nutrition, the 415. How Good (or Bad) The overall conclusion is that biases effect of health on employment, and the are Country Projections? introduced by country economists into relationship between income and fertil- the projections because of an overly opti- ity. Norman Hicks and Michel Vaugeois mistic view of their countries is only part After describing how the LSMS be- of the problem; inaccurate forecasts of gan and how data are collected, Glewwe Country projections are routinely used to export and import prices, export volume presents selected results. Some general describe likely prospects for national ac- growth, and external resources are also a trends have emerged in studies of five of counts and balance of payments aggre- source of errors. The likelihood of wide the six countries for which LSMS data are gates. However, an examination of those variations between projections and ac- available: undertaken during the 1983-85 period tual events suggests that the use of these Most of the poor are in rural areas; shows that they are often overly optimis- projections for judgments about credit- the fraction ofthe poor population in rural tic, and that there are wide variations worthiness and country risk could be mis- areasis always substantially higher than between projected and actual outcomes. leading. Not only are improvements the fraction of the total population in This raises serious questions about the needed in country modeling, but equally rural areas. utility of these projections for making important are improvements in the fore- Most of the poor are in households in judgments about future prospects and casts of external environment facing de- which the head works in agriculture. The creditworthiness. veloping countries. heads of poor households are most likely This paper- a product of the Strate- to be self-employed, especially in Africa. Bank economists routinely undertake pro- gic Planning Division, Strategic Planning (Very few heads of poor households work jections of national accounts and balance and ReviewDepartment-ispartofPRE's for the government, so freezes on govern- of payments for their countries, and these ongoing mandate to undertake periodic ment wages are unlikely to hurt many of appear as part of the Bank's Country reviews of Country Strategy Papers. the poor.) Strategy Papers. Since these projections Please contact Lynette Alemar, room S13- The heads of poor households have are used to form judgments about country 141, extension 31023(17pages with tables, low levels of education - most of them prospects and creditworthiness, it is im- an annex, and appendices). elementaryeducation orless, andin some portant to know how accurate they fore- (particularlyAfrican)countries noeduca- cast the future, and what biases exist in tion at all. theprocess.Thegeneralviewisthatthese 416. Improving Data on Poverty Glewwealsopresentsselectedresults projections are often optimistic in terms In the Third World: The World of studies on the persistence of poverty, of their expectations of favorable results. Bank's Living Standards and of studies of the effects on the poor of This note examines projections done Measurement Study structural adjustment, offoodstamps and during the 1983-85 period, and compares food subsidies, and of raising user fees for the projected levels of GDP, imports, ex- Paul Glewwe health care and education. ports, terms of trade, savings and invest- This paper - a product of the Wel- ment with the actual outcome for the An account ofthe World Bank's ambitious fare and Human Resources Division, same period. The principal conclusions effort to collect household-level data on Population and Human Resources De- are that for this period: poverty in developing countries - and of partment - is part of a larger effort in * GDP projections tended to be opti- what that data are beginning to say about PRE to examine the causes and conse- mistic (4.2 percent projected average ver- the effects ofgovernment policies on living quences of poverty in developing coun- sus 2.9 percent actual); conditions of the poor. tries. Please contact Brenda Rosa, room * Projected export volumes, however, S9-137, extension 33751 (36 pages with tended tobe slightly lower than the actual The starting point for reducing world pov- tables). outcome (6.1 percent versus 6.4 percent); erty was to provide accurate, up-to-date * The actual terms of trade deterio- data on poverty in developing countries. ration (-4.8 percent) was somewhat worse The sparse, outdated data previously 417. Modeling the Macroeconomic than expected (-0.2 percent), but there available were often of dubious accuracy Requirements of Policy Reforms were extremely wide variations among and usually unavailable in a form useful countries; for policy analysis. William Easterly, E. C. Hwa, * Investment and savings rates were One of the most ambitious attempts Piyabha Kongsamut, and Jan Zizek both slightly overestimated, but with sig- to improve the quality of data collected at nificant variation among countries; the householdlevel from developingcoun- The macroeconomic requirements of pol- * On a regional basis, projections of tries is the Living Standards Measure- icy reforms can be determined through an GDP growth in African countries had the ment Study (LSMS) program, which the extension of the Bank's RMSM model to 10 Policy Research Working Paper Series includefiscal and monetary variables and All scenarios require reducing public dampens investment. In the long run, behavioral functions. investmentifno other fiscal measures are real exchange rate depreciation leads toa taken. Since reducing public investment restructuring of private industry to meet Easterly, Hwa, Kongsamut, and Zizek lowers growth, these simulations drama- rising export demand, efficiency improve- assess the macroeconomic policy regime tize the need to pursue fiscal reforms that ments increase profitability, and private required for structural economic reform compensate for the adverse fiscal effects investment recovers quickly. in trade and financial policy. To do so, oftradeorfinancialliberalization without But how long are the short and long they develop a macroeconomic model for reducing urgent social spending or in- runs? deriving the appropriate stance on vestments in public infrastructure. Chhibber and Shafik, using an econ- macroeconomic policies needed to sup- The model does not try to capture the ometric model of the Indonesian econ- port structural reform measures in trade favorable effects of reform on efficiency omy, found that Indonesia adjusted in and finance. andgrowth, which otherevidence suggests about two or three years - which is a - The macroeconomic projection model would be large enough to raise growth in relatively quick turnaround compared ofColombiatheyuseisan extension ofthe the long run even if there were an ill- with other countries undergoing adjust- Bank'sRevisedMinimum Standard Model advised reduction in public investment. ment. (RMSM) currentlyin use. They enrich the This paper -a product of the Macro- In the opinion of the authors, the traditional RMSM by adding fiscal and economic Adjustment and Growth Divi- credibility of Indonesia's economic poli- monetary identities as well as behavioral sion, Country Economics Department - cies played a key role in Indonesia's turn- functions for the following variables: pri- is part of a larger effort in PRE to develop around. By orchestrating comprehensive vate consumption, private investment, a macroeconomic projection model that reforms in taxation, the financial sector, money demand, demand for quasi money, will improve and extend the Bank's RMSM and the exchange rate, the Indonesian export supply, and import demand, model. Please contact Raquel Luz, room government sent a clear signal to the They illustrate how the basic model N11-057, extension 34303 (82 pages with private sector that lent credibility to its functions by comparing three simulations figures and tables). adjustment efforts. This was also crucial to a base case run, increasing the targets to the recovery of investment and the for three variables: the real exchange rate, restoration of growth. the real interest rate, and the inflation 418. Does Devaluation Hurt Private This paper - a product of the Office rate. Investment? of the Vice President, Development Eco- All three simulations increase the The Indonesian Case nomics - is part of a larger effort in PRE financeable fiscal deficit, but in different to understand the response of the private ways. A target of real exchange rate ap- Ajay Chhibber and Nemat Shafik sector to policies, so as to better design preciation increases it by making more adjustment programs. Please contact foreign credit available to the public sec- In the short run, devaluation hurts pri- DECVP, room S9-021, extension 33490 tor. Higher targets for real interest and vate investment because higher real im- (43 pages with figures and tables). inflation rates increaseitby making more port costs for capital and intermediate domestic credit available. goods limit private sector profitability. In They then extend the model to take thelongrun, the recovery intradablegoods 419. The Design and Sequencing into account the external financing con- sectors increases profitability and private of Trade and Investment Policy straint facing the government and the investment recovers. But how long is the Reform: An Institutional Analysis economy, and by adding detail on the tax long run? and banking systems. They use the ex- Brian Levy tended model to discuss macroeconomic Devaluation affects investment because adjustments needed for policy reform be- of its effect on the real supply price of How different levels of political commit- ing considered in Colombia for trade (re- capital goods; the real price of imported ment and different degrees of organiza- duced tariff rates and relaxed import inputs, which together with capital goods tional capability affect the design, se- quotas), finance (reduced reserve re- are used to produce output; the real prod- quence, and outcomes oftrade and invest- quirements and forced investment re- uct wage and thereby profitability and ment policy reform in twelve Bank-sup- - quirements for the banking system), and investment; real income, which affects ported countries. reducing inflation, the demand for domestically produced All the policy reforms require fiscal goods; and nominal and real interestrates, Adjustment faces political obstacles to adjustment to be consistent with avail- which in turn affect investment. the extent that it imposes costs on groups able financing. For example, reduced tar- Information on the short- and long- within society that are important to gov- iff rates mean lost revenues, which must term effects of devaluation are critical in ernment or threatens the stability of a becompensatedbyrevenueincreaseselse- designing adjustment programs - par- regime. where or spending cuts. The incipient ticularly in assessing the appropriate It faces organizational obstacles to increase in import demand because of amount of external assistance -because the extent that it imposes tasks that gov- reduced tariffs requires more currency the short-term effects may be radically ernment bureaucracies are incapable of depreciation, although not as much as the different from the long-term effects. meeting. increase in the tariff rate. Quota reduc- In the short run, the real cost of Political obstacles can undermine tion also requires some currency depre- imported capital and inputs increases, decisions about the extent of reform and ciation. which hurts private sector profits and efforts to implement reform. Organiza- Policy Research Working Paper Series 11 tional obstacles affect mostly implemen- jectives for the design of irrigation service * Acceptindirectcostrecovery where tation. fees: economic efficiency, income distri- it exists, but insist on an accounting of the Levy argues that policyreform should bution, and public savings. equity issues associated with rent trans- be designed one way in countries with The objective of economic efficiency fers for irrigation. strong organizational capabilities but was framed in irrelevant terms and the On the fifth and sixth points, analy- limited political flexibility and quite an- detailed objectives for income distribu- sis must take into account the welfare other way when the situation is reversed. tion were unworkable. This left the objec- effects on the major groups involved. The Organizationally strong but politi- tive of public savings - for which there appropriate objective for irrigation serv- cally constrained countries should start are no clearcut instructions. ice fees (if there are no equity issues) is with roundabout (indirect) but adminis- So between 1976 and 1988 no effec- public savings or cost recovery. tratively intensive reforms as a way of tive formal policy guidelines existed for This paper - a product of the Agri- building a constituency for subsequent cost recovery on irrigation - although cultural Policies Division, Agriculture and liberalization - for example, promoting the Bank was active in lending for irriga- Rural Development Department-is part exports by setting up bonded exportfacili- tion in those 12 years. of a larger effort in PRE to provide ana- ties and duty and tax drawback systems No OED review ofloan conditionality lytical reviews of major issues in the sus- before trying to liberalize imports. on cost recovery for irrigation has been tainability of natural resources and pres- By contrast, countries with political produced for the period, but the 1986 ervation of environmental quality. Please flexibility but weak organizational capa- OED review on the period before 1976 contact Cicely Spooner, room N8-035, ex- bilities-includingmanyin Sub-Saharan concluded that the record for the earlier tension 30464 (32 pages). Africa - should avoid roundabout meas- period was not good. ures. It is easier for them to dismantle In at least two-thirds of the projects poor regulations and interventionist in- reviewed, the covenant requiring cost re- 421. Taxation of Financial stitutions than it is to get them to stop covery to cover atleast O&M costshad not Intermediation: Measurement constraining economic activity and start been honored. In many cases, the cove- Principles and Application supporting it. nantscoveringcostrecoverywere sovague to Five African Countries In politically flexible but organiza- that it was difficult to judge if there had tionally weak countries, free entry should been compliance. Auditors found O&M of Christophe Chamley and Patrick Honohan be favored over the establishment of one- the irrigation satisfactory in only half of stop shops to streamline bureaucratic re- the projects. Hidden taxes on thefinancial system, such quirements for new entrants; targeted Existing guidelines are inadequate, as interest rate ceilings, reserve require- investmentincentives shouldbe abolished and the need for quality control is great, ments, and the currency tax are often rather than rewritten to favor socially so O'Mara proposes six points as the basis heavier than explicit taxes. Interest rate efficient subsidization; and import liber- for a new policy framework for Bank ir- ceilings may distort financial intermedia- alization should be pursued as much as rigation projects: tion more than other taxes. possible, not finessed through support for * Accept the diversityofcultures and exporters. institutional arrangements in borrowing To measure distorting taxes (explicit and This paper - a product of the Public countries and incorporate flexibility and implicit) on the financial sector of five Sector Management and Private Sector ingenuity into the design of feasible irri- African countries, Chamley and Honohan Development Division, Country Econom- gation institutions. view taxation more broadly than is cus- ics Department-is part of alarger effort * Focus the Bank dialogue on the tomary. in PRE to examine the institutional di- physical sustainability of irrigation in- They go beyond the currency tax and mensions of economic reform and the way vestments and associated natural re- reserve requirements to include the quasi- they influence the supply response of the sources. In short, the Bank should be tax effects of interest rate ceilings. Under private sector. Please contact Brian Levy, more flexible about institutional prefer- this broader approach, the true scale of room N9-059, extension 37488 (33 pages ences but should insist more strongly on taxation on financial intermediation is with tables). arrangements that preserve sustainabil- much higher than is commonly appreci- ity. ated. * Approach the financing of irriga- The level of tax has varied widely 420. Making Bank Irrigation tion as a policy adjustment issue. over time and between countries, but has Investments More Sustainable * Base cost-recovery policy on an been a significant element in total gov- analysis of the total complex of govern- emient revenues, especially during fis- Gerald T. O'Mara ment interventions. Most countries pre- cal crises induced by commodity slumps. fer to impose direct and indirect taxes on Between 1978 and 1988, this kind of tax It is time to rationalize policy guidelines agricultural commodity output although accounted for an average 4 percent to 7 on Bank irrigation projects. such taxes are often unjustified in terms percent of GDP in three of the less macro- of equity or cost recovery economically stable economies (Ghana, Until 1976, Bank policy emphasized re- Decisions on the third and fourth Nigeria, and Zambia) and close to 2 per. covery ofall costs on irrigation projects, or points require thorough economic analy- cent of GDP in the two more stable econo- at least complete recovery of operating sis. mies sampled (Cfte d7voire and Kenya). and maintenance (O&M) costs. Subse- * Assign tax policy instruments to Expressed as a percentage of M2, the tax quently, policy specified three pricing ob- appropriate policy objectives. rate has gone as high as 90 percent. 12 Policy Research Working Paper Series By any reckoning, the financial sec- bitious enough; meaningful change will But the Bank cannot identify the tor has been more heavily taxed than require more forceful reform. Middle- need to remove X thousand surplus per- other sectors. Even excluding the cur- range measures such as voluntary depar- sonnel and assume that the job of remov- rency tax, which does not directly affect ture schemes and early retirement pro- ing them will be carried out bythe govern- the banking system, taxes collected aver- grams are useful but are not a substitute ment or a bilateral donor. The challenge aged the equivalent of several times the for biting the bullet. for the Bank is to design projects that value added of the banking system in the Whether more aggressive reform is have measurable short-run cost-contain- three high-tax countries. Thatis a serious feasible is partly a technical but mainly a ment goals but realize themin the context disincentive to financial intermediation political issue. But in the few countries of a strategy to solve the fundamental and surely too high for economic effi- where reform has been carried out, the management problems in the long run. ciency. political costs were lower than most gov- This paper - a product of the Public Different types of tax distort behav- ernments (perhaps even the donors) ex- Sector Management and Private Sector ior differently. In relatively less devel- pected. This may have been partly be- Development Division, Country Econom- oped financial markets such as the five cause of the surprising capacity of labor ics Department-is part ofalargereffort studied, interestrate ceilings mayimpose markets to absorb surplus government in PRE to assess the Bank's accomplish- higher welfare costs than explicit taxes or workers and partly because of the skillful ments, problems, and prospects in the reserve requirements. handling of reform. field of public sector management. An Surges in inflation in the five coun- Functional reviews and competency earlier version ofthe paper was presented tries correlated with high taxes on the testing provide symbolic assurance that ataDecember 1989 conference on"Institu- financial sector. Governments reforming the reform process will be fair. Retrain- tional Development and the World Bank." taxes on the financial system should con- ing, redeployment, credit, and public Please contact Rose Malcolm, room N9- sider building in mechanisms (adjusting works programs forredundantemployees 055, extension 37495 (50pageswithtables). administered interest rates, for example, are symbolically and politically effective ormovingto explicit, such as value-added, but have limited practical impact and are taxes) to reduce the sensitivity of finan- administratively difficult. 423. Relative Price Changes and cial sector taxes to the inflation rate. The Bank should no longer encour- the Growth of the Public Sector This paper - a product of the Finan- age or support mechanisms such as top- cial Policy and Systems Division, Country ping up executive-level salaries for key M. Shahbaz Khan Economics Department - is part of a government posts unless such incentive larger effortin PRE to examine the effects schemes are part of an action strategy for The relative size of the public sector and of economic regulation on the financial long-term structural reform. the rate at which its size changes may be sector. Please contact Wilai Pitayato- Technical assistance loans (TALs) for severely underestimated in developing nakarn, room N9-003, extension 37666 civil service management should probably countries and overestimated in developed (83 pages with figures and tables). provides twice the present amount of staff countries, ifthe indicator for the size ofthe supervision and specialized expertise. public sector is the ratio ofcurrent public Such technical assistance loans re- spending to GDP. 422. Civil Service Reform quire more time to prepare and imple- and the World Bank mentthan doinfrastructure projects. They Policy recommendations to reduce the often get short shrift because of their growth of public spending are haunted by Barbara Nunberg and John Nellis dependence on the scheduling and re- the inevitability of: quirements ofstructural adjustment lend- * Wagner's law - the hypothesis Some argue that the complexity and un- ing. On the other hand, without SALs, that with economic development an in- certainty of civil service reform place the many civil service reforms in TALs have creasing share of GDPis devoted to public field outside the Bank's comparative ad- no teeth. spending. vantage. But a retreat from civil service Most Bank activities have concen- * Baumol's effect - the hypothesis management reform is tantamount to de. trated on short-term cost-containment that as economies develop, public sector nying the crucial importance of govern- measures. More emphasis must be given prices rise faster than prices in the gen- ment administrative capacity to imple- to longer-term management issues if sus- eral economy. ment economic and social programs. A tained improvement in government ad- Neither of these hypotheses has ad- more realistic approach is to try to learn, ministrative capacity is to take place. equatelybeen tested, largely because con- through trial and error, how to make such More attention must be placed on devis- sistent public sector prices are unavail- programs work better. ing a coherent, overarching strategy and able for most developing countries. detailed tactics for civil service reform. Khan proposes that the unavailabil- After reviewing civil service reform work Some argue that the complex and ity of consistent public sector price defla- in the Bank, Nunberg and Nellis reach uncertain nature of civil service reform tors can be overcome by econometrically certain conclusions: places the field outside the Bank's com- estimating these series with the help of The impact of Bank programs to con- parative advantage. They argue that the data on public spending and the widely tain the cost and size of civil services Bank should confine itself to helping de- available GDP deflator. He uses this through emergency reform of pay and fine economically rational policies, such method to test both hypotheses. An analy- employment policies has so far been neg- as the appropriate, affordable size of the sis of time-series data from 71 countries ligible. Reform efforts have not been am- wage bill. indicates that: Policy Research Working Paper Series 13 * Although data support Wagner's the strength of that plan and the reasons 425. Earmarking Government law in the majority of developing coun- for its eventual failure - the fact that it Revenues in Colombia tries, the degree of support varies with was inherently a short-term process. the level of development. In response to In December 1988, Mexico's Presi- William A. McCleary rising income, real public sector spending dent Salinas announced that external and Evamaria Uribe Tobon rises most in the low-income economies, creditors were expected to contribute to a less in the middle-income economies, and medium-term solution. In March 1989, Reducing and rationalizing the earmark- least in the industrial market economies. the new U.S. Treasury Secretary, Brady, ing of government funds will give * Similarly, the average income elas- effectively legitimized the word "debt re- Colombia's government budget more flex- ticity of public spending drops from 2.2 in lief" in a speech that opened the way for ibility. The extent of earmarking could be the low-income economies to 1.6 in the the 1989 debt restructuring agreement sharply reduced by limiting its applica- 'middle-income economies to about 1.0 in that van Wijnbergen analyzes here. tion to revenue-sharing between levels of the industrial economies. In the long run, That agreement offered commercial government and to cases where the benefit the size of the public sector tapers off as creditors the choice between exchanging principle applies. . economies develop. old debt instrumentsfor new instruments This is mainly because of changing involving debt relief (lower interest rates About 55 percent of total public income in price levels in the public sector relative to or principal) but partially secured with Colombia is earmarked for specific areas price levels in the general economy. Al- collateral; or unsecured instruments of government activity. McCleary and though Baumol's effect cannot be observed without debt relief, but with a new money Tobon recommend reducing the propor- in a majority of the countries, relative commitment attached. tion and amount of earmarked funds to prices tend to fall rapidly in the low- Active debates on the merits of this give the governmentbudget more flexibil- income countries, less rapidly in the package are often confused. In an exten- ity. Their recommendations would elimi- middle-income countries, and actually sive economic analysis, van Wijnbergen nate one quarter of existing earmarking start rising in the industrial economies. addresses the question: who in the end and introduce greater flexibility for an This is believed to be due to the differ- profited most from the official resources additional one quarter. They further con- ences in technological intensity between devoted to the deal: Mexico or its commer- clude that: the public and private sectors, the strength cial creditors? He concludes: Earmarking should be limited to rev- of the government in negotiating input Mexico made efficient use of the offi- enue- sharing and to situations where prices, and labor market conditions as cial funds available for debt reduction. there is a clear connection between the countries move through different stages The market value of the claims before source of revenue and the benefits of ear- of development enhancement declined by close to the full marked spending (for example, between This paper, a background paper for amount of the value of the additional payroll taxes and pension/disability ben- the 1988 World Development Report, is a foreign official resources devoted to the efits or between gasoline taxes and high- product ofthe Office ofthe Vice President, package. The rate of return on the use of way funding). Development Economics. Please contact official resources far exceeds the interest Even then the commitment to ear- the World Development Report office, rate at which they were extended. marking should not be open-ended. The room P4-009, extension 38064 (20 pages The market value after enhancement automatic financing arrangement should with tables). was basically the same as the market be reviewed regularly and terminated value of the outstanding claims before the automatically unless expressly renewed. deal - so Mexico's commercial creditors This would force a review of pricing ar- 424. Mexico's External Debt gotafair deal. The credit enhancementby rangements, of the quality ofinvestments Restructuring in 1989-90 and large made up for the debt relief. But financed, andofthepast andfuture growth no more than that - the official creditors' of sector infrastructure relative to needs. Sweder van Wijnbergen money benefited Mexico rather than its Payroll taxes should cover only social commercial creditors. The World Bank, security. Colombia's payroll taxes add 24- Who in the end profited most from the the IMF, and the Government of Japan 29 percent to the cost of labor. Eliminat- official resources devoted to Mexico's last (which provided the official resources) ing payroll taxes for non-social-security debt restructuring: Mexico or its commer- achieved their objective ofhelpingMexico; purposes would lowerlaborcosts and prob- cial creditors? Mexico. But in establishing the additional resources did not accrue to ably take 0.5-1.0 percentage points off the the basis for long-termgrowth the package the creditors, which manyfeared and some unemployment rate. seems a reasonable compromise between deemed inevitable. Earmarking for PROEXPO, which the conflicting interests of Mexico and its Finally, on the basis of available evi- finances subsidized loans for exporters, commercial creditors. dence, this package established the basis should be eliminated. There is little con- for sustainable growth in Mexico. nection between those who pay import Mexico's suspension of debt service pay- This paper is a product of the Coun- duties and those who benefit (exporters or mentsinAugustl982usheredintheinter- try Operations Division, Latin America foreign consumers). The level of duty is national debt crisis. In two consecutive and the Caribbean Regional Office, Coun- arbitrary so it is questionable whether debt restructuring packages, in 1984 and try Department II. Please contact Marga- the correct amount of export financing is 1987, Mexico began vigorous structural ret Stroude, room 18-163, extension 38831 provided, and the large subsidy differ- reform under the so-called Baker plan. (33 pages with figures and tables plus 21 ences among sectors distort the allocation Mexico's experience vividly demonstrates pages of annex). of resources. 14 Policy Research Working Paper Series The earmarking of departmental What happened to economic performance inflation because prices have already ad- taxes on alcohol, tobacco, and gambling in developing countries under growth- justed to the parallel exchange rate. Al- for health, welfare, and sports are par- oriented adjustment programs sponsored though structural factors were important ticularly strong candidates for elimina- by the World Bank and the IMF? in the past, inflation in Ghana has been tion. There is no connection between tax- Analyzing data for a sample of 93 primarily a monetary phenomenon and payers andbeneficiariesin these arrange- countries, Faini, de Melo, Senhadji- the product of weakness in the financial ments and hence no indication of whether Semlali, and Stanton compared the aver- system in recent years. appropriate amounts offundingfor these agevaluesofeconomicindicatorsfor 1982- activities is being provided. 86 with the corresponding values for 1978- Adjustment programs typically involve a The relatively new tax allowance and 81. They controlled for the external envi- complex policy package thatincludes price sales tax transfer have played important ronment and initial conditions and al- liberalization, devaluation, and trade roles in the government's effort to decen- lowed for policies that would have been policy reforms - together with public tralize, the former for departments, the adopted if the countries had not partici- enterprise and fiscal reform, including latter mainly for municipalities. These pated in adjustment. reduced subsidies and rationalization of revenue-sharing arrangements need to They found no statistical evidence of public spending. be strengthened by eliminating anoma- faster (or slower) growth for the countries A common concern in these reform lies in the sharing formulas, introducing that received loans. packages is the potential inflationary ef- more incentives for local resource mobili- They found that a higher current fects of the combination of devaluation, zation, and strengthening municipal ca- account surplus and lower inflation dur- trade liberalization, subsidy reduction, pacity to absorb the additional resources. ing 1978-81 were associated with better and price decontrol. This issue is critical Earmarking that follows the benefit investment performance during 1982-86. in Africa, where inflation has accelerated principle closely (the coffee fund, the And that deterioration in the external in several countries, particularly those gasoline tax, and the municipal valoriza- environment in 1982-86 was associated undergoing adjustment. tion tax) can be continued, but in each with lower growth during that period. Some argue that devaluation - an case,modifications are suggested to make They also examined the investment- important instrument in IMF and World the arrangement work better. output relationship for 14 countries that Bank adjustment programs - is not nec- Certain parts ofthe new Organic Law received sizable growth-oriented adjust- essarily the best instrument for real ex- ofthe Budgetrelated to earmarking should ment loans - estimating the growth for- change rate devaluation, given its infla- be implemented quickly - the limits on gone because of lower aggregate invest- tionary effects and taking into account minibudgets, the prohibition of new ear- ment under adjustment. the structure of African economies. Some marking from existing public resources, They conclude that signs of sustain- have criticized IMF and World Bank pro- and the claim of the central budget on able recovery through higher investment grams as leading to the so-called "Latin public enterprises' operating surpluses. were not evident, at least through 1986. Americanization" of Africa. This paper - a product of the Public But these results are not surprising, be- In Ghana, which has carried out one Economics Division, Country Economics cause considerable time must pass for the of the most thorough structural adjust- Department - is part of a larger effort in benefits of structural reform to material- ment programs in Africa, an increasingly PRE to improve the evaluation of govern- ize. high inflation rate has been attributed to ment expenditure programs and the ra- This paper - a product of the Trade major devaluations ofthe official exchange tionalization of public expenditures. Cop- Policy Division, Country Economics De- rate. Chhibber and Shafik dispute this iesareavailable free from the World Bank, partment - is part of a larger effort in conclusion based on careful testing and 1818HStreetNW,WashingtonDC20433. PRE to analyze the sustainability of simulationsusingamacroeconomicmodel Please contact Ann Bhalla, room N10- structural adjustment programs. The pa- estimated with Ghanaian data. 059, extension 37699 (88 pages with peris partofthe research project on trade The model results show that there is tables). reform in structural adjustment loans no direct relationship between the official (RPO 675-32). Copies are available free exchange rate and inflation; prices had from the World Bank, 1818 H Street NW, already adjusted to the exchange rate 426. Growth-Oriented Adjustment Washington DC 20433. Please contact prevailing in parallel markets. Programs: A Statistical Analysis Maria Ameal, room N10-031, extension The results also show that official 37947 (33 pages with tables). devaluation had a positive effect on Riccardo Faini, Jaime de Melo, Ghana's budget. Revenue improvements Abdel Senhadji-Semlali, and Julie Stanton came from three channels: the higher 427. Exchange Reform, Parallel grant aid disbursed at amore depreciated There is nostatistical evidence thatgrowth Markets, and Inflation In Africa: exchange rate, a reduction in the subsi- was faster - or slower - for countries The Case of Ghana diesthathadaccruedtoimportersthrough that received adjustment loans. And there an overvalued exchange rate, and an in- are no signs of sustainable recovery Ajay Chhibber and Nemat Shafik crease in export taxes as cocoa farmers through higher investment - at least increasingly marketed their output through 1986. This model using Ghanaian data shows through official channels. that in the presence of an active parallel The official devaluation therefore did market, official devaluation does not cause not produce higher budget deficits, de- Policy Research Working Paper Series 15 mand pressure did not spill onto the par- tation of monopoly positions and infla- unmanageable fiscal deficits. The keymay allel market, and the exchange premium tion. be identifying acceptable revenue alter- narrowed considerably. The key to the Various macroeconomic conditions natives to cocoa export taxes. Among con- success of the program was the adequate also need to be fulfilled for perestroyka to clusions the authors reach: level of foreign financing, combined with succeed. The government should aim at To maintain the right price incen- a coherent set of fiscal policies. realistic growth rates, establish abalance tives in the cocoa subsector, the exchange Chhibber and Shafik argue that al- between investment and consumption, rate regime should be liberalized so that though inflation had structural causes in eliminate the overhang in the market for the prevailing rate always roughly equals the past, the acceleration in recent years consumer goods and services, and drasti- the equilibrium level. is primarily a monetary phenomenon. It cally reduce the budget deficit. The government should explore shift- also reflects weakness in the financial At the same time, the success or fail- ing taxes from cocoa producers to all con- system that must be tackled to sustain ure of perestroyka will have implications sumers by increasing taxes on appropri- reform. for the success ofreformsin the European ate consumer goods - especially those This paper - a product of the Office socialist countries. And the performance that are income elastic and price inelastic of the Vice President, Development Eco- of'these economies will be affected by the (such as gasoline, cars, and consumer nomics - is part of alarger effort in PRE increased demand for quality in the So- durables). to understand the dynamics of inflation, viet Union. But successful reform efforts A policy of low cocoa taxes and high exchange reform, and price decontrol in on their part will help to meet this de- cocoa production favorably affects the Africa. Please contact DECVP, room S9- mand to exploit the opportunities offered rural poor. Taxing cocoa farmers directly 041, extension 33490 (67 pages with fig- by the vast Soviet market. lowers their income, indirectly lowers the ures and tables). This paper - a product of the Office income of food producers, and transfers oif the Vice President, Development incomes from those farmers to food con- Economies - is part of a larger effort in sumers -worsening income distribution. 428. Perestroyka and Its PRE to examine efforts made in socialist It would probably help to stabilize Implications for European Socialist countries toreform theireconomies. Please the real producer price ofcocoa. An attrac- Countries contact DECVP, room S9-047, extension tive alternative is a variable rate tax on 33769 (22 pages). cocoa (above the critical level) that in- Bela Balassa creases and decreases with the worldprice and would distribute the world market Perestroyka, introduced in the Soviet 429. Ghana's Cocoa Pricing Policy price risk between cocoa farmers and the Union to reform the economy after the rest of society (assumingrevenuerequire- "period of stagnation" under Brezhnev, Merrill J. Bateman, Alexander Meeraus, ments are fixed). This would stabilize the involves combining centralized planning David M. Newbery, William Asenso Okyere, real incomes of cocoa farmers and let with elements ofa market economy. For it and Gerald T. O'Mara consumers share in windfall profits from to succeed, certain micro and macro con- high cocoa prices. ditions need to be fulfilled. Ghana's cocoaproductiondeclinedbecause The yearly cocoa buying price should of policies that overvalued the domestic always be set above 140 cedis (in 1987 Perestroyka, introduced in the Soviet currency and heavily taxed cocoa exports. prices) if the objective is to stimulate Union to reform the economy after the A variable rate tax on cocoa (above the growth in long-term supplies. "period of stagnation" under Brezhnev, critical level) that increases and decreases COCOBOD should terminate its involves combining centralized planning with the world price would distribute the marketing activities for coffee, and all with elements ofa market economy. For it price risk between cocoa farmers and the taxes on coffee exports should cease. Even to succeed, certain micro and macro con- rest ofsociety, stabilize cocoa farmers'real with heavy taxation, net revenue from ditions need to be fulfilled. incomes, and let consumers share in wind- coffee is negative to the government un- As far as micro conditions are con- fall profits when world cocoa prices are der the current arrangement. Stopping cerned, one should emphasize the inter- high. coffee taxes would give coffee producers a dependence of rational prices, decentrali- stronger incentive to expand production, zation, profit maximization, incentives, The long decline in Ghana's cocoa produc- particularly where swollen-shoot virus and competition. For commodities pro- tion - from half the market 25 years ago infestation has reduced profits from cocoa duced domestically, the establishment of to one-tenth the market now - was as- production. rational pricesrequires thatprices equate sociated with policies that overvalued the This paper - a product of the Agri- demand and supply. This, in turn, neces- domestic currency, implicitly taxed cocoa cultural Policies Division, Agriculture and sitates the decentralization of decision- exports, and ignored the realities of world Rural Development Department -is part making and profit maximization by the markets. of a larger effort in PRE to analyze the firm. At the same time, managers would This study addresses the dilemma economics of perennial crops and thus have to be provided with appropriate in- Ghana's government faces: how to pro- provide policy guidelines for efficient ag- centives in order to ensure that firms vide enough producer incentives to stimu- ricultural development. Please contact maximize profits. Finally, there is need late the cocoa exports Ghana needs for Cicely Spooner, room N8-039, extension for competition to guarantee that profit foreign exchange while maintaining the 30464 (214 pages with figures and tables maximization does not lead to the exploi- government revenues needed to avoid plus 103 pages of annexes). 16 Policy Research Working Paper Series 430. Rural-Urban Growth Linkages products. Increased production of these Sub-Saharan Africa have had with mar- In India labor-intensive products shouldespecially keting and pricing systems, and show benefit the poor. how these systems have been caused or Peter B. Hazell and Steven Haggblade The size of the agricultural income exacerbatedbygovernmentcontrols. They multipliers depends primarily on the level document the steps several countries have Improving the nonfarm response to grow- of per capita agricultural income, but taken toward relaxing those controls and ing demand from agriculture calls for public policy can affect their magnitude. allowing more participation by private appropriate growth in agricultural tech- They are positively related to the develop- enterprise. nology, adequate investments in rural in- ment ofsuchrural infrastructure as roads, They draw some general conclusions frastructure, and the avoidance ofpolicies electrification, and banking services. They about the kinds of changes in parastatal that discriminate against small, labor- are stronger under irrigated than rainfed marketing organizations that most effec- intensive businesses infavoroftheirlarger, agricultural growth and larger for small- tivelyimprovetheirabilitytomarketerops capital-intensive cousins. to medium-size farms than for larger efficiently and cope with changes in world farms. prices: Using two models - an econometric Improving the nonfarm response to The path a country should take to- analysis of cross-sectional data on states growing demand from agriculture calls ward more private sector participation and districts and a semi-input-output for appropriate growth in agricultural depends heavily on the form ofmarketing model fitted to a national input-output technology, adequate investments in ru- and pricing system that exists and the table for 1979/80-Hazell and Haggblade ral infrastructure, well-developed rural time needed to develop needed skills in analyze the relationship between agricul- towns, and the avoidance of tax, regula- the private sector. tural growth and growth in the rural tory, or licensing policies that discrimi- Complete or increased privatization nonfarm economy. They conclude that: nate against small, labor-intensive busi- ofmarketing and adoption of free-market Because of strong links to agricul- nesses in favor of their larger, capital- pricing is easier under the caisse system tural growth, rural nonfarm income and intensive cousins. than the marketing board system. Under employment will both grow faster than This paper, a background paper for the caisse system, the private sector al- their agricultural counterparts. A sus- the FY1991 Country Economic Memoran- ready handles domestic and export mar- tained agricultural growth rate of 2.4 per- dum for India, is a product of the Agricul- keting - so the transition essentially cent (the past trend) will lead to 3.0 per- tural Policies Division, Agriculture and involves increasing competition in an ex- cent growth in nonfarm income in rural Rural Development Department and is isting private sector (step A). areas and towns and 2.8 percent growth part ofalarger effort in PRE tolearn more Under the monopolistic marketing in nonfarm employment. If agriculture about the indirect effects of agricultural board system, countries should identify grows 4 percent, these rates increase to growth on the rural nonfarm economy, activities (such as processing) that can be 5.8 percent and 4.0 percent, respectively. and how the value of the income and performed immediately by the private Continued growth in agricultural employment benefits can be enhanced for sector and take steps to transfer those outputis unlikely to provide the growth in the poor. Copies are available free from steps to the private sector (step B). productive employment required to ab- the World Bank, 1818 H Street NW, In countries with a marketing board sorb projected increases in the rural labor Washington DC 20433. Please contact system and a weak private sector, export force. The employment gap will increase Cicely Spooner, room N8-039, extension and domestic marketing can initially be if irrigation plays a decreasing role in 30464 (79 pages with tables). shared by the boards and the private agricultural growth. Secondary rounds of sector, with boards acting as "buyers of growth in the rural nonfarm economy last resort." Over time the boards should could bridge this gap given moderate ag- 431. Recent Developments be treated as just another of the market- ricultural growth. In Marketing and Pricing Systems ing agencies competing with the private Export and domestic urban demand for Agricultural Export sector (step C). must play an important role if manufac- Commodities In Sub-Saharan After taking steps B and C, market- turing is to continue to grow 8 percent a Africa ing boards will be like caisses and in time year. Despite the strength of the rural- can take step A. urban linkages, agricultural growth alone Panos Varangis, Takamasa Akiyama, If an immediate change from a fixed cannot provide enough market to sustain and Elton Thigpen producer pricing system to a free-market rapid growth in India's manufacturing pricing system is not feasible or is judged sector. An agricultural growth rate of 2.4 Privatization of marketing and the adop- undesirable, a gradual transition can be percent a year will generate only 1.8 per- tion offree-market pricing is easier under made by implementing a progressive ex- cent (if irrigated agriculture) to 1.9 per- the caisse system than under the monopo- port tax system that is more progressive cent (if rainfed agriculture) growth in listic marketing board system. A progres- in the initial stages. national manufacturing output. Even 6 sive export tax system, based on a market- This paper - a product of the Inter- percent growth in agriculture will gener- determined price, can ease the transition national Commodity Markets Division, ate onlyabout 5.5 percent growthinmanu- from a fixed producer pricing system to a International Economics Department - facturing output. free-market pricing system. is part of a larger effort in PRE to under- Agricultural growth will lead to ex- stand the impacts of various kinds of pansion in high-value agricultural out- Varangis, Akiyama, and Thigpen docu- primary commodity marketing and pric- put, especially livestock and horticultural ment the difficulties various countries in ing systems and how best to change to Policy Research Working Paper Series 17 more efficient systems. Copies are avail- on external borrowing reinforces the ad- for industries producing intermediates able free from the World Bank, 1818 H verse effects of these shocks. and inputs for downstream subsectors - StreetNW, Washington DC 20433. Please This paper - a product of the Office and within each subsector. contact Dawn Gustafson, room S7-044, of the Vice President, Development Eco- Nominal protectionrates (asreflected extension 33714 (69 pages with charts nomics - is part of a larger effort in PRE by domestic to world price ratios), averag- and tables). to understand the economic policies in the ing40-50 percent, are substantially lower developing countries. Copies are avail- than average tariff collection rates (60-70 able free from the World Bank, 1818 H percent) and much lower than official 432. Policy Choices in the Newly Street NW, Washington DC 20433.Please tariffs (120-140 percent). The wide varia- Industrializing Countries contact DECVP, room S9-047, extension tions in protection reflect a complex sys- 33769 (18 pages with tables). tem comprising many exemptions and ad Bela Balassa hoc tariffs. Tariff'reform is urgently needed. Tar- The Far Eastern newly industrializing 433. The Pervasive Effects iffs should primarily provide protection countries (Hong Kong, Korea, Singapore, of High Taxation of Capital Goods and incentives, with only a secondary and Taiwan) achieved much larger in- In India: Findings function of generating public revenue. creases in per capita incomes than their and Conclusions from a Sample First, tariffs should be slashed, and im- Latin American counterparts (Argentina, of Projects ports liberalized, on capital goods, toward Brazil, Chile, and Mexico) in the 1963-88 a uniform tariff of 25 percent and full period. Differences in economic growth Francois Ettori exemption for projects exporting at least rates find their origin in differences in halfofoutput. Forintermediates and other savings ratios and investment efficiency. India's heavy duties on capital goods blur inputs, most tariff exemptions should be the incentive signals from the tariff struc- eliminated, import regimes unified, and Whilesavings rates differedlittle between ture. In practice, that structure favors tariffs aligned on collection rates toward the two groups of countries between 1963 import substitution of intermediate prod- reduced levels averaging 40 percent. and 1973, these ratios increased substan- ucts from heavy industry and discourages Public revenue should be generated tially in the Far Eastern NICs in subse- exports. The complex protection structure increasingly through trade-neutral in- quent years as they employed measures should be simplified, with priority to struments (profit taxes and indirect taxes encouraging savings. Similar increases s4ashing the duties on capital goods. such asMODVATandconsumptionVAT). did not occur in Latin America where the This paper -a product of the Indus- policies applied were not favorable to say- Some 60 industrial projects (chiefly in the try and Finance Operations Division, Asia ings. chemical and engineering subsectors) fi- Regional Office, Country Department IV Investment efficiency was higher in nanced by the Development Finance In- (India) - is part of a larger effort to the Far Eastern NICs than in the Latin stitutions in India in 1988 and 1989 were undertake a comprehensive review of American NICs throughout the period. analyzed. The major finding is that levy- India's trade regime and policies and to The Far Eastern NICs achieved high lev- ing the heaviest duties on imported capi- make recommendations for liberalization els of investment efficiency in the frame- tal goods has deeply distorted industrial of trade policies. Copies are available free work of an open economy, with high and incentives and harmed industrial com- from the World Bank, 1818 H Street NW, risingratios ofexports to the gross domes- petitiveness and exports. Washington DC 20433. Please contact tic product. Export expansion involved an With tariffs on capital goods averag- Francois Ettori, room D10-049, extension increasing shift toward manufactured ing 80 percent (except for electronic in- 80324 (39 pages with graphs and tables). goods. dustries equipment which pays about 40 Exports in the Far Eastern newly percent), Indian projects are generally 40 industrializing countries were promoted to 50 percent more expensive than they 434. Tax Sensitivity of Foreign by the system of incentives that entailed would be under free trade, and up to 80 Direct Investment: no discrimination, or little discrimina- percent more expensive in capital- inten- An Empirical Assessment tion, against exports. These countries also sive projects. relied to a considerable extent on export The high investment costs require a Anwar Shah and Joel Slemrod promotion in response to external shocks compensatory effective protection aver- and did not engage in excessive foreign aging 30 percent to allow industrial Developing countries with heavy foreign borrowing. projects to earn returns at least equal to direct investment need not worry about The experience of the Far Eastern those available under free trade. How- providing special tax incentives for for- and Latin American newly industrializ- ever, about half the projects (generally eign investment. But they must be sure ing countries provides important lessons those producing final goods) receive effec- that their tax system is competitive with to other developing countries. It indicates tive protection significantly lower than the home tax regime of a marginal inves- the superiority of outward-oriented poli- the compensatoryeffective protection, and tor who has access to foreign tax credits cies that provide similar incentives to generate lower profits than those of for- against domestic tax liabilities. exports and to import substitution. It also eign competitors. shows that the continuation of outward- Nominal protection varies widely The tax sensitivity of foreign direct in- oriented policies permits overcoming the between subsectors-from 25percentfor vestment (FDI) has important policy im- effects of external shocks while reliance final goods industries to 60 to 65 percent plications for developing countries. 18 Policy Research Working Paper Series If FDI is not responsive to taxation, it optimal short-term forecasts, superior to 436. Commodity Price Forecasts may be an appropriate target for taxation "naive" forecasts or futures prices. and Futures Prices by the host country, which can raise rev- enue without sacrificing any economic Forecasts of primary commodity prices, Boum-Jong Choe benefits from FDI. which the Bank's International Commod- Shah and Slemrod examine this ity Markets Division has been preparing Commodity futures prices have biases due question for Mexico by modeling the tax formore than twodecades,are usedmainly to risk premia and expectational errors, regimes in Mexico and the home country for project evaluation and balance-of- thus limiting their usefulness as a short- ofa marginal investor, the credit status of payments projections for developing coun- term price forecasting tool. Also, futures U.S. multinationals, country risk factors, tries. There has been some concern about prices are more adaptive to spot price and regulatory and trade regimes in their accuracy. Until very recently, the movements than price expectations, but Mexico. majority of studies of both survey expec- not necessarily more rational. Theyconclude that the FDIin Mexico tations and futures prices, including pre- is sensitive to the Mexican and U.S. tax viousretrospective studiesofthe division's Choe investigates the relationship be- regimes, to the multinationals'credit sta- price forecasts, found that expectations tween commodity futures prices and price tus, to country credit ratings, and to the are formed irrationally and inefficiently. expectations, to determine the usefulness regulatory environment. Lately,however,attemptshavebeenmade of futures prices as a short-term price So Mexico's current policy of disman- to explain the sources of forecast biases to forecasting tool. tling regulations and having a tax regime put the irrationality of expectations in Previous studies offorecasts from the competitive with that in the United States question. Bank's International Commodity Markets is expected to improve FDI in Mexico. Choe takes a new look at these fore- Division found evidence that commodity Mexico must aim for tax rates similar casts in light of recent theoretical and specialists'forecasts are outperformed by to those in the United States to eliminate empirical work on the formation of expec- "naive" (static) forecasts, which will hold any tax-induced disincentives for invest- tations. The forecast data analyzed are if commodity markets are efficient. On ment and toward off any possible transfer one year-ahead forecasts made for 10 the other hand, futures prices also have of revenues from Mexico to the U.S. trea- commodity prices over the 1979-88 pe- shown biases, typically underforecasting sury through U.S. foreign tax credit pro- riod. His main findings are: subsequent spotprices. Someresearchers visions. * The division's forecasts tend to attribute this futures discount bias to A potential investor might find show positive forecast errors - overesti- time-varying risk premia. Others assume Mexico's new 2 percent assets tax, be- mating future spot prices. that agents are risk-neutral and that bi- cause ofits partial noncreditabilityagainst * Among the expectations models ases reflect market inefficiency and the U.S. taxliabilities,acauseforconcern.An estimated, the adaptive expectations failure of rational expectations. alternative minimum tax on an adjusted model appears to describe the division's The informational value of futures base that includes tax preferences as part forecast behavior most closely. prices for forecasting depends on the size of taxable income could achieve the same * The division's forecasts are stabi- of the risk premium relative to the purpose but would probably be fully cred- lizing, whatever the expectations model expectational error. A recent study found itable against U.S tax liabilities. used. There are no indications of "band- that expectational errors dominate the This paper - a product of the Public wagon" behavior. forward discount bias of the foreign ex- Economics Division, Country Economics * The division'sforecasts are far from change rate and that the risk premium is Department -is part of a larger effort in static since they put much less weight on small, relatively stable, and uncorrelated PRE to promote sound public policies in current spot prices than other expecta- with the expectational error. the development of the private sector in tions data - they are not as adaptive as Choe investigates whether commod- developing countries. Copies are avail- others to the latest price changes. ity futures prices exhibit similar charac- able free from the World Bank, 1818 H * The rationality of the division's teristics. Healsoestimatesarelationship Street NW, Washington DC 20433. Please forecasts cannot be rejected. between futures prices and price expecta- contact Ann Bhalla, room N10-059, ex- This paper - a product of the Inter- tions. His main findings include: tension 37699 (41 pages with figures and national Commodity Markets Division, * The rational expectations hypoth- tables). International Economics Department - esis is more widely rejected with futures is part of a larger effort in PRE to under- prices than with the division's forecasts. stand the short- and long-run behavior of * Risk premia and expectational er- 435. Rational Expectations primary commodity prices and the impli- rors are equally important in explaining and Commodity Price Forecasts cations of movements in these prices for the futures forecast bias - so futures the developing countries. Copies are avail- prices have to be adjusted for risk premia Boum-Jong Choe able free from the World Bank, 1818 H to be useful for short-term forecasting. Street NW, Washington DC 20433. Please * The variance of risk premia is not Forecasts for the primary commodity mar- contact Sarah Lipscomb, room S7-062, larger than that ofexpected price changes ket by the Bank's International Commod- extension 33718 (22 pages with tables). for most commodities. ity Markets Division - with significant * The risk premium appears to be but not excessive adaptation to spot-price correlated with the futures discount for at movements - probably are reasonable, least half the commodities. Policy Research Working Paper Series 19 * Futures prices are more heavily a better job than economists on average. 438. How Redistribution Hurts influenced by current spot prices than by This finding supports the view that insti- Productivity in a Socialist expected future prices. tutional analysis is a speciality distinct Economy (Yugoslavia) This paper - a product of the Inter- from economics, and thatspecializedtrain- national Commodity Markets Division, ing - whether in a technical specialty or Milan Vodopivec International Economics Department - in disciplines such as public administra- is part of a larger effort in PRE to under- tion or social sciences other than econom- In socialist economies, profitable firms stand the short- and long-run behavior of ics -- can improve one's ability to analyze are taxed to subsidize unprofitable ones, primary commodity prices and the impli- institutions and design ID interventions. and productive workers subsidize unpro- cations of movements in these prices for Second, the data strongly suggest that ductive workers. Yugoslav firms, the developing countries. Copies are avail- more experienced people tend to do better Vodopivec concludes, produce less because .able free from the World Bank, 1818 H ID work. While experience and educa- of both types of redistribution. Street NW, Washington DC 20433. Please tional background are highly correlated, contact Sarah Lipscomb, room S7-062, each appears to make an independent Socialism as practiced in Eastern Europe extension 33718 (23 pages with charts contribution to the quality of ID treat- is characterized by massive income redis- and tables). ment. Third, country experience adds con- tribution. Vodopivec focuses on (1) siderably to the quality of lD work. interfirm redistribution, consisting of These findings lead the authors to taxing profitable firms in order to subsi- 437. Institutional Development make several recommendations. First, dize unprofitable ones, and (2) intrafirm Work in the Bank: specialized public sector management di- redistribution, consisting of the compres- A Review of 84 Bank Projects visions can be useful in improving the sion of personal income differentials Bank's ID work in adjustment and techni- within a firm. Cheryl W. Gray, Lynn S. Khadiagala, cal assistance loans, but they are no sub- Vodopivec constructs a theoretical and Richard J. Moore stitute for expertise and sensitivity to ID model of redistribution of income as prac- concerns within the country departments ticedin Yugoslav firms. Empirical results Institutional development work in Bank themselves (ideally through the inclusion lead him to conclude that efficiency in projects can be improved through careful of at least one ID specialist on the staff of production could be improved at no cost if attention to staffing, organization, work each such department). Second, the Bank such redistribution were abolished. Fur- assignments, and managerial commit- should continue to emphasize sector- thermore, economies in which much of ment. specific training and experience - par- GNP is redistributed through bargaining ticularly line management experience - are bound to be inefficient also in distri- To assess the quality of institutional de- in hiring staff for the sector divisions. bution - because some groups are less velopment (ID) work in recent Bank Third, residentmissions should playmore able to represent their common interests projects, and the factors affecting that of a role in project design and supervision than others. Contrary to a common belief, quality, Gray, Khadiagala, and Moore than they do now. Fourth, greater empha- socialist countries can not be praised on reviewed the design of 84 projects ap- sis on project supervision is needed. Few the count of equity either. proved by the Board in 1988. They found incentives now existfor good supervision, Increasingwagedifferentialsmaynot the following: and responsibility for project outcomes be too controversial or difficult a task in The Bank's record on ID is mixed. ID appears to be weak. Yugoslavia. More difficult will be the is- treatment was judged good in 43 percent Finally, the Bank's best institutional sue of interfirm transfers, and to prevent of the projects, adequate in 24 percent, work is done when managers are most them the government should: and weak in 33 percent. ID treatment committed to ID goals. Managers can * Stop subsidizing enterprises (from tended to be better in investment projects improve the quality of ID work by giving either government or enterprise sources). - particularly in infrastructure, energy, clear signals - through hiring practices, * Make the fiscal system unselective and human resources - than in adjust- work assignments, policy papers, andtransparent(applyuniformtaxrates, ment loans. Among regions, Asia and Af- speeches, and (most important) reviews unburden enterprises of parafiscal "fi- rica had a larger percentage of well-de- of individual loans - that ID is crucial to nancial investments," and reduce the signed loans than EMENA and LAC. the Bank's mission of promoting develop- system's technical complexity by reduc- Of the people working on ID issues, ment. ing the variety of taxes enterprises pay). 44 percent were technical specialists, 27 This paper - a product of the Office * Impose positive interest rates (in percent were economists, 18 percent were of the Vice President, Development Eco- real terms) on any kind of loan - for lawyers, financial analysts, project offic- nomics - is part of a larger effort in PRE example, by indexing debts. ers, or country officers, and 11 percent to understand and support the process of Vodopivec claims that socialist coun- were people with specialized ID training. institutional development in developing tries lack adequate mechanisms to pre- Consultants played only a minor role ex- countries. Copies are available free from vent such redistribution - that ill-de- cept in agricultural projects. the World Bank, 1818 H Street NW, fined property rights, together with a Several staff characteristics appear Washington DC 20433. Please contact monopartypolitical system, generatesuch to affect the quality of ID treatmentin the Lois Lockyer, room N6-037, extension redistribution. Changing that means in- design of Bank projects. First, technical 36969 (27 pages with boxes and tables). troducing new mechanisms to: and institutional specialists appear to do * Provide alternative services on the 20 Policy Research Working Paper Series basis ofimpersonal (market) decisionmak- able economic effects while utilizing scarce Thailand's recent boom has been accom- ing, thus supplantingbargainingbetween administrative resources. plished in an economy open to external interest groups, where feasible. The lack of success of planning, to- forces. Despite the fiscal correction * Where impersonal decisionmaking gether with the growing understanding of achieved in 1986-89, expansion of domes- is not feasible (as in fiscal and monetary the importance of incentives and mar- tic demand made itself felt in a widening policy), supplement current institutions kets, have contributed to the decline of of the current account deficit. This deficit by providing checks and balances in po- planning in the 1980s. The question re- partly reflects the need for a surge of litical decisionmaking. mains, then, what should the role of the capital spending to develop export pros- The peaceful revolutions in Eastern public sector in developing countries be? pects and to provide the necessary infra- Europe have removed political obstacles This question may be addressed by con- structure - but care must be taken that to introducing such changes, but imple- sidering the choice between public and investment not get too far out of line with menting them may be a long, painful private enterprises in the manufacturing the economy's long-term savings poten- process. sector, the size of the government, the tial. Interfirm and intrafirm redistribu- implications of public investments, and How well the country's financial sec- tion shouldbe abolishedanda social safety the evaluation of public sector projects. tor can provide the investment funds the net established - one that does not ham- Available evidence indicates the su- boom demands depends partly on its abil- - per efficiency (as in Sweden). Dethroning periority of private enterprises over pub- ity to mobilize savings, on official policy all oldinstitutionsin socialist countries in lic enterprises. It further appears that about credit allocation, and on the degree a "great leap," however, might be like increases in the size of the government to which capital is free to flow interna- throwing out the baby with the bath wa- adversely affect growth performance in tionally. ter. Many institutions deserve abandon- developing countries. Finally, increases Resource mobilization in Thailand is ment, but in a radically changed environ- in the share of public investment tend to impressive: its liquidityratio is surpassed ment, worker participation in profit- be associated with a decline in the share in only a handful of developing countries. sharing and decisionmakingmayincrease of total investment in GNP and with a fall There are some selective credit mea- productivity, as it does in developed mar- in investment efficiency. sures - mainly favoring agriculture, ag- ket economies. Nevertheless, there is evidence that ribusiness, and commodity exports - but This paper - a product of the Social- infrastructural investments favorably af- these are either relatively small in scope ist Economies Division, Country Econom- fect private investment. Atthe same time, or tend to be only partly enforced, so they ics Department-is part ofa larger effort such investments should be subject to distorttheallocationofereditonlyslightly. in PRE to investigate the behavior of rigorous project evaluation so that appro- A number of quasi-fiscal requirements firms in socialist economies. Copies are priate choices may be made among alter- add about 1.5 percentage points to gross available free from the World Bank, 1818 native investments. They should also be banking spreads. H Street NW, Washington DC 20433. based on multiannual programs. Thus, The interest-rate ceilings on bank Please contact Julia Lutz, room N6-037, the usefulness of planning re-emerges in loans have probably lowered the cost for extension 36970 (39 pages). the confines ofpublic sector investmentin some nonprime borrowers but may have infrastructure. increased rates for others and excluded This paper - a product of the Office some high-risk borrowers. 439. Indicative Planning of the Vice President, Development Eco- Capital movements are restricted, in Developing Countries nomics - is part of a larger effort in PRE and there is evidence that domestic mon- to study development policies. Copies are etary conditions have a short-run effect Bela Balassa available free from the World Bank, 1818 on wholesale interest rates. But whole- H Street NW, Washington DC 20433. sale interest rates tend to converge to The lack of success of planning, together Please contact DECVP, room S9-047, ex- foreign levels in the medium term, sug- with the growing understanding of the tension 33769 (23 pages). gesting that monetary policy has only a* importanceofincentives and markets, have short-term effect. contributed to the decline of planning in Easterly and Honohan make recom- the 1980s. The question remains, then, 440. Financial Sector Policy mendations for developing monetary what should the role ofthe public sector in In Thailand: A Macroeconomic policy instruments and for recasting and developing countries be? Perspective reducing quasi-fiscal and credit alloca- tion impositions on the financial system. Indicative planning involves the estab- William Easterly and Patrick Honohan This paper -a product of the Macro- lishment of sectoral targets which are not economic Adjustment and Growth and compulsory for the private sector and are How well Thailand's financial sector can Financial Policy Divisions, Country Eco- imbedded in macroeconomic projections provide the investible funds demanded by nomics Department - is part of a larger that pertain to a period of several years. the country's current boom depends partly effort in PRE to analyze links between Indicative planning has been widely prac- on its ability to mobilize savings -through macroeconomic policy and financial sec- ticed in developing countries during the official policy on credit allocation and tor performance. This work is related to a postwar period. At the same time, the through the movement of capital interna- research project on the macroeconomic review of the experience of these coun- tionally. consequences of public sector deficits. tries indicates that it failed to have favor- Copies of this paper are available free Policy Research Working Paper Series from the World Bank, 1818 H Street NW, tiations of a long-term relationship be- contact Sheilah King-Watson, room Washington DC 20433. Please contact tween lenders and a borrower depends on 025, extension 31047 (57 pages). Raquel Luz, room N11-057, extension the commitment opportunities of lenders 34303 (68 pages with figures and tables). and their legal privileges vis-a-vis other lenders. Cooperative equilibria can be un- 442. IndIan Women, Health, attainable for the coalition oflenders due and Productivity 441. Inefficient Private to institutional distortions. The impor- Renegotiation of Sovereign Debt tance of legal institutions within and Meera Chattejee across creditor countries for efficiency of Kenneth M. Kletzer renegotiations is discussed at length. Documentation of the interaction of In- Informational asymmetries are an dian women's poor health status and low -Private renegotiation of debt repayments additional source of distortions in the productivity and evidence that raising the_ and new loans is inefficient because ofthe resource allocation sustained through economic value ofwomen is ultimately ths creditors' seniority privileges and lack of bargaining over repayments and new most effective way of improving thei- commitment and the inadequate informa- loans. Because a borrower may be able to health. tion creditors have about debtors' policy conceal that she would be willing to repay choices. as contracted, she may be able to renego- To overcome constraints on Indiar tiate debt-service obligations to her ad- women's access to health care requires The negotiation of sovereign debt repay- vantage. In an equilibrium with imper- social interventions (freeing women t. ments and of new loans after default may fect; information about debtor character- seek health care), economic interventions yield inefficient outcomes that justify in- istics, the loan and renegotiation offers (improving the opportunity costs of their tervention by creditor country govern- made by lenders anticipate this possibil- doing so), and service interventions (mak- ments and international financial insti- ity leading to less initial lending and a ing relevant health care services more tutions. Kletzer analyzes possible distor- faster build-up of a debt overhang. easily and widely available). tions arising in renegotiations between The paper also presents a model of Over thelong term, the most effective private creditors and sovereign borrow- strategic bargaining with asymmetric in- means of improving women's health and ers. He argues that legal privileges ac- formation about the debtor government's reducingfertilitylevels are those that will corded to existing creditors in their home social preferences to capture the con- raise the perceived economic value of jurisdictions can distort the flow of re- straints that the domestic political envi- women. sources for capital formation abroad. Se- ronmentimposes on debt-servicing. Credi- Among the other issues discussed in niority privileges for old lenders convey to tors may delay agreement to elicit private this major report are the following: them some of the social returns from new information, and the consequent suspen- Women get less to eat than men, lending, reducing the potential rewards siori of inflows leads to a socially ineffi- which limits their physical development, for those whomightprovidethe newfunds. cient capital accumulation path in this reproductive success, and productivity. A simple dynamic model is presented dynamic model. The cycle of malnutrition produces low in which the motivation for borrowing The analysis stresses the distinction birth weight and low infant and maternal from abroad is to smooth consumption between explicit contracts with state-con- survival - which encourages another overtime when national income is subject tingent repayment schedules and long- roundofhighfertilityandattendantstress torandomfluctuations. The borrower can- term relationships created by simple con- on the women and on society's resources. not commit to make future repayments to tracts that exchange resources for an abil- Efforts to improve women's partici- creditors due to sovereign immunity. Pay- ity to impose sanctions whose value is pation in the labor force should be linked ments are made by the borrower to avoid negotiated ex post. Because institutions to efforts to provide support facilities for credible suspensions ofaccess toconsump- created by creditor country governments child care and maternal and child health. tion-smoothing opportunities. These are convey legal privileges that distort the The critical target group for fertility imposed in the future, in contrast to a allocation of resources in the bargaining planning is rural adolescent girls, who repeated static model in which sanctions process, the paper urges investigation of must be given educational and vocational -are traded for payments contemporane- official alienation of these privileges, opportunities and prepared for marriage ously. regulatory reform, and introduction of and motherhood. Half of all rural girls Time inconsistency arises because alternative financial instruments that aged 15 to 19, and 44 percent ofall girls in lenders cannot commit to accept future embody opportunities for creditor com- this age group, are married. Providing net resource transfers which, in some mitment. more and better education and employ- contingencies, they will wish to renegoti- This paper - a product of the Debt ment for girls and women is an important ate. Therefore, renegotiation of simple and International Finance Division, In- strategy for delaying the marriage age debt contracts expost need not lead to the ternational Economics Department - is and reducing fertility and infant mortal- equilibrium path achieved using state- part of a larger effort in PRE to determine ity. contingent contracts when commitment the conditions under which debtor coun- In the short term, the most effective ispossible.Newcapitalinflowstoheavily- tries benefit from debt and debt service means of improving women's health is to indebted countries will not be forthcom- reduction operations. Copies are avail- increase the number and improve the ing when further lending is socially effi- aVle free from the World Bank, 1818 H training and deployment of village-based cient. The bargaining conduct in renego- StreetNW,WashingtonDC20433.Please health care workers (mainly women) and 22 Policy Research Working Paper Series their ability to deliver health care ser- Before these programs, inflation was or the exchange rate is used as an anchor. vices to women in their homes. higher, more unstable, and more clearly In either case, growth will suffer in One way to strengthen the function fiscal in Argentina than in Brazil. These the short or medium run. and local connections of these women differences all but disappeared after the Argentina and Brazil should shift might be to organize their services and Austral and Cruzado programs, as both toward orthodox stabilization programs training around a single major health countries underwent similar inflation-sta- and avoid price controls (particularly a intervention: distributing iron-folate tab- bilization cycles. wage-price freeze in the private sector) to lets to control anemia, which affects more There is a pattern to those cycles. restore credibilityto conventional anchors. than 60 percent of Indian women. Anemia Inflation falls dramatically in response to This paper - a product of the Macro- increases women's susceptibility to ill- a stabilization program based on wage- economic Adjustment and Growth Divi- ness, complications in pregnancy, mater- price controls andremains low formonths. sion, Country Economics Department - nal deaths, and survival, generally. Thus Then inflation accelerates as controls are is part ofalarger effort in PRE to examine. it lowers their productivity. removed and eventually becomes explo- stabilization policies. It was funded by Improving health, nutrition, and sive, often reachinghyperinflationarylev- the research project "Stopping High In- family planning services - all three to- els. A new round of controls sets the stage flation" (RPO 674-24). Copies are avail- gether - will improve the balance be- for the new cycle, able free from the World Bank, 1818 H tween the energies women expend in pro- Kiguel and Liviatan address the ques- Street NW, Washington DC 20433. Please duction and reproduction and their re- tion of why neither country succeeded in contact Raquel Luz, room N11-057, ex- wards. sustaining a high but stable rate of infla- tension 34303 (35 pages with figures and This paper -a product of the Women tion. tables). in Development Division, Population In their view, the type of instability and Human Resources Department - is that emerged after the failure of the het- part of a larger effort in PRE to under- erodox shocks came about because the 444. The Political Economy stand the linkages between improving countries relied heavily on income poli- of Inflation and Stabilization women's access to education, extension cies to stop inflation. The repeated use of in Middle-Income Countries training, credit, health care and other these controls, together with firms' and public resources, and increasing women's workers' pessimism about future govern- Stephan Haggard and Robert Kaufman productivity andthusfamily welfare. Cop- ment actions, caused the instability. ies are available freefrom the World Bank, One of the main problems in these Macroeconomic stability is most precari- 1818 H Street NW, Washington DC 20433. countries is to establish a minimum de- ous, and stabilization most likely to be Please contact Rose Vo, room 89-125, ex- gree of credibility in the government's delayed, where the party system is frag- tension 35108 (130 pages, with figures disinflationary policies and in the mented or polarized, and tables). sustainability of the fiscal adjustment, something no stabilization program has Drawing on case studies of 58 episodes of done in Argentina in the last 30 years. inflation and stabilization in 17 middle- 443. The Inflation-Stabilization Presumably this will require imple- income Latin American and Asian coun- Cycles In Argentina and Brazil menting basic fiscal reform aimed at con- tries, Haggard and Kaufman analyzed vincing the public that adjustment is sus- the political economy ofinflation and sta- Miguel A. Kiguel and Nissan Liviatan tainable. Relying on high public sector bilization. They concluded that political prices and a fall in real wages during the factors that affect macroeconomic stabil- The repeated use of price and wage con- freeze is not enough because these mea- ity and stabilization efforts include popu- trols is likely to destabilize inflation in the sures are not immune to inflationary list movements, elections, and pressures medium run. The similar cyclical pattern shocks. from interest groups. of inflation observed in the aftermath of It is also necessary to restore cred- Macroeconomic stability is most pre-' the failures of the Austral plan in Argen- ibility in the governments' commitment carious, they found, where the party sys- tina and the Cruzado plan in Brazil is to stand behind the nominal anchors, tem is fragmented or polarized, reinforc- mostly linked to anticipations about the whatever the cost. Thisisa differentkind ing social and economic cleavage among introduction ofprice controls. The hetero- ofcredibilityissue.The governments must contending groups and exacerbating po- dox approach is risky if not accompanied be willing now to maintain the announced litical instability. Stabilization is invari- by an adequate adjustment in the budget exchange rate or monetary target even if ably delayed in such a setting. deficit. pessimistic expectations result in Where rates of inflation are low or overvalued currency or high real interest moderate, democratic and authoritarian The Austral plan in Argentina and the rates. governments seem equally capable of Cruzado plan in Brazil were the first Given their cyclical recent histories, implementingstabilization policies. In this stabilization programs in recent years there is no way to avoid the confrontation sample, virtually all high inflation was that succeeded (albeit temporarily) in between pessimistic expectations and the brought down only under the auspices of drastically reducing inflation in the short effort to set nominal anchors. This con- authoritarian regimes - underscoring run. They also had a lasting effect in the frontation will resultin amonetary crunch the challenges facing the newly democra- sense of changing the pattern of inflation or in overvaluation of the currency, de- tizing Latin American and Central Euro- in both countries. pending on whether the monetary supply pean governments. Policy Research Working Paper Series 23 These cases suggest, however, that terprises that operate in uncompetitive ture, estimates, and validation. They institutional arrangements that insulate markets may face little pressure to oper- present a stand-alone, counterfactual ap- economic decisionmaking from partisan ate efficiently. plication of a trade liberalization scenario conflict can contribute to successful stabi- Lack of competition may also exacer- for Mexico. lization under democratic auspices. bate the problem of asymmetric informa- The conclusion: If human consump- This paper- a product of the Macro- tion between ownersandmanagers. Own- tion is the welfare criterion, trade liberal- economic Adjustment and Growth Divi- ers of public firms - citizens and taxpay- ization improves the average consump- sion, Country Economics Department - ers - are unlikely to exert pressure on tion possibilities for the Mexican people. is part of a larger effort in PRE to un- public enterprises to operate efficiently. Lower prices formaize andsoybeans shift derstand the political economy of stabili- And public firms may be protected from consumption possibilities outward, with zation and structural adjustment. Copies insolvency by "soft" budget constraints. an increased price for sorghum offset by -are available free from the World Bank, Kranton points out the need for an efficient input substitution in livestock 1818 H StreetNW, WashingtonDC 20433. integrated theory of public production (to production. Please contactAludia Oropesa, room N11- help formulate policies to minimize costs) The cost of this improvement is sig- 019, extension 39176 (64 pages with and more empirical work to explain the nificantly less domestic production of tables). differences in costs between public and maize and more variation in producer private enterprises. prices formaize and sorghum. As a result, This paper - a product of the Trans- maize imports may reach very high levels 445. Pricing, Cost Recovery, port Division, Infrastructure and Urban on occasion. For a government that pre- and Production Efficiency Development Department - is part of a fers to produce most of a major food grain In Transport: A Critique larger effort in PRE to improve policies on domestically, this may be a high price to pricing, cost recovery, and efficient re- pay. But in the long term, the food secu- Rachel E. Kranton source use in transport. Copies are avail- rity cost of maize imports appear to be able free from the World Bank, 1818 H much lower. Public sector pricing policies may under- Street NW,Washington DC 20433.Please This paper - a product of the Agri- mine incentives to reduce costs. Therefore contact Wendy Wright, room S10-055, cultural Policies Division, Agricultural measures topromotecostreduction should extension 33744 (45 pages). andRural Development Department-is be part of any pricing policy reform de- part of a larger effort in PRE to under- signed to increase cost recovery. stand the dependence of domestic agricul- 446. MEXAGMKTS: A Model turalmarketsondomesticmacroeconomic Drawing on developments in industrial of Crop and Livestock Markets policy and the macroeconomic and trade organization and analyzing the U.S. ex- In Mexico policies of major trading partners. Copies perience in reforming Conrail, Kranton are available free from the World Bank, emphasizes that policies to reform public Gerald T. O'Mara and Merlinda Ingco 1818HStreetNW,WashingtonDC20433. enterprises should first promote cost re- Please contact Cicely Spooner, room N8- duction. Pricing policies aimed at cost The MEXAGMKTS model allows an ex- 035, extension 30464 (61 pages with recovery should be undertaken only in ploration ofthe effects on individual com- graphs and tables). conjunction with general enterprise re- modity markets ofMexico's domestic mac- form, to ensure that the pricing scheme roeconomic policies or of the macroeco- does not undermine the enterprise's fi- nomic and sectoral policies of Mexico's 447. Analyzing the Effects of U.S. nancial and operational discipline. trading partners. Agricultural Policy on Mexican Kranton discusses five sources of in- Agricultural Markets Using efficiency in public transport: The genesis of the model MEXAGMKTS the MEXAGMKTS Model * The goals of the enterprise or the was the perception that agricultural poli- regulation of its operations. cies in Mexico (and many other countries) Gerald T. O'Mara * The structure ofthe outputmarket. are often second-best responses to the * The control mechanism between negative side effects of broad macroeco- This model simulationsuggests thatprices government and the enterprise. nomic and international trade policies. and trade in Mexican agricultural pro- * The managerial incentive struc- MEXAGMKTS was designedtoallow duction are sensitive to policy changes in ture. analysis of the relationship between such U.S. agriculture under a scenario oftrade * The conditions of employment. agricultural policies and different macro- liberalization for Mexico. Even when public enterprises are bent economic and international trade regimes. on maximizing consumer welfare, costs MEXAGMKTS is part of a set of O'Mara uses results from simulations of are not necessarily minimized. Control interlinked macroeconomic ane sectoral the FAIRMODEL, USAGMKTS, and mechanisms that allow for asymmetric models of Mexico and the United States MEXAGMKTS models to analyze the ef- information between layers of manage- (with enough specifications for the rest of fects of changes in U.S. agricultural policy ment and provide performance incentives the world to close the system). on Mexican agricultural markets. encourage efficiency. Regulation may O'Mara and Ingco discuss the histori- He concludes that under a scenario of cause inefficiencyby distortingincentives cal context in which MEXAGMKTS was trade liberalization for Mexico, Mexican and creating protected markets. And en- developed as well as its economic struc- agricultural production, prices, and trade 2,I Policy Research Working Paper Series are quite sensitive to agricultural policy tions of various alternative U.S. agricul- heavily on current economic circum- changes in the United States. tural policy scenarios, to estimate the stances. Plausible changes in U.S. agricul- effects of various feed grain policy instru- This model helps countries that trade tural variables (of 10 percent, say) indi- ments. with the United States to sort out the cate possible changes of 10 to 15 percent Plausible U.S. agricultural policy ad- effect of current economic circumstance in the border prices Mexico faces. justments can alter border prices facing on U.S. policies. The extent of such changes depends world trading partners by 10 to 15 per- This paper - a product of the Agri- on the state of the agricultural sectors cent. The extent of these adjustments cultural Policies Division, Agricultureand an .macroeconomies in the United States depends heavily on the current state of Rural DevelopmentDepartment-is part anc the rest of the world. And the magni- the U.S. agricultural economy-and they ofalarger effort in PRE to understand the tuee and direction of the Mexican re- are transmitted to other grain and live- dependence of domestic agricultural mar- sponse depends on the state of Mexico's stock markets in varying degrees. kets on domestic macroeconomic policy - macroeconomy and agricultural sector. This paper - a product of the Agri- and the macroeconomic and trade policies The ability to discern the effects of a cultural Policies Division, Agriculture and ofmajor trading partners. Copiesareavail- give2n policy change in the United States, Rural DevelopmentDepartment-ispart able free from the World Bank, 1818 H although difficult, would be of significant ofa larger effort in PRE to understand the Street NW, Washington DC 20433. Please value to Mexican policymakers under dependence of domestic agricultural mar- contact Cicely Spooner, room N8-035, ex- trade liberalization. kets on domestic macroeconomic policy tension 30464 (34 pages with tables). This paper - a product of the Agri- and the macroeconomic and trade policies culitural Policies Division, Agriculture and ofmajor trading partners. Copies are avail- Rural Development Department - is able free from the World Bank, 1818 H 450. Portfolio Effects of Debt- oart of a larger effort in PRE to under- Street NW, Washington DC 20433. Please Equity Swaps and Debt Exchanges stand the dependence of domestic agri- contact Cicely Spooner, room N8-035, ex- with Some Applications cu'tural markets on domestic macroeco- tension 30464 (42 pages with tables). to Latin America nonic policy and the macroeconomic and .-ade policies of major trading partners. Daniel Oks Copies are available free from the World 449. Analyzing the Effects of U.S. Bank, 1818 H StreetNW, Washington DC Macroeconomic Policy on U.S. This modelexplains why debt-equityswaps 20433. Please contact Cicely Spooner, Agriculture Using the USAGMKTS tend to raise the steady-state price of sov- rom N8-035, extension 30464 (23 pages Model ereign debt in Chile and Braziland reduce wi:th tables). it in Argentina and Mexico. Richard Just Oksproposesaportfolioequilibriummodel 44&o A Model of U.S. Corn, Countries that trade in agricultural com- for assessing the short-term and long- SoThum, and Soybean Markets modities with the United States need to term macroeconomic effects of debt ant the Role of Government sort out the effect of U.S. macroeconomic buybacks and debt equity-swaps. Pog rams (USAGMKTS) policy on U.S. agriculture. This report He examines the main results in the describes the results of simulating the light ofrecent Latin American experience Ric-nard E. Just effects of U.S. macro policy on U.S. agri- with voluntary debt reduction. He shows culture. that in the short-term, debt-equity swaps This estimated model of corn, sorghum, are inflationary and raise real equity and and soybeans markets (USAGMKTS) The USAGMKTS model was developed to sovereign debt prices - and that foreign sere;as as the U.S. agricultural sector in a determine the effects ofpotential changes debt buybacks at a discount raise real study of the effects of U.S. agriculture and in U.S. policy on the border prices of corn, equity and sovereign debt prices. racroeconomic policy on Mexico's agri- sorghum, and soybeans. The steady-state impact of debt-eq- cul6ural sector. It is part of a set of interlinked mac- uity swaps on sovereign debtpriceshinges roeconomic and sectoral models that link on the values of the following parameters: This model of U.S. corn, sorghum, and Mexicoandthe UnitedStates(with enough the foreign resource transfer a country aybeaans markets also includesU.S.mar- specification for the rest of the world to can make, the ratio of domestic equity ket- for beef, hogs, and poultry-because close the system). held by foreigners to a country's foreign oftheir importance and endogeneity with The macroeconomic effects of mon- debt, the terms of the debt-equity ex- respect to U.S. feed grain policies, which etary and fiscal policy are estimated us- change, the rate of profit or equity, the ars major determinants of corn and sor- ing the FAIRMODEL model of the U.S. rate of profit remittances, and the tech- ghm prices. macroeconomy. nology (decreasing, constant, or increas- Themodelispartofasetofinterlinked The results show that the effects of ing returns to scale). zectoral and macroeconomic models that U.S. macroeconomic policies on pricing Estimates of these parameters indi- lin. Mexico and the United States (with and exports can be substantial. Recent cate that debt-equity swaps raise the enugh specification for the rest of the and pending macroeconomic policy ad- steady-state price of sovereign debt in worid to close the system). justments can change prices 15 percent or Chile and Brazil and reduce it in Mexico. Just reports the results ofthe simula- more. Moreover, the response depends This paper - a product of the Debt Policy Research Working Paper Series 25 and International Finance Division, In- 452. Modeling Investment Behavior conclude whether crowding out or in oc- ternational Economics Department - is in Developing Countries: An curred at the macroeconomic level ( to part of a larger effort in PRE to assess the Application to Egypt accept the alternative hypothesis) but it macroeconomic effects of voluntary debt is possible to draw conclusions about what reduction. Copies are available free from Nemit Shafik did not happen (the null hypothesis). the World Bank, 1818 H Street NW, The model also provides aframework Washington DC 20433. Please contact This model of investment behavior takes for analyzing the effects of government Sheilah King-Watson, room S8-025, ex- into account certain characteristics com- policy by considering explicitly the role of tension 31047 (37 pages with tables). mon to developing countries, such as the a number of possible instruments such as oligopolistic structure of markets, putty- the exchange rate, the quantity of credit clay technology, the inelastic supply of available to the private sector, and the 451. Productivity, Imperfect nontraded capital goods, and financial composition and financing of the govern- Competition, and Trade repression. mentbudget. Futureresearch maychoose Liberalization in C6te d'ivoire to test other empirical proxies, such as Investment functions are notoriously dif- protection, within the same framework. Ann E. Harrison ficult to estimate, particularlyin develop- This paper - a product of the Inter- ing countries. Shafik presents a model of national Economic Analysis andProspects If structural changes affect the nature of the determinants of private investment Division, International Economics De- competition in an economy, both changes that takes into account common charac- partment - is part of a larger effort in and levels of change in productivity may teristics of a developing economy. PRE to understand the determinants of be mismeasured. Firms'decisions aboutinvestment are private investment in developing coun- outcomes of the oligopolistic structure of tries. Copies are available free from the Research on productivity often focuses on markets, putty-clay technology, the in- World Bank, 1818 H Street NW, Wash- the relationship between productivity in- elastic supply of nontraded capital goods, ington DC 20433. Please contact Joseph creases and such structural changes in an and financial repression. These factors Israel, room S7-218, extension 31285 (66 economy as trade reform. result in an important role for markups, pages with figures and tables). If those structural changes affect the internal financing, demand, and the cost nature of competition or affect scale, how- ofinvestment goods - defined, not as the ever, both the changes and the level of interest rate, but as the price outcome 453. Do Steel Prices Move change in productivity may be from the interaction of supply and de- Together? A Cointegration Test mismeasured. mand in the market for capital goods. Harrison extended previous studies By constructing an index of the rela- Ying Qian to measure the relationship between pro- tive price of investment goods, it is pos- ductivity, market power, and trade re- sible to provide a more meaningful indi- Lack of international comparability n forms. Using a panel of 287 firms in Cbte cator of the true cost of capital to the firm crude steel prices presents a problem in d'Ivoire, she analyzed changes in firm under a repressed financial system. In an constructing an econometric model of the behavior and productivity, measuring economy with a well-functioning credit global steel market. market power before and after the 1985 market, the Keynesian equilibrium con- trade reform. dition equating the marginal efficiency of Harrison found evidence that market investment with the interest is likely to The commonly used measures of crude power fell in several sectors following the hold. But under financial repression or steel prices are the weighted average of changes in trade policy. She also shows where credit markets are imperfect, the the prices of steel products and the index that ignoring the effects of liberalization interest rate is not a true reflection of the of the weighted average of prices based or, has led researchers to mismeasure the cost of capital to the firm. Instead, a com- a certain year. effect of trade reform on productivity. bination of the price of investment goods But in the context of constructing an This paper - a product of the Trade and. the quantity of capital available to econometric model of the global steel Policy Division, Country Economics De- the private sector appears to be a more market - a model that treats steel in partment - is part of a larger effort in realistic proxy. crude steel equivalent terms - these PRE to analyze the relationship between Shafik tests the model measures are not comparable interna- trade policy and industrial efficiency. econometrically for Egypt, using the re- tionally. Copies are available free from the World cent literature on cointegration and error If the various product prices are Bank, 1818 H StreetNW, Washington DC correction to avoid spurious regressions cointegrated, it is appropriate to use the 20433. Please contact SheilaFallon, room and to estimate the long-run equilibrium price of the most widely produced and N10-025, extension 38009 (41 pages with relationship between investment and its traded product in the model (uncoate-d tables). determinants. steel sheet) as an indicator of the general She discusses the limit of testing movement of crude steel prices. econometrically whether the government This would solve the problem of in- "crowds in"or"crowds out" private invest- ternational comparisons. ment and the impossibility of construct- Qian tested the cointegration of stee ing the counterfactual. It is not possible to product prices, using import unit values 26 Policy Research Working Paper Series for France and West Germany and survey Asset and liability management is This paper establishes a simple general market prices for the United States. designed to quantify risk exposure explic- equilibrium trade model to estimate the He concludes that thehypothesisthat itly in the planning process, and to carry effects of the Multifibre Arrangement the price of uncoated steel sheet out hedging activities with financial (MFA) on world trade in clothing, espe- cointegrates with the prices of other steel market transactions. It could provide an cially on exports from developing coun- products holds in most cases in France opportunity to reduce the effects of exter- tries. and Germany. The same is not true of the nal shocks and complement a country's The MFA, in effect for more than a United States, which may point to quality long-term development planning. quarter of century, has strongly influ- problems with the price data. Drawing on the recent studies on enced world trade in textiles and clothing. Use of the price data ofuncoated steel theory and practice, Masuoka provides a Although intensive negotiations on the sheet as the indicator of crude steel prices primerfor persons interestedinacountry's abolition of the MFA are under way in the in the global steel model would thus seem risk-management. Emphasizing practi- Uruguay Round, there is little hope for its appropriate for capturing long-term price cal aspects, the primer presents five ma- imminent demise. movements of various steel products. jor issues: The MFA greatly affects developing Using cointegration tests, the paper * The concept of asset and liability countries because the MFA restrictions alsoinvestigates the relationship between management at the country level and the are imposed discriminatively on the ex- macroeconomic variables and steel prod- methods of risk exposure measurement. ports from developing countries. Until uct prices. * Basic characteristics and mecha- very recently, however, the emphasis of This paper - a product of the Inter- nisms of modern financial instruments - empirical studies of the MFA was on im- national Commodity Markets Division, including forward, futures, option, and porting developed countries rather than International Economics Department - swap contracts and examples of simple exporting developing countries. is part of alarger effort in PRE to investi- risk-hedging activities with these instru- One of the main features of the esti- gate the decline since the mid-1970s in ments. Commodity risk management in- mation in this paper is its recognition of the use of metals in the industrial coun- struments, such as commodity swaps, the underuse of MFA quotas. Contrary to tries. Whether or not this change in in- commodity-linked loans, and commodity popular belief, the MFA quotas are some- dustrial countries' demand for metals is bonds are also explained. times not binding because the use of the permanent is of great importance for the * Actual applications of modern fi- quotas is very low. developing country producers of the raw nancial techniques by some developing Although the structure of the model materials. Copies are available free from countries. is simple (two markets and six groups of the World Bank, 1818 H Street NW, * Factors impeding developing suppliers), itis useful for analyzingvari- Washington DC 20433. Please contact countries' use of modern financial tools ous effects of the MFA, including: Sarah Lipscomb, room S7-062, extension and some ways to remove these factors. * The trade-suppressing effect (how 33718 (33 pages with figures and tables). * The World Bank's technical assis- much the clothing exports from restricted tance programs for helping developing LDCs are suppressed due to the MFA). countries improve their risk management. * The trade-diversion effect among 454. Asset and Liability This paper - a product of the Office markets (how much the clothing imports Management In the Developing of the Vice President, Development Eco- are increased when one of the markets, Countries: Modern Financial nomics - is part of a larger effort in PRE either the United States or the European Techniques - A Primer to explore the possibility of developing Community, unilaterally lifts the MFA countries using financial market transac- restrictions). Toshiya Masuoka tions to hedge their exposure to external * The spillover effect (how much un- shocks. Copies are available free from the restricted LDCs benefit from the restric- The increased volatility ofexchange rates, World Bank, 1818 H Street NW, Wash- tions on other LDCs). interest rates, and primary commodity ington DC 20433. Please contact Sook Domestic producers in the developed7 prices over the last two decades has high- Bertelsmeier, room S9-039, extension countries, especially those in the United lighted the importance for developing 33767 (56 pages with boxes, figures, and States, have benefited greatly from the countries of managing these risks. tables plus 6 pages of appendix). MFA restrictions. The value of shipments of clothing by U.S. producers is more than The increased volatility ofexchange rates, $3 billion higher ($400 million for EC interest rates, and primary commodity 455. A Formal Estimation producers) than they would have been prices over the last two decades has high- of the Effect of the MFA otherwise. When MFA quotas and tariffs lighted the importance for developing on Clothing Exports from LDCs are taken together, the value of clothing countries of managing these risks. Asset shipments by U.S. producers is $8 billion and liability management - a risk-man- Junichi Goto higher ($1.5 billion for the EC producers) agement technique to systematically than without such restrictions. control price risks with market-based fi. Exporting developing countries are losing The spillover to unrestricted devel. nancial instruments - has been devel- a lot under the MFA's restrictions on trade oping countries (such as most Latin oped and broadly used in the industrial in clothing: the trade-suppressing effects American countries) is much smallerthan countries. But its applications to develop- on restricted suppliers are big; the spill- often alleged. The spillover effect to unre- ing countries have been limited. overeffectson unrestrictedLDCs are smalL stricted LDCs is less than $200 million (or Policy Research Working Paper Series 27 a mere 2 percent of the value of shipments Pharmaceutical industries in Africa de- User fees. User fees can be assessed by the unrestricted LDCs). pend on imported raw materials that are forprimary care (Bamakoinitiative). This But the trade-suppressing effect on expensive when bought in small quanti- may have the advantage of achieving the restricted LDCs (such as Hong Kong ties. It is generally cheaper to import sustainability in primary care, but dis- and South Korea) is much larger than generic drugs than to produce them lo- courage the poor from using health ser- that of spillover. Due to the MFA, the cally. The paper discusses procurement vices. It is not known what the poor have value of the clothing exports from re- strategies that have resulted in savings to give up to have access to health services stricted LDCs is suppressed by more than in several countries. for which they must pay. For tertiary $1 billion, even in the short run. In the Drugs are wasted due to poor storage care, user fees can prevent the overuse of long run, after various adjustments, the conditions, inadequate security, and de- services. lost shipments of LDCs restricted by the ficient inventory control systems. Proper User fees, where they exist, cover MFA amount to more than $2 billion. selection, quantification, storage, and in- only a small fraction of expenditures for This paper - a product of the Inter- ventory management of drugs could alle- health services. Cost recovery through national Trade Division, International viate this problem. userfees cannot be an objective as the cost Economics Department - is part of a Drugs are also wasted because of of providing health services far exceeds larger effort in PRE to assist developed inappropriate and over-prescription, and patients' ability to pay. The purpose of and developing countries evaluate the noncompliance by patients. Efforts to in- user fees must be to facilitate distribution effects of tariffs and nontariff barriers on volve prescribers in using standard treat- of health services. international trade. Copies are available ment schedules and to inform patients Community financing. Another pos- free from the World Bank, 1818 H Street about the proper use of drugs could result sibility is to raise the funds for health NW, Washington DC 20433. Please con- in improved efficiency. services through collective action by the tact Maria Teresa Sanchez, room S8-040, Africa has special characteristics in community. There needs to be a clearly extension 33731 (32 pages with figures its land- use patterns, population density, perceived collective need and a commu- and tables). and road infrastructure that affect the nity organization. However, the contribu- distribution of drugs. Counterfeit drugs tions collected are often in kind and not and difficulties in financing essential easily convertible into cash. 456. Improving the Supply drugs are also serious problems. The ad- Revolving fund programs for nutri- and Use of Essential Drugs vent of AIDS has presented new chal- tion and sanitation merit consideration. In Sub-Saharan Africa lenges in the provision of essential drugs. Health insurance. Health insurance This paper - a product of the Popu- has limited use in Africa. There are few S. D. Foster lation, Health, and Nutrition Division, examples of health insurance plans, and Population and Human Resources De- they are generally provided by employers The supply and use of essential drugs in partment - is part of a larger study in in urban areas. Insurance programs are Sub-SaharanAfrica is at best inadequate PRE of African health policy. A policy expensive to run, provide incentives for because of inappropriate practices in the paper is being written based on the study. members to overuse services, and may selection, procurement, storage, distribu- Copies of this paper are available free have the effect of lowering the quality of tion, andprescription ofdrugs. This paper from the World Bank, 1818 H Street NW, care. recommends solutions basedon drug poli- Washington DC 20433. Please contact This paper - a product of the Popu- cies implemented successfully in several Otilia Nadora, room S6-065, extension lation, Health, and Nutrition Division, African countries. 31091 (38 pages with tables). Population and Human Resources De- partment - is part of a larger study in Few people in Sub-Saharan Africa have PRE of African health policy. A policy access to essential drugs.Andwhere drugs 457. Financing Health Services paperisbeing writtenbasedon the study. are available, they are inequitably dis- In Africa: An Assessment Copies of this paper are available free tributed and improperly used. The main of Alternative Approaches from the World Bank, 1818 H Street NW, problems - and possible solutions - are: Washington DC 20433. Please contact Drugs are distributed through the Germano Mwabu Otilia Nadora, room S6-065, extension private sector, nonprofit organizations, 31091 (22 pages). and governments. The private sector con- African economies are performing poorly, sists of a large proportion of unqualified and it is unlikely that governments will illicit peddlers of drugs who dispense finance the health sector by raising addi- 458. Does Japanese Direct Foreign adulterated or expired drugs without pre- tional tax revenues or by borrowing from Investment Promote Japanese scription. Pharmacies run by qualified international sources. What are the possi- Imports from Developing pharmacists are a small minority. Non- bilities for user fees, community financ- Countries? profit organizations - usually humani- ing, and health insurance as alternatives? tarian, secular, or religious - and public And should cost-recovery be an objective? Kenji Takeuchi agencies run by governments also distrib- ute drugs. Only economic growth can significantly One way for developing countries to pen. African countries do not have the increase the finances available for health etrate the Japanese market could be to rely capacity to produce the drugs they need. services in Africa. onexpansionofJapan's intrafirm imports 28 Policy Research Working Paper Series -particularly for machinery production 459. Policies for Economic 460. Does Food Aid Depress Food - from Japanese manufacturing affili- Development Production? The Disincentive ates in these countries. Dilemma In the African Context Stanley Fischer and Vinod Thomas Japanese direct foreign investment (DFI) Victor Lavy in developing countries has been export- The economic policies developing coun- market-oriented. Exports were the domi- tries should follow to sustain economic Food aid has a significant positive effect nant sales destinations for the affiliates growth and development. on food production. Any disincentive in- in the primary industries. duced by the additional supply of food is In manufacturing, although local Fischer and Thomas's explanation of the offsetby thepositive effects -particularly markets were the dominant sales desti- policy and institutional reforms needed to when the basket of food aid is very differ- nations of the Japanese affiliates, the sustaineconomicgrowth and development ent from the locally produced basket, as is share of exports increased from 26 per- is organized around several main points: often true in Sub-Saharan Africa. cent in 1972 to 42 percent in 1986. The * The appropriate macroeconomic only subsectors in which export's share framework will ensure stability. Fischer Food aid averages only 10 percent of total remained below 30 percent in 1986 were and Thomas discuss the essentials of fis- financial aid to developing countries, but iron/steel, transport machinery, and cal, monetary, and exchange-rate policy in certain African countries-Botswana, chemicals. as well as investment and savings ratios Cape Verde, Mauritius, and Mauritania The share of Japanese affiliates in and strategies. - it represents more than half the food Japan's imports of manufactures from * Sectoral pricing and development available for consumption. Asia(where Japanese manufacturing DFI and regulatory environments must ad- What is the relationship offood aid to was most active) is found to have been dress key constraints on growth, while food production and to commercial im- particularly high in the electrical ma- respecting the need for stability. The au- ports? Three main hypotheses have been chinery industry (50-100 percent), very thors discuss economywide issues as well advanced: significant for transport machinery (ris- as issues related to agricultural, indus- * Food aid is an addition to local food ing from 30 percentin 1980 to 77 percent trial, and human resource development, suppliesthatultimatelylowerspricesand in 1986), precision machinery (rising from poverty alleviation, and sustainable de- acts as a disincentive to local producers. 30 percent to 60 percent), and general velopment (observingenvironmental con- The immediate effects may be small, but machinery (rising from 20-24 percent to siderations). a lagged response can be generated. 65-75 percent). * The domestic economy must be in- * Food aid displaces commercial im- For manufacturing as a whole, the tegrated with the global economy to in- ports and does not add to domestic food share increased from 15 percent in 1980- crease competition and improve competi- supplies. If there is full displacement, 83 to more than 20 percent in 1986. tiveness. Fischer and Thomas discuss re- prices should not change and there will be Thus for many types of machinery forms of commercial and trade policy and no effect on incentives. production, Japanese affiliates in Asia the capital account. * Food aid is determined to some seem to have become established as a * The government must create the extent by local food production. But in the base for exporting to the Japanese market proper enabling environment - an ap- medium run it can generate a positive through intrafirm trade. propriate legal, regulatory, institutional, supply effect that increases the level of In some other manufacturing and policy framework. Fischer and Tho- production. subsectors, Japanese affiliates have di- mas discuss areas in which the quality Lavy applied vector auto-regression rected their sales efforts to other overseas and competence of governments need im- (VAR) analysis to data for Sub-Saharan destinations, graduallyreducing the share proving as well as the nature and appro- Africa to test these hypotheses. The issue going to the local market. priate extent of the government's role in is not whether food aid is good or bad but This paper - a product of the Inter- providing social services, managing eco- how it can be used to promote economic national Trade Division, International nomic policy, and fostering development development and improve the nutrition of Economics Department - is part of a of the private sector. the food-insecure. larger effort in PRE to analyze the pros- The authors conclude with an analy- Lavyfoundthatfoodaidhasasignifi- pects for developing country exports, par- sis of the Bank's changing emphasis on cant positive effect on food production. ticularly manufactured exports, in major types of lending, and with a discussion of Any disincentiveinducedby the additional industrial country markets. Copies are majorremaining uncertainties, including supply of food is offset by the positive available free from the World Bank, 1818 the role of external funding and interna- effects. H Street NW, Washington DC 20433. tional development agencies. The total net increase in food supply Please contact Jean Jacobson, room S8- This paper, a background paper for following an increase in food aid is, how- 037, extension 33710 (41 pages with the 1991 World Development Report, is a ever, of lower magnitude than expected - tables). product ofthe Office ofthe Vice President, - because food aid tends to replace almost DevelopmentEconomics. Copies are avail- an equivalent amount of regular food able free from the World Bank, 1818 H imports. StreetNW,WashingtonDC20433.Please The extent to which an increase in contact the World Development Report food aid will lead to a drop in prices and office, room P4-009, extension 38064 (38 output depends on whether it leads to a pages with tables). net increase in the food supply. If com- Policy Research Working Paper Series 29 mercial imports decline as food aid in- * Investments in education and have a much different nontax and regula- creases, the disincentive effect is miti- training for girls increase their participa- tory policy than developed countries do, gated. tion and productivity in the labor market with such features as more protection, Food aid is more likely to have a more than a similar investment in boys' rationed foreign exchange, price controls, positive effect in countries that use fer- education increases theirs. Those invest- black markets, andcreditrationing. Shah tilizer intensively. One possible explana- ments also reduce fertility and improve and Whalley argue that these features tion for this is that countries that enjoy a the education of children and the health can greatly complicate - even obscure - relative abundance ofregular food aid can and nutrition of all family members. Re- the incidence effects of taxes in develop- use theresources made available through turns are high on human capital invest- ing countries. reduced food imports to investmorein the ments in women -at least as high as an For several taxes, taking such fea- agricultural sector-whichismorelikely equivalent investment in men. The gov- tures into account can reverse signs or when such an investment is a condition ernment must identify ways to channel substantiallyaltertraditionallyprepared imposed by the aid donors. more resources to women's education. estimates of incidence effects. This paper - a product of the Wel- * Households and communities are Shah and Whalley discuss the impli- -fare and Human Resources Division, probably the main sources of gender bias cations of their findings for country lend- Population and Human Resources De- in parental investment in children's edu- ing programs and comment on how the partment and the African Food Security cation, so the government must identify extent to which nontax policy reform has Unit - was written as a background ways to influence the household's deci- already been implemented affects the sig- paper for the Food Aid in Sub-Saharan sions about education. Policy research is nificance of the points they raise in this Africa study. Copies are available free needed to idehtify how households and paper. from the World Bank, 1818 H Street NW, communities affectparental decisions and This paper - a product of the Public Washington DC 20433. Please contact how the government can intervene effec- Economics Division, Country Economics Angela Murphy, room S9-114, extension tively to affect this decisionmaking. Department-is part of a larger effort in 33751 (28 pages with tables). This paper -a product of the Women PRE to promote the development of tax in Development Division, Population and systems in developing countries that are Human Resources Department - is part simple, fair, and efficient, and advance 461. Labor Market Participation, of a larger effort in PRE to determine if poverty alleviation objectives. Copies are Returns to Education, and Male- and how women's productivity (and thus available free from the World Bank, 1818 Female Wage Differences In Peru famnilywelfare) are improved when women H Street NW, Washington DC 20433. are given more access to education, exten- Please contact Ann Bhalla, room N10- Shahidur R. Khandker sion, training, credit, health care, and 059, extension 37699 (62 pages with other public resources. Copies are avail- tables). Private schools are more effective than able free from the World Bank, 1818 H public schools in increasing productivity StreetNW, Washington DC 20433.Please -and returns on female education are at contact Belinda Smith, room S9-125, ex- 463. Redefining Government's least as high as returns on male educa- tension 35108 (51 pages with tables). Role in Agriculture in the Nineties tion, so governments must find ways to improve the public schools and increase Odin Knudsen and John Nash, with girls'schooling. 462. An Alternative View of Tax contributionsbyJames Bovard,Bruce Gardner, Incidence Analysis for Developing and L. Alan Winters Using household survey data from Peru, Countries Khandker estimates differences between The legitimate roles ofgovernment in ag- .male and female participation in the la- Anwar Shah and John Whalley riculture -especially investment and re- bor market, productivity (measured by search - have often been subordinated to wages), and economic returns to school- Traditional tax incidence analysis makes roles for which government has shown ing. assumptions that do not apply in develop- little competence, suchasprice setting and He tries to identify characteristics ing countries - estimates change signifi- intervention in markets. These priorities that enable some women, although not cantlywhenanalystsconsidersuchfactors must be reversed. many, to participate in the labor market; as high levels of protection, rationed for- to determine whether the private returns eign exchange, price controls, black mar- Government policies in agriculture have toeducationvarybygenderandinfluence kets, and credit rationing. been costly and misdirected worldwide, school enrollment; and to evaluate the argue Knudson and Nash. extent to which the male-female wage gap Despite decades of studies, tax incidence In developed countries, those policies is caused by differences in human capital. analyses for developingcountries continue have cost taxpayers and consumers hun- Khandker reaches three policy con- to be based on the same shifting assump- dreds of billions of dollars yet failed to clusions: tions usedin developed country studies- provide low-cost food while sustaining * Public schools are less effective despite obvious pitfalls. farm incomes. They have disrupted world than private schools in raising productiv- Taxes are assumed to be shifted for- trade and could create divisive trade con- ity and reducing the wage gap. Policy- ward to consumers or backward onto fac- flicts with ramifications well beyondagri- makers should make the public school tor incomes. culture. They enrich larger farmers and system more effective. But developing countries typically agroindustrialists and probably acceler- 30 Policy Research Working Paper Series ate the replacement of the family farm suggestions for change. tional level increased a husband's earn- with the large farm business. In the long Resolving the problems in agricul- ings in Israel's primary sector (in which run they have contributed to degradation tural policy requires withdrawing most workers have good jobs, with good pay, of the environment. government intervention from agricul- security, and fringe benefits) -but not in In developingcountries, those policies tural markets and recognizing economic the secondary sector (in which workers have impoverished rural people without rights: the farmers - to produce what- have low-paying, unstable, generally un- providing the food security urban con- evercommodities theyfeel will profit them attractive jobs). sumers and policymakers want. Immense bestand sell them freelyathome or abroad; These new findings are consistent funding wasted on subsidies of fertilizer, the traders - to move goods in expecta- with the general implications of the dual credit, and urban consumers should have tion of profits, without fear of repression; labor market model. been invested in areas where private and consumers - to buy foods at the Thispaper-aproductoftheEduca- markets do not work well because the lowest prices, from foreign or domestic tion and Employment Division, Popula- costs or benefits are difficult to internal- sources. tion and Human Resources Department ize for private agents - infrastructure or This paper - a product of the Trade -is part of alarger effortinPRE to assess some basic research, for example. Policy Division, Country Economics De- the impact of women's education on pro- This inefficiency need not continue, partment - is part of a larger effort in ductivity and family welfare. Copies are argue Knudsen and Nash. The Uruguay PRE to investigate the impact of indus- available free from the World Bank, 1818 Round is an ideal opportunity for devel- trial country policy on developing coun- H Street NW, Washington, DC 20433. oped and developing nations to strike a tries and how impediments to structural Please contact Valerie Charles, room S6- bargain, the elements of which should be adjustment in the latter countries can 228, extension 33651 (17 pages with to: best be removed. Copies of this paper are tables). * Make agricultural trade subject to available free from the World Bank, 1818 the full discipline of the GATT by elimi- H Street NW, Washington, DC 20433. nating waivers and exemptions that have Please contact Karla Cabana, room N10- 465. How integrated Are Tropical set agricultural commodities apart from 037, extension 37946 (122 pages with Timber Markets? other products in their treatment under tables). the GATT. Panos Varangis * Bring developing countries fully into the GATT, by eliminating their spe- 464. Does A Woman's Education Do tropical timber price series - across cial status, which allows them to avoid Affect Her Husband's Earnings? species, products, and regions - move reciprocity in trade policy reform and to Results for Israel in A Dual Labor together, at least in the long run? Most do, protect infant industries or use quanti- Market tests show. tative restrictions for balance of payments purposes. Shoshana Neuman and Adrian Ziderman The tropical timber market is character- * Get all countries to reform their ized by multiple species, multiple prod- agricultural policies, to reduce the many Household survey data indicate that in ucts, and regional patterns of production policy-induced distortions that plague the Israel a woman's education increases her and trade. In such a market, finding a sector. Measures that need reform in- husband's earnings at higher occupational representative price is a difficult and per- clude import restrictions, export subsi- levels but not at lower ones. haps an irrelevant task. So Varangis con- dies, and dumping of surplus commodi- ducted tests to see whether prices from ties by the OECD countries; and subsidies A recent focus on decisionmaking within different species, products, and regions to fertilizer, irrigation, and credit that the household (rather than by the indi- move together, at least in the long run. If distort trade incentives in both developed vidual) has opened a new field of research they do, the use of a representative price and developing countries. into the economics of marriage and the may be appropriate. The analysis could Such a bargain would result in a family. also be seen as a test of whether the Asian redefinition of governments' role in agri- Recent research indicates that in the and African/European markets are inter- culture, increased sectoral efficiency na- United States, at least, a wife's education dependent. tionally, and a more smoothly functioning has a positive effect on ahusband's earning The following are the test results: and tightly knit world agricultural trad- capacity - a focused instance of the eco- * All series, except that for teak, ing system. nomic benefits of(particularly nonmarket) were found to be cointegrated. The results Many of the unproductive policies association. Even if education did not get for teak may be explained on the grounds detailed by Knudsen and Nash have a women jobs or improve their ability to that the series was the only domestic common cause, they say: governments' function as housewives and mothers, it is price series; all other prices are interna- tendency to see problems as resolvable by not wasted. tionally traded. Also, but not very likely, taking income from some and giving it to Such cross-productive effects may be the relative shortness of the teak series others. What is needed, they say, is to different in the type of dual labor market may have reduced the tests' power. reconsider the government's proper role that exists in Israel. * Tropical timber prices in the major in agriculture - and the institutional Drawing on data from the Israel La- geographical regionsmove together. There changes that would follow from that. bor Mobility Survey, Neuman and maybe short-term deviations,butmarket Knudsen and Nash are specific in their Ziderman found that the wife's educa- forces pull these regional prices together Policy Research Working Paper Series 31 in the long run. 467. Structural Adjustment declined. Primary enrollment ratios * Given that prices move together, and Living Conditions tended to decline in the adjusting coun- the long-run forecast for one has implica- In Developing Countries tries, especially those that reduced per tions for the others. capita spending on education. * Log and sawnwood prices move NanakKakwani,EleneMakonnen, andJacques Still, the data do not show a clear together, which is to be expected since van der Gaag overallrelationshipbetweenadjustingand logs are the primary input for sawnwood. nonadjusting countries in trends in most This paper - a product of the Inter- By and large, social indicators in develop- of the social indicators. By and large so- national Commodity Markets Division, ing countries improved in the 1980s, but cial indicators improved in the 1980s - International Economics Department - progress was slowest in the countries that but progress was slowest in the countries ispartofalargereffortinPRE toexamine needed it the most. The data show unac- that needed it the most. -price formation in primary commodity ceptably high mortality rates, low school Improving the living conditions of markets. Copies of this paper are avail- enrollment levels, and extensive undernu- the poor calls for growth-orientedpolicies, able free from the World Bank, 1818 H trition in many parts of the world. Of the effects of which will be felt only in the StreetNW, Washington DC 20433. Please particular concern are the declining pri- long run. During adjustment, immediate contact Dawn Gustafson, room S7-044, mary enrollment ratios in intensely ad- interventions are neededtomitigate short- extension 33714 (25 pages, including justing countries. This erosion of human run welfare losses experienced by readily graphs and tables). capital is inconsistent with the main ob- identifiable groups. jectives of adjustment: sustainable long- The analytical foundations of those term growth. interventions mustbe strengthened. And 466. Is There An Intra-Household long-term social sector policy must be Kuznets Curve? Kakwani, Makonnen, and van der Gaag developed to guarantee sustainable suc- compare trends in per capita private con- cess against the correlates of poverty. Lawrence Haddad and Ravi Kanbur sumption, social sector indicators, and Such policies have been shown to be fea- government spending in the social sec- sible and affordable and hold for adjust- There probably is -so that the benefits of tors, between countries thatreceived Bank ing and nonadjusting countries alike. an increase in household well-being need adjustment loans and countries that did Thispaper-aproductoftheWelfare not fully "trickle down" to the most disad- net. and Human Resources Division, Popula- vantaged members of the household - Most surprising was the lack of re- tion and Human Resources Department particularly in the poorest households. sponse in absorption to adjustment mea- -isparofalarger effortinPREtoassess sures. Intensely adjusting countries the impact of adjustment on living stan- Is there a "Kuznets curve" for intra- showed more growth in private con- dards in developing countries. It was pre- household inequality? Does intra-house- sumption in 1985-87 than did pared as background for the Second Re- hold inequality first increase, peak, and nonadjusting countries. Moreover, the port on Adjustment Lending (RAL II). An then decrease as the household becomes governments role relative to GDP in- extended version of this paper was pre- better off? creased rather than decreased. This re- sented at the World Bank/IFPRI Poverty Haddad and Kanbur found both mains the case in some intensely adjust- Research Conference in October 1989. theoretical and tentative empirical sup- ing countries even if interest payments Copies of the paper are available free port for this hypothesis. are not considered. from the World Bank, 1818 H Street NW, The policy significance ofthis finding There is little a priori reason, then, to Washington DC 20433. Please contact is that the benefits of an increase in believe that the poor are being hurt by Brenda Rosa, room S9-137, extension household well-being need not fully adjustmentbecauseabsorptionisreduced. 33751 (57 pages, including tables). "trickle down" to the most disadvantaged But there is still cause for concern: real members of the household. This is par- per capita spending in the social sectors ticularly true for the poorest households. decreased in many countries, especially 468. Does the Structure This finding should be taken into those adjusting intensely. of Production Affect Demand for . account in the design of supplementary Health-related data show continued Schooling In Peru? feeding programs, for example. Research progressin the 1980s, probably evenfaster is now under way on this topic. than in the 1970s, for adjusting and Indermit Gill This paper - a product of the Re- nonadjusting countries alike. Food pro- search Administrator's Office - is part of duction data show total per capita growth The more important the services sector, a larger effort in PRE to investigate ap- of10 percent for 1980-87-but significant the more likely girls are toget more educa- propriate targeting of poverty-alleviation growth in Asia overshadowed large de- tion. The more important industry, the policies. Copies are available free from clines in Africa, Europe, and the Middle more likely boys are to get more education. the World Bank, 1818 H Street NW, East. Undernutrition increased in low- Both sexes get more schooling as the sup- Washington DC 20433. Please contact income African countries but wasreduced ply price of schooling falls, but girls gain Jane Sweeney, room S3-026, extension everywhere else. more than boys do. 31021 (29 pages). School enrollment rates improved significantly in the 1970s but only a little Analyses of gender differences in invest- in the 1980s - and in some countries ments in human capital typically em- 32 Policy Research Working Paper Series phasize family resources as the determin- improving access to secondary schooling, -if not the sole -income opportunity for ing factor. These studies usually find that for example - and (on the demand side) growing numbers of the poor. Interna- investmentsin male offspringare greater, expanding the services sector. The de- tional aid agencies have explored policies that these differences narrow as the level mand-side prescription contradicts the to make informal businesses more profit- of household wealth increases, and that World Bank and IMF policy advice that able. But this surge of interest is not equity is also affected by the composition developing countries foster the growth of based on much empirical evidence about of household wealth (proxied by the tradables to service their external debt. what determines the firms' performance. amount the mother earns and/or her edu- This paper - a product of the Women Nor is the value ofwomen's entrepreneur- cational level). in Development Division, Population and ial activities reflected in the national ac- Gill addresses one drawback of these Human Resources Department - is part counts. analyses: they do not explicitly consider of a larger effort in PRE to determine if Smith and Stelcner analyze Peru's the factors that determine the demand for and how women's productivity (and thus urban informal sector - particularly schooling and health - other than tastes family welfare) are improved when women women's role init-basedonatheoretical -andwhythisdiffersformenandwomen. are given more access to education, model of informal retail trade (the domi- Gill uses the regional structure of the training, credit, health care, and other nant nonfarm family enterprises), using economy, proxiedby the shares of services public resources. Copies are available free data from the Peru Living Standards Sur- and industry in regional gross domestic from the World Bank, 1818 H Street NW, vey (PLSS). product (GDP), as an indicator of the Washington DC 20433. Please contact They address these questions: What demand for educated workers. By exam- Maria Abundo, room S9-123, extension factors explain differences in the perfor- ining whether the level of schooling as a 36820 (55 pages, including tables). mance ofretail businesses? Ifthese can be function of shares of services and indus- identified, what types of policy initiatives try differs for men and women, he looks might improve the performance of firms, for gender bias in the demand for school- 469. Modeling Economic Behavior especially those run by women? Among ing. Gill estimates schoolingdemandfunc- In Peru's Informal Urban Retail their recommendations: tions for males and females using house- Sector * Channeling credit to small busi- hold data from the Peruvian Living Stan- nesses. dards Survey, and provincial data from J. Barry Smith and Morton Stelcner * Promoting cooperatives and self- the Peruvian census. help associations, which provide credit, Gill's primary findings are: Small family businesses that operate facilitate bulk purchases, and establish * As services and industry increase outside theformalsystem comprise a large markets for entrepreneurs. asa share of GDP, relative to agriculture's partoftheeconomyindevelopingcountries * Providing technical assistance, share, the demand for schoolingincreases and more than half the Peruvian street such as short-term instruction in basic for both boys and girls. (Both industry vendors are women. This model of infor- management. and services reward education more than mal activity in Peru's urban areas elicits * Makingit easier and cheaper to get agriculture does. Parents form expecta- policy recommendations to improve pro- business licenses. tions about the sector their children are ductivity (especially women's) in the infor- * Provide or facilitate cooperative likely to work in as adults and choose mal sector. childcare centers, facilities for preparing levels of schooling accordingly.) food, and neighborhood facilities for basic * As services' share in GDP increases The informal sectoris a collection ofloosely health care to reduce the heavy workload compared to agriculture (holding organized, small-scale competitive family typical for women. industry's share constant), girls'demand businesses that rely little on nonfamily This paper-aproductof the Women for schooling increases more than boys' hired labor, use labor-intensive technolo- in Development Division, Population and demand for schooling. gies, and operate largely outside of the Human Resources Department -is part * An increase in industry's share in legal, bureaucratic, and regulatory of a larger effort in PRE to determine if- GDP relative to agriculture (holding ser- framework in terms oflicenses, taxes, and and how women's productivity (and thus vices' share constant) is more closely as- contractual obligations. familywelfare)areimprovedwhenwomen sociated with an increase in the demand In Lima, Peru, the informal sector are given more access to education, exten- for schooling of boys than of girls. makes up halfthe labor force, accounts for sion, training, credit, health care, and * A decrease in the supply price of 61 percent of the hours worked, and gen- other public resources. Copies are avail- schooling increases the level of schooling erates an astounding 39 percent of GDP. able free from the World Bank, 1818 H attained by both sexes, but the gain is More than half the street vendors are Street NW, Washington DC 20433. Please larger for women. women. contact Maria Abundo, room S9-123, ex- * Increases in wealth, all else being In the informal sector, the free play of tension 36820 (87 pages with diagrams equal, are associated with increases in market forces determines returns to pro- and tables). both sexes' demand for schooling. ductive factors, especially labor. Informal What are the policy implications of enterprises are concentrated in low-in- these findings? Some ways to increase come areas of urban centers, but rural educational levels, especially those of households in Kenya and Peru, among women, include (on the supply side) low- other countries, have joined. ering the supply price of schooling - The informal sector is an important Policy Research Working Paper Series 33 470. What Do Alternative Measures 471. The Determinants of Farm Concerns about the inadequacy of of Comparative Investment and Residential investmentfinanceforagriculturalhouse- Advantage Reveal About Construction in Post-Reform China holds are not yet justified in areas where the Composition of Developing the supply of such production inputs as Countries' Exports? Gershon Feder, Lawrence J. Lau, Justin Lin, fertilizer is unsatisfactory. But once the and Xiaopeng Luo input supply system improves, limited Alexander J. Yeats credit will become a constraint -and the Forced consolidation of small Chinese rural credit system, which is geared to Developingcountries'"revealed"compara- farms into larger farms is unwarranted rural industry and commerce, will have to tive advantage in labor-intensive exports but China needs mechanisms to facilitate be reoriented. tends to fall as the requirements increase free-market land transactions, better Radical revision of the land tenure for natural resources, physical capital, supplies of such inputs as fertilizer, and - system is not called for as the land leasing and human capital - including higher -when those are available -a reoriented system seems not tobe hamperinginvest- per capita wages and more professional or rural credit system. Early extensions of ment. But likely erosion of investment technical personnel. farmers'leases on state-owned land would incentives will be averted if leases are reassure farmers about the government's extended before they mature, reassuring Despite their extensive applications in commitment to the present system. farmers aboutthe government'slong-term research and policy studies, no product- commitment to the present system. level comparisons hadbeen made between After 20 years of collectivization, China's This paper - a product of the Agri- Bela Balassa's"revealed"comparative ad- agricultural sector was reformed in the cultural Policies Division, Agriculture and vantage (RCA) index and indices associ- last decade. Individual farm/household Rural Development Department-ispart ated with the National Bureau of Eco- units replaced collective production. of an effort to investigate rural credit nomic Research (NBER) that reflect the Households were given individual leases markets, farm investment, and agricul- standard Hecksher-Ohlin theory of com- on former commune land - first for 3-5 tural productivityin China. Thatresearch parative advantage. years, but now for 15 years, and even is part of a larger effort in PRE to deter- Yeats conducted several empirical longer for tree crops. mine howfinancial intermediation affects tests for developing countries' exports of HouseholddataonfourareasinChina economic activities. Copies are available manufactured products, partly toidentify in 1987-88 revealed patterns of spending free from the World Bank, 1818 H Street factors that often lead to differences be- on productive assets, durable consumer NW, Washington DC 20433. Please con- tween the two indices. goods, and housing. tact Cicely Spooner, room N8-039, exten- The results show that products in Using a model of household produc- sion 30464 (35 pages). which developing countries have achieved tion andinvestment decisions, Feder, Lau, a revealed comparative advantage are Lin, and Luo analyzed data on several highly concentrated in a broad group of factors that had been thought to inhibit 472. Gains in the Education labor-intensive products; for other items, investmentin farm capital andencourage of Peruvian Women, 1940 to 1980 their RCAs are generally below unity. residential or other nonfarm investments: Within the labor-intensive group, the typically small size of farms together Elizabeth M. King and Rosemary Bellew however, developing countries failed to with increasing returns to scale in pro- develop arevealed comparative advantage duction; inadequate credit; and farmers' What determinesgirls'educational attain- for about half of the items. perceptions of insecurity because of pos- ment? School quality (measured by the A regression model suggests that in sible policy shifts during the life of their numberoftextbooks and teachers);changes the labor-intensive group, revealed com- leases on state-owned land or the likeli- in attitudes and better economic opportu- parative advantage falls as the require- hood of being assigned other lands when nitiesfor educated women;parents'(espe- ments increase for natural resources, for the contract matures. cially mothers') years of schooling and physical capital, andforbuman capital- What were the policy implications of occupations; and the opportunity cost of including higher per capita wages, and the study results? sending a girl to school - especially in more professional or technical personnel. If the four study sites reflect the rural families, or when mothers must hold This paper - a product of the Inter- situation elsewhere in China, jobs outside the home. national Trade Division, International policymakers' preoccupation with issues Economics Department - is part of a of farm size and consolidation are unwar- Since the mid-1950s, Peru's education larger effort in PRE to provide basic in- ranted. The production gains from con- policies have been designed to raise skill formation for analyzing the present level solidation would be limited and the costs levels and make education available to and composition of developing countries' substantial. more of the population. Those policies exports and projecting future changes in Where farms are tiny, farm size is a rested mainly on expanding the number them. Copies are available free from the problem - but coercing consolidation or of schools. As a result, school enrollment World Bank, 1818 H Street NW, Wash- recollectivization would be harmful. It rates and attainment levels rose. But an ington, DC 20433. Please contact Jean would be preferable to introduce institu- apparent parental preference to educate Jacobson, room 88-037, extension 33710 tional mechanisms and procedures to fa- sons more than daughters meant that (29 pages, including tables). cilitatemarket-inducedlandtransactions. boys' schooling levels rose more quickly More mobility of labor would also help. than girls.' Policies were not enough to 34 Policy Research Working Paper Series brings girls' schooling even with boys', 473. Adjustment, Investment, project on the sustainability of trade re- especially in rural areas. and the Real Exchange Rate form in structural adjustment programs. School quality, measured crudely by In Developing Countries Copies are available free from the World the supply oftextbooks and the number of Bank, 1818 H StreetNW, Washington DC teachers, appears to have improved the Riccardo Faini and Jaime de Melo 20433. Please contactRebeccaSugui, room schooling of women. Girls who had a text- N10-031, extension 37951 (44 pages in- book for their own use attained more than This review ofadjustment experience sug- cluding tables). halfayear of schooling than those whodid gests that sharp devaluation of the ex- not. Changes in attitudes and better eco- change rate is probably ineffective in nomic opportunities for educated women countries exporting primary goods. To en- 474. Methods for Measuring also seem to have strengthened the de- courage investment, adjustmentpackages the Effect of Adjustment Policies mand for educating rural girls. must do more to ensure a stable macroeco- on Income Distribution Parents' years of schooling and oc- nomic environment and appropriate debt cupations were significant determinants relief Anne Maasland of educational levels. The impact of these socioeconomic factors lessened over time At the center of the controversy about the There are a variety of approaches, and as the number of schools expanded and effectivenessof"adjustmentwithgrowth" country issues and data availability will primary education became more available. loan packages from the IMF and the World determine the most practical approach. The relative effects of parents'educa- Bank has been the heavy emphasis on tion differed for boys and girls. In the real exchange rate depreciation as a way Maasland reviews the different methods adult sample,both parents'educationhad to restore external balance and elicit a for measuringhow adjustment affects the a strong positive effect on daughters'edu- positive supply response. distribution of income and characterizes cation; for sons, the father's education Faini and de Melo examined the ad- them as qualitative or quantitative - had double the effect of the mother's edu- justment record for a large sample of and general equilibrium or partial equi- cation. In the youth sample, the mother's developing countries and found that ad- librium. education had a stronger effect on the justment has been far more successful for No single integrated model can an- daughter's education. These differences countries exporting manufactured goods swer all questions. The most practical reflect a preference on the part of fathers than forcountries exporting primarygoods approach for a particular country depends to send their sons to school, which moth- (mostly low-income African countries). on the issues that the country faces -and ers partly counter-balanced. Devaluation of the exchange rate in available data and resources. Peru's education policies have re- countriesexportingprimarygoodsappears In a data-poor country with no duced the direct costs associated with to be ineffective. Most of their adjustment microsurveys or good macrodata, a more going to school. But time allocation pat- has taken the form of reduced spending qualitative, partial-equilibrium analysis terns reveal that the opportunity cost to rather than increased supply. As a result, will be required. the family of school attendance could be they have not resumed sustainable If the country has a microsurvey, an effective barrier to further improve- growth. poverty profiles can be quantitative and ments in school enrollment and continu- The longer-term prospects for ex- more detailed. ation rates. Even at a young age, girls - porters of manufactured goods are much In a data-rich country, macroeco- especially in rural families - participate brighter. They show more signs of im- nomic and microeconomic data can be in the labor market and contribute sub- proving efficiency and less decline in in- combined to construct a computable gen- stantially to productive work at home. vestment than do exporters of primary eral equilibrium model with which to This paper - a joint product of the goods. generate quantitative estimates of the Education and Employment Division and Faini and de Melo found strong sup- impact of adjustment policies. the Women in Development Division, portforthedebtoverhangargument.That Between these extremes, other Population and Human Resources De- is, after controlling for other factors, they methodologies may be applicable - de- partment - is part of a larger effort in found that the resumption of private in- pending on the availability of data and PRE todeterminehowtoimprovewomen's vestment growth had been hampered in the particular focus of the reform pro- accesstoeducationindevelopingcountries countries with a heavy debt burden and gram. Partial analysis may be relevant if and if and how that education improves an unstable macroeconomic environment. a country faces special issues. theirproductivityand family welfare. The Investors postpone investment until the Maasland found that a study of the paper will be part of a book on women and uncertainty about a stabilization program effects of macroeconomic policy on distri- the economy of Peru to be published by isresolved-andlowinvestment,inturn, bution will benefit from an analysis of the Bank. Copies of this paper are avail- increases the probability of economic de- microeconomic issues that address how able free from the World Bank, 1818 H terioration. This suggests that adjustment the poor and other groups respond to the Street NW, Washington DC 20433. Please packages must do more to ensure a stable changed environment after adjustment. contact Cynthia Cristobal, room S6-033, macroeconomic environment and appro- These responses can significantly affect extension 33640 (47 pages, including priate debt relief. the outcome of real incomes and poverty. tables). This paper - a product of the Trade The importance of these feedback effects Policy Division, Country Economics De- suggests that wherever possible, general partment - is part of a PRE research equilibrium effects should be considered. Policy Research Working Paper Series 35 This paper - a product of the Macro- in the same industry but different coun- ing is low in the geographical areas where economic Adjustment and Growth Divi- tries, the poor live and for the kinds of health sion, Country Economics Department - This paper - a product of the Public care the poor use, so the poor benefit little is part ofa larger effort in PRE to analyze Sector Management and Private Sector from these informal national health in- the impact of adjustment programs on Development Division, Country Econom- surance systems. income distribution. Copies are available ics Department -is part ofalarger effort The small middle class benefits most free from the World Bank, 1818 H Street in PRE to: (1) assess the divestiture expe- from health insurance in Sub-Saharan NW, Washington DC 20433. Please con- rience to date; (2) determine the factors Africa. In the private sector, employers tact Patricia Dixon, room N11-025, exten- that led to its success or failure; and (3) provide health care either directly or on sion 39175 (37 pages). suggest how the World Bank and its bor- contract - which is effectively health rowers may effectively use divestiture as insurance. As government employees, they a public policy tool to enhance economic get preferential treatment under formal 475. Does Divestiture Matter? development. This paper is a revised ver- and informal health insurance, even na- A Framework for Learning sion of a research proposal that the World tional health insurance. The countries in from Experience Bank'sResearchCommitteehasapproved Sub-Saharan Africa have not given the for funding. Work implementing the pro- poor more, or more equitable, access to Ahmed Galal posed methodology is underway in Chile, formal health insurance. Mexico, the U.K., and Malaysia. Copies of And the forms of health insurance An analytical framework for empirically this paper are available free from the adopted in Sub-Saharan Africa do not evaluating the effects of divestiture. World Bank, 1818 H Street NW, Wash- encourage efficiency. Zimbabwe, for ex- ington DC 20433. Please contact Gloria ample,whereprivateinsurancehasgrown The economic rationale for divestiture Orraca-Tetteh, room N9-069, extension rapidly since independence, has used the rests on two propositions: that it will 37646 (31 pages). U.S. Blue Cross/Blue Shield model that improve firms' productive efficiency and existed in the United States in the 1960s that it will reduce the budgetary burden and 1970s - in which the tax system that public enterprises impose. 476. Health Insurance heavily subsidized health insurance, all But there has been almost no empiri- In Sub-Saharan Africa: kinds of medical risk were covered (even cal analysis of what actually happens A Survey and Analysis for frivolous purposes), and neither the after divestiture, of which enterprises are providers or consumers of health care desirable candidates, and under what RoTald J. Vogel were encouraged to restrain costs - so conditions divestiture might improve a that health costs increased rapidly. One country's economic performance. The middle class, not the poor, benefit way or another, all the health insurance Galal provides an analytical frame- from the little health care insurance that arrangements Vogel studied have the work (partial equilibium analysis) for exists in Sub-Saharan Africa. Encourag- same perverse incentive effects that those assessing these basic arguments and ing the development ofprivate health care open-ended, cost-basedretrospectiveBlue evaluating the lessons of experience. insurance could free up morefundsfor the Cross insurance payments had on health To avoid the shortcomings of the few poor. Prepaid capitated health insurance care providers. studies that have been done, Galal says willencourage efficiency by healthprovid- Reform ofthese arrangements will be three questions must be asked: What are ers; deductibles andcoinsurance will have politically difficult. In countries with an the changes in economic efficiency and similar effects on health consumers. implicit national health coverage, more fiscal incidence, if any? What possible equity for the poor requires that more of factors explain divestiture outcomes? Based on a survey and analysis of health the MOH budget be directed their way. Whatis the causal linkbetween outcomes insurance in 23 countries in Sub-Saharan One way to do this would be to eliminate and their hypothetical determinants? Africa, Vogel reachedcertain conclusions: any favorable treatment government Galal suggests that to tease causality Most Ministry of Health (MOH) bud- employees receive in the health care sys- out of the limited data that exists on this get expenses in these countries (with the tem. The availability of more private relatively recent phenomenon, analysts possible exception of Tanzania and Ethio- health insurance would similarly free compare data on: pia) are skewed to a small, well-defined more MOH resources.Governments must * The same enterprise before and population. The well-to-do pay for the examine the regulatory and incentive at- after divestiture. "best" health care in the private sector, mosphere to be sure they are not inhibit- * Divested and undivested firms in out of their own pockets or through insur- ing the development of private health the same sector and same country. ance policies (usually from foreign insurance. * The performance of the divested sources). But they must alsobe careful that the firm and an explicit counterfactual (the Most poor people rely on the MOH private health insurance that does de- hypothetical performance of the firm had budget as an implicit or informal form of velop fosters more efficient health care. it remained public). national health insurance or on tradi- Prepaid capitated health insurance will * The performance of divested firms tional healers for whose care they must encourage efficiency by health providers; in competitive and noncompetitive mar- pay out of pocket - paying more for tra- deductibles and coinsurance have similar kets in the same country. ditional healers anddrugs than theymight effects on health consumers. * The performance of divested firms cc-pay on health insurance. MOH spend- This paper - a product of the Popu- 36 Policy Research Working Paper Series lation, Health, and Nutrition Division, The strength of the lease-contract risk of death for children under five. Early AfricaTechnical Department-was writ- arrangement in Guinea lies in the sim- weaning is responsible for up to 29 per- ten as part of a Regional Study on Health plicity ofthe institutional framework, the cent of Egyptian children's deaths. Financing, with financial support from specificity ofresponsibilities, and the clar- Children whosemothersbecomepreg- NORAD and SIDA. It was presented at a ity of accountability relationships and nant again are more likely to die if the seminar in April 1990 and will eventu- incentives. In planning investments and pregnancy begins while the child is still ally be part of a World Bank technical setting tariffs, SONEG has an incentive an infant. Ending breastfeeding is re- paper. Copies are available free from the to maintain the financial viability of the sponsible for up to 41 percent of pregnan- World Bank, 1818 H Street NW, Wash- operations on which it depends for rev- cies - 52 percent among women who do ington DC 20433. Please contact Karol enue. SEEGismotivated toincrease prof- not use contraceptives. Brown,room J9-112, extension 35073 (40 its by operating efficiently and to avoid Breastfeeding lasts an average 17 to pages, including tables). financial penalties by meeting service 18 months in Egypt, so policy should standards. probably not encourage all women to The challenges lie in the difficulty of breastfeed longer, but women who 477. Private Participation creating in SONEG a strong oversight breastfeed for only short periods should in the Delivery of Guinea's Water agency that will be able to negotiate effec- probably be encouraged to breastfeed- Supply Services tively with SEEG, and the difficulty of longer. And parents should be encour- attracting competition for subsequent con- aged to be more careful about childcare Thelma A. Triche tracts. Unless SONEGis successful, many andchildren's dietandhygieneafter wean- of the potential efficiency gains of private ing. Lease contracts provide a promising for- participation may not be captured by con- Replacement behavior in response to mat for capturing the potential efficiency sumers. children's death accounts for up to 18 gains ofprivate participation in the water Processing the IDA credit for this percent of pregnancies. It is not actual supply sector, but to ensure that these arrangement was delayed because World mortality but perceptions of a child's gains accrue to society as a whole, lease Bank procurementguidelines do notcover chances for survival that drive fertility. contracts must be carefully designed and the selection of contractors for lease con- As infant deathsbecome less common, the the responsible public authority must be tracts or concessions. With the growing proportion of replacement pregnancies capable of fulfilling the monitoring and interest in private operation of public should decline. regulatory role effectively. services, the Bank should consider de- An importantfeature of this analysis veloping appropriate guidelines for se- was that fertility (represented by preg- In 1989, the Republic of Guinea restruc- lecting contractors for lease contracts and nancy) was examined simultaneously with tured its urban water supply sector and concessions. child survival and breastfeeding, as three entered into a lease-contract arrange- This paper - a product of the Water components of a system. The analysis ment in which private interests partici- and Sanitation Division, Infrastructure involvedregressionmodelsforthehazard, pate in delivering services. and Urban Development Department - or risk, of three events occurring after a Ownership of the country's urban ispartof alargereffortin PRE toexamine live birth: another pregnancy, weaning, water supplyfacilities and responsibility the implications of private participation or the death of the child. for sector planning and investment were in the delivery ofpublic services. Copies of This paper - a product of the Popu- transferred to a new national water au- this paper are available free from the lation, Health, and Nutrition Division, thority, SONEG. A new water manage- World Bank, 1818 H Street NW, Wash- Population and Human Resources De- ment company (SEEG) was created as a ington DC 20433. Please contact Mari partment - is part of a larger effort in mixed enterprise by the government (49 Dhokai, room S10-017, extension 33970 PRE to examine family consequences of percent) and a private foreign investor- (30 pages). high fertility. Copies are available free manager(51 percent)tooperateandmain- from the World Bank, 1818 H Street NW, - tain the facilities. Washington DC 20433. Please contact If carefully designed, a lease-con- 478. Interrelations Among Child Otilia Nadora, room S6-065, extension tract arrangement can transfer maxi- Mortality, Breastteeding, 31091 (52 pages, including tables). mum commercial risk to the contractor and Fertility in Egypt, 1975-80 for day-to-day operations bus, unlike a concession, does not transfer ownership John Marcotte and John B. Casterline 479. Conversion Factors: or the burden of capital expenditures for A Discussion of Alternate Rates major new investments. Weaning children in infancy increases the and CorrespondIng Weights Recent experience with lease con- risk ofdeath for Egyptian children under tracts and concessions in C6te d'Ivoire five. Early weaning should be discour- Michael Hee demonstrated that fragmentation of re- aged. Parents should be encouraged to be sponsibilities for planning, investment, more carefulabout childcare and children's Time series of alternative conversion fac- operations, maintenance, and debt ser- diet and hygiene after weaning. tors and of corresponding weights pro- vice may lead to inefficiency and lack of vides the framework for estimating over- accountability. And revenue protection Using Egyptian data from 1975-80, allconversionfactors that are analytically clauses may erode incentives for effi- Marcotte and Casterline found that relevant and meaningful. ciency. weaning children in infancy increases the Policy Research Working Paper Series 37 The significant operational implications Observingthe limitations ofsmall domes- A comparison of the 1967 and 1979 underlying the Bank's estimates of per tic markets, Bela Balassa has advocated censuses showslittle improvementin pro- capita GNP represent important consid- low, uniform, across-the-board tariffs and ductivity overall -but these figures don't erations in systematizing the use of offi- export subsidies - that is, tariffs of X separate the effects of trade liberalization cial and other exchange rates in deter- percent balanced by export subsidies of X from the effects ofrecession, high interest mining the exchange rate tobe used in the percent - to overcome the disadvantages rates, and real appreciation. Bank's Atlas methodology. Hee explores of small domestic markets and to permit To isolate the effects of trade liberal- the potential for a system of time series the exploitation of economies of scale ization, Tybout, de Melo, and Corbo com- for various conversion factors and a corre- through specialization according to com- pared industries in which protection was sponding set of time series for weights. parative advantage. significantly reduced with industries in The framework is useful for coun- De Melo and Roland-Holst show which it was not. Several findings tries with multiple exchangerates. Itgives analytically and empirically that econo- emerged. us a way to develop time series on parallel mises of scale complicate analysis of the First, in industries for which protec- and black market exchange rates, pur- welfare effects of trade policy, especially tion was lifted, the smallest plants tended chasing-power parities, trade-related when some sectors have domestic market to expand output more. Cross-plant esti- taxes and subsidies, and potentially more. power. mates of returns to scale dropped signifi- The starting premise is that a single In particular, the standard cantly. Thesefindingsareconsistent with official exchange rate has a weight of 1.0 distortionary costs of protection under the view that exposure to foreign compe- in all years; all other rates (implicitly) constantreturnstoscalemustbe amended tition forces suboptimally small produc- have zero weights. A major component of to accommodate the welfare effects of ers toward minimally efficient scale. this framework is the redistribution of changes in scale efficiency. Second, production levels became weights among multiple exchange rates. Calculations comparing trade poli- higher and more uniform across plants in Such a matrix of conversion factors cies that achieve neutrality of incentives those industries undergoing dramatic re- and corresponding weights could provide between sales to domestic and foreign ductions in protection. the mechanism (1) for a systematic ap- markets suggest that - under the most Taken together, these results sup- proach to weighting alternative rates; (2) plausible scenarios about the entry and port the received wisdom that increased for estimating the effects of alternative exit of firms - export promotion is likely exposure to trade improves competition weighting schemes; (3) for determining to be more beneficial than protection for within an industry. the effects of incorporating parallel or sectors with increasing returns to scale. This paper - a product of the Trade black market exchange rates; (4) for pro- Illustrative calculations of optimal Policy Division, Country Economics De- viding the basis for less erratic and un- trade policy packages suggest that the partment - was prepared for the World predictable fluctuations in the data in the benefits of departing from the principle of Bank research project, "The Effects of World Bank Atlas and World Tables; and nondiscrimination between domestic and Trade Regimes on Industrial Competi- (5) for improved and more transparent export sales may be insufficient to justify tion and Efficiency" (RPO 674-46). Copies documentation of methods and "special" their higher administrative costs. are available free from the World Bank, cases. This paper - a product of the Trade 1818 H Street NW, Washington, DC This paper - a product of the Socio- Policy Division, Country Economics De- 20433. Please contactRebecca Sugui, room economic Data Division, International partment - is part of the PRE research N10-031, extension 37951 (44 pages, in- Economics Department - is part of a project "The Effects of Trade Regimes on cluding tables). larger effort in PRE toward a more ver- Industrial Competition and Efficiency." satile approach to estimating conversion Copies are available free from the World factors for the World Bank Atlas and op- Bank, 1818 H Street NW, Washington, 482. Membership In the CFA Zone: erational purposes. Copies are available DC 20433. Please contact Rebecca Sugui, Odyssean Journey or Trojan free from the World Bank, 1818 H Street roomN10-031,extension 37951(15pages, Horse? NW, Washington DC 20433. Please con- including tables). tact Estela Zamora, room S7-136, exten- Shantayanan Devarajan and Jaime de Melo sion 33706 (59 pages, including tables). 481. The Effects of Trade Reforms CFA countries fared worse than other on Scale and Technical Efficiency: comparable countries in the 1980s and 480. An Evaluation of Neutral New Evidence from Chile reduced spending - particularly invest- Trade Policy Incentives Under ments - disproportionately in adjusting Increasing Returns to Scale James Tybout, Jaime de Melo, to the external environment. This is an and Vittorio Corbo ominous sign for future growth. Jaime de Melo and David Roland-Holst Pressure from foreign competition forces For most of the 13 African members of the Under the most plausible scenarios about all firms toward common, higher levels of CFA Franc Zone, the 1980s have been a the entry and exit of firms, a policy of productivity. decade of slow or negative growth in per export promotion is likely to be more ben- capita GDP, worsening balance of pay- eficial than a policy oftrade protection for How did industrial structure and perfor- ments, debt crises, financial crises, de- sectors with increasing returns to scale. mance change after Chile's dramatic trade clining competitiveness, and an apparent liberalization? failure to adjust to the changed environ- 38 Policy Research Working Paper Series ment they inherited from the 1970s. the Nordic countries, and (2) a new tran- ingtomany developingcountriesbecause, Devarajan and de Melo reassess the sitional structure relyingonglobal quotas in principle, the "acquired rights" of the costs and benefits of membership in the with country allotments for current quota exporters can be preserved. Not for long, CFA Franc Zone in light of its members' holders, suggested by the United States however. When substantial quota expan- poor performance in the 1980s. and Canada. sions take place, as the quotas on efficient They base their assessment on com- suppliers become redundant, quota hold- parisons of the members' performance Under both scenarios, accelerated quota ings will be worthless. Interestingly indicators with indicators for comparator growth is the main device for phaseout. enough, an accelerated quota growth not groups: other countries in Sub-Saharan Country quotas, in the first approach, and differentiated across suppliers, as sug- Africa, other low- and middle-income global quotas in the second, will have to gestedby the developing countries, would countries, and other exporters of fuel and expand in such a way as to avoid a"shock" do exactly that. primary goods. when they are abolished at the end of the There is one important virtue in a Performance indicators for members phaseout. phaseout based on the current structure of the CFA Zone deteriorated more than To negotiate a quota-growth scenario of the MFA. Not only are the mechanisms indicators for other groups, especially in - whether this be in the framework of in place familiar to the negotiating par- the second half of the decade. the MFA or through global quotas - the ties, but so are the magnitudes of most of - Growth and investment rates, in parties need points of departure, such as the parameters: current quota levels, particular, fell more for CFA countries. base-year quota levels or quota growth quotagrowthratesoverthelastfewyears, This decline is attributed to the CFA rates. The guideline in the MFA was a 6 and their use ratios. If this approach is members' declining competitiveness as percent annual quota growth. Developing adopted, however, the parties have to other countries undertook adjustment countries consider this a concession ob- make a concerted effort to keep in mind programs that emphasized depreciation tained from industrial markets and re- that this is not an extension of the MFA, of the real exchange rate. quest it as the minimum base-year quota but its abolition. Controlling for changes in the exter- growth rate. This paper - a product of the Inter- nal environment, Devarajan and de Melo In fact, there were large variationsin national Trade Division, International show that CFA countries adjusted less quota growth across products and sup- Economics Department - is part of a than comparator countries during the pliers, as well as across markets, and on larger effort in PRE to provide technical 1980s. the whole quotas expanded at a signifi- support to the developing countries in the And the burden of their adjustment cantly lower rate. For the phaseout, the Uruguay Round of Multilateral Trade appears to have fallen disproportionately negotiatingparties may therefore consider Negotiations under the auspices of the on reduced spending, particularly reduced allowing some differentiation in quota GATT and to contribute to the analysis of investment - an ominous sign for future growth rates, particularly across product substantial issues therein that pertain to growth. categories. the broad development objectives of the This paper - a product of the Trade The second most important element World Bank. Copies of this paper are Policy Division, Country Economics De- in the phaseout proposals - beside ex- available free from the World Bank, 1818 partment - is part of a larger research panding quotas and abolishing them at H Street NW, Washington DC 20433. effort in PRE on the experience of eco- the end of the phaseout period - is Please contact Grace Ilogon, room S8- nomic integration. An earlier version of scrapping them along the way according 038, extension 33732(46 pages, including this paper was presented at the Confer- to some predetermined criteria and tables). ence on African Economic Issues in scheme. In the proposals, this is defined Nairobi, Kenya, June 5-7, 1990. Copies in terms of country characteristics (such are available free from the World Bank, as new entrants and least developed 484. Stock Markets, Growth, 1818 H Street NW, Washington, DC countries), specific products, product and Policy 20433. Please contactRebeccaSugui, room characteristics (such as type of fibers or N10-031, extension 37951 (28 pages, in- degree of processing), or some criterion Ross Levine cluding tables). pertaining to the historical record, such as quota use. How stock markets can accelerate growth The historical record reveals that and how policy can affect that growth 483. An Evaluation of the Main growth in highly utilized (that is, filled either directly (by altering investment in- Elements in the Leading Proposals and binding) quotas was significantly centives) or indirectly (by changing the to Phase Out the Multi-Fibre lower compared with unfilled quotas. incentives underlying the creation of fi- Arrangement Phaseout scenarios based on quota growth nancial contracts). may have to take into consideration this Refik Erzan and Paula Holmes distinction to achieve an effective relax- To help explain the role of financial mar- ation. In this context, scrapping unfilled kets in economic development, Levine Two approaches took the lead in the ne- quotas in stages, depending on their use constructs an endogenous growth model gotiations to dismantle the Multi-Fibre record, would hasten the dismantling of in which a stock market emerges to allo- Arrangement (MFA): (1)aphaseout within the MFA by allowing the concentration of cate risk. The model explores how the the framework of the MFA, proposed by efforts to deal with binding quotas. stock market alters investment incen- developing countries, the EC, Japan, and An MPA-based phaseout is appeal- tives in ways that change steady-state Policy Research Working Paper Series 39 growth rates. economic adjustment in developing coun- to the DRS, allows the user to experiment Levine demonstrates that stock mar- tries. Copies are available free from the with different forms of debt restructuring kets can accelerate growth by (1) facilitat- World Bank, 1818 H Street NW, Wash- in a simple manner. The debt module also ing the ability to trade ownership of firms ington DC 20433. Please contact Raquel allows the calculation ofthe supply sched- without disrupting the productive pro- Luz, room N11-057, extension 34303 (32 ule for foreign credit and the projection in cesses occurring within firms, and (2) al- pages, including tables). detail (by creditor) of debt stocks, capital lowingagents to diversify portfolios across flows, and interest payments. firms. Finally, since the model is based on Policy affects growth directly by al- 486. A RMSM-X Model for Turkey the concept of a consistent flow of funds tering investment incentives and indi- among all the specified sectors, itis neces- rectly by changing the incentives under- Luc Everaert, Fernando Garcia-Pinto, sary to build a consistent historical data lying the creation of financial contracts. and Jaume Ventura set for at least the base year. Appendix 1 This paper - a product of the Macro- explains how such a set of consistent economic Adjustment and Growth Divi- The theoreticaldesignofaRMSM-Xmodel, macroeconomic data was constructed. sion, Country Economics Department - its interaction with a debt module, and the The RMSM-Xmodel presentedin this is part of a larger effort in PRE to un- construction ofa consistent historicaldata paper will be extended to include more derstand the role of financial markets in set is applied to Turkey. estimated behavioral relations (RMSM- economic development. Copies are avail- XX) for future operational work on Tur- able free from the World Bank, 1818 H To improve the Bank's macroeconomic key. Applications of the RMSM-X model Street NW, Washington DC 20433. Please modeling capabilities, the Country Eco- have also been developed for Colombia, contact Ross Levine, room N11-023, ex- nomics Department is developing a con- Zimbabwe, Chile, and the Philippines. tension 39175 (33 pages). tinuum of macro models referred to as This paper - a joint product of the RMSM-X and RMSM-XX. These models Macroeconomic Adjustment and Growth share a common accounting framework Division, Country Economics Department 485. Do Labor Market Distortions that ensures economic consistency among and the Country Operations Division, Cause Overvaluation and Rigidity economic sectors. Country Department I, Europe, Middle of the Real Exchange Rate? RMSM-Xis the simplestmodel, with East, and North Africa Regional Office - an elementary economic structure. The - is part of a larger effort in PRE to assist Ram6n Lopez and Luis Riveros RMSM-XX more richly specifies the be- in the design and analysis of macroeco- havioral links among economic variables. nomic policies. Copies of this paper are Liberalization of the labor market would Everaert, Garcia-Pinto, and Ventura available free from the World Bank, 1818 substantially reduce or prevent show in detail how to specify the budget H Street NW, Washington DC 20433. overvaluation of the real exchange rate. constraints and market clearing condi- Please contact Sanjev Aggarwal, room tions in a RMSM-X model for Turkey. N11-019, extension 39176 (59 pages plus Lopez and Riveros developed a theoreti- Theyinclude six sectors: the Government, 105 pages of appendices). cal model for analyzing the effect of labor the State Economic Enterprises, the markets on the real exchange rate. They Central Bank, the domestic banking sys- applied an empirical version of the model tern, the nonfinancial private sector, and 487. Industrial Organization to four Latin American countries with the foreign sector. The different markets Implications of OR Trade Regimes: relatively different labor markets and consist of a domestically produced and Evidence and Welfare Costs macroeconomic conditions. exportable good, an importable, a money They found that distortions in the market, a domestic credit market, a quasi- Timothy Condon and Jaime de Melo formal labor market are a major factor market for Central Bank Credit, and a causing real wage rigidity and the low foreign asset market. This model can be Athree-sectorcalibratedsimulationmodel responsiveness of the real exchange rate used to project the behavior of these sec- is used to examine the welfare effects of an to nominal devaluation. tors in a simple manner, linked through increase in quantitative trade restrictions - They also found that changes in the the various markets. when production in some sectors is char- minimum wage have substantially They explain four possible closures of acterized by increasing returns to scale. broader effects on an economy's wage the model. One choice depends on whether structure than previously thought. policy variables are exogenous (the posi- The empirical evidence reviewed by In other words, liberalization of the tive closure) or targets on economic vari- Condon and de Melo suggests that in labor market could make exchange rate ables are given and policy variables are developing countries that protect trade policies more effective by preventing solved for (the normative closure). Under with quantitative restrictions (QRs), too overvaluation of the real exchange rate. both closures, a second choice, depending many domestic manufacturingfirms tend This paper - a joint product of the on whether an external credit constraint to operate on too small a scale, often Trade Policy Division and the Macroeco- or target is binding or not, is implemented. making above-average profits. nomic Adjustment and Growth Division, The interaction of the projection Cross-section econometric evidence CountryEconomics Department-is part model and a debt module is explained in -consideringfactors that influence prof- of a larger effort in PRE to identify the detail. The debt module, which in the itability in three sectors - supports the role of labor markets in the process of future shouldbecome automaticallylinked view that imports impose a discipline on 40 Policy Research Working Paper Series the behavior of domestic firms. That is, NW, Washington DC 20433. Please con- AfricaTechnical Department-was writ- firms in sectors with heavy imports tend tact Rebecca Sugui, room N10-031, exten- ten as part ofthe Africa Regional Studyon to adopt pricingrules that resemble com- sion 37951 (23 pages, including tables). Health Financing, with financial support petitive behavior. from NORAD and SIDA. Copies are avail- On thebasis of this evidence, Condon able free from the World Bank, 1818 H and de Melo built a three-sector simula- 488. Prepaid Financing of Primary Street NW, Washington DC 20433. Please tion model to examine the welfare effects Health Care in Guinea-Bissau: contact Karol Brown, room J9-112, exten- of an increase in QRsin sectors that have An Assessment of 18 Village sion 35073 (50 pages, including tables). increasing returns to scale. They intro- Health Posts duced several model variants to ascertain the effects of industrial organization con- Per Eklund and Knut Stavem 489. Health Insurance in Zaire siderations:firm exits/entries, departures from competitive pricing, interactions Flat-fee prepayment may be the only fea- Donald S. Shepard, Taryn Vian, between entry and pricing rules, and sible cost recovery scheme for primary and Eckhard F. Kleinau economies of scale. health care in rural villages of Guinea- They performed numerical simula- Bissau. The level of satisfaction was high This in-depth study of health insurance tions on a representative three-sector inthissimpleprepaymentschemefordrugs schemes in Zaire recommends developing semi-industrial economy (the sectors be- and limited primary health care in 18 more pilot insurance systems in areas ing agriculture, manufacturing, and ser- villages. In a larger health system or in an where health systems already function - vices). The simulations involved progres- urban area, it might be more difficult to and strengthening existing systems sively tighter QRs, starting from a regime administer such a scheme and to prevent through training, exchange visits, infor- with no QRs. abuse of the system. mation systems, and technical assistance. These simulations suggest that the Implementing a nationwide health insur- traditional welfare costs for moderate ra- With population growth increasing and ance system is not likely to be as successful tioning could be tripled ifthe manufactur- budgets declining, the need for cost recov- as decentralized, locally managed plans. ing sector had increasing returris to scale. ery in health care has grown. Eklund and A 20 percent rationing of intermedi- Stavem report on a prepayment scheme After identifying 12 systems of health ate andconsumption goodscould resultin for drugs and limited primary health care insurance in Zaire, Shepard, Vian, and a welfare loss ofabout 2 percent ofnational at 18 village health posts (USBs) in Kleinau prepared detailed case studies of income if economies of scale and indus- Guinea-Bissau. four systems (two urban and two rural) trial organization are not considered. At these health posts, adverse selec- and brief studies of four others. The case When industrial organization consider- tion was reduced because enrollment in studies focused on the terms of the in- ations are considered, the welfare loss each village was almost universal. The surance plans, their organization and could quadruple. villages provided construction materials management, resource mobilization, effi- Simulations conducted for alterna- and labor - and indicated their willing- ciency, equity, client perceptions, and the tives - the entry of enough firms to ness to pay more if drugs were available quality of services. Among the lessons eliminate profits or oligopolistic pricing on a timely basis. (Drugs are heavily sub- learned: with no new firms entering the sector - sidized, and supplies rapidly depleted.) * Plans vary substantially in the ser- suggest a trade-offbetween excessive firm Despite rapid depletion ofdrug stocks, vices covered. Consumers found coverage entries and collusive behavior. Collusive the level of satisfaction was high. Villag- of ambulatory care attractive despite sub- behavior causes welfare losses because of ers' willingness toprepay was often linked stantial premia or required copayments. anti-competitive pricingbutfacilitates the to better service, with drugs more readily Only halfthe plans covered inpatient care. exploitation of economies of scale. The available and midwives better trained. * The most successful schemes had welfare gains of moving to competitive Still, the quality of service at village modest premia. pricingthrough the entry of newfirms are health posts can only be as good as the * Acceptable quality of service is a mitigated because firms operate on a support they get from the rest of the precondition for successful implementa- smaller than optimal scale. health care system. Authorities must tion of an insurance scheme. This paper - a product of the Trade strengthen health center support services * The implementation of voluntary Policy Division, Country Economics De- and improve the drug resupply system. schemes requires publicity within the partment - is part of a larger effort in Workers at each post could also use bi- community at the outset. PRE to help developing countries design cycles - which might be offered through * The risk thatinsurance plans would more effective trade policy. Specifically it an incentive or credit scheme. be overcharged was limited by the decen- is part of a PRE research project on "In- Flat-fee prepayment may be the only tralization and direct management. dustrial Competition, Productive Effi- feasible cost-recovery scheme at the vil- * Simple control methods, such as ciency, and Their Relation to Trade Re- lage level. In a larger health system or in printedpremium stamps, detaileddescrip- gimes." An earlier version of the paper an urban area, it might be more difficult to tions of enrollees, and the enrollment of was presented at the meeting of the "Ap- administer such a scheme and to prevent entire families, helped reduce fraud and pliedEconometricAssociation"in Istanbul adverse selection and overuse of services. error. in December 1986. Copies are available This paper - a product of the Popu- * Appropriate investment strategies free from the World Bank, 1818 H Street lation, Health, and Nutrition Division, preserved the value of premium income. Policy Research Working Paper Series 41 Investing in imported drugs was a hedge losses that often accompany reduced pro- * Matching the sales and value- against erosion of the purchasing power tection. The reason is that such losses can added tax rates on domestic production of preima. exacerbate macroeconomic difficulties, and imports, to transfer the function of * Financial analysis of the insurance lead to delays or reversals in trade liber- protection to customs duties. systems requires better accounts. Few alization programs, and make policy * Bringing customs duties on items insurance plans had good financial re- change less credible. for which there is no domestic production ports of the health delivery plan, much Tariffs on imports do two things: pro- and which are therefore purely revenue- less of the insurance plan. tect domestic producers and raise public raising under the rubric of the sales tax/ * A financial guarantor (for example, revenues. Even the poorestcountrieshave value-added tax. a development organization guaranteeing essentially two instruments for fulfilling * Offsetting any reduction in cus- the first year's services) boosts the public's those two objectives: (i) customs duties toms duties with an equivalent increase cbnfidence in the insurance system. and (ii) sales taxes and value-added taxes in the sales tax/value-added tax structure * Evidence of adverse selection and (VATs) on imports. Since the customs -which, since thattaxappliesto domestic moral hazard was found in most plans. duty raises the price facing domestic pro- production as well as imports, would in- Their impact can be moderated by re- ducers of an imported good above the crease revenues. A smaller-than-equiva- quiring that the entire family joins or by world price, it is a subsidy to domestic lent upwardadjustmentin the salesvalue- enrolling employee groups. producers. Since the sales tax/value-added added structure would therefore suffice if * Informal associations exist that fi- tax, together with the customs duty, raises the change were required to be revenue- nance members' health care through in- the price facing users of the import above neutral. terest-free loans to pay for births, hospi- the world price, they tax domestic users. More realistically, the rate structure talizations, and other emergencies. The customs duty can then serve protec- might have to be raised beyond the point This paper - a product of the Popu- tion objectives, while the two together can of revenue-neutrality to allow for assis- lation, Health, and Nutrition Division, bedesignedtomeetrevenue requirements. tance to sectors hurt by the tariff reduc- Africa Technical Department - was Opportunities for radical redesign of tion. Such assistance,ifextended through written as part of the Africa Regional the incentive structure are rare. The fol- the budget process, would have the ad- Study on Health Financing to aid the lowing integrated structure of taxes cum vantage vis-a-vis protective tariffs of be- ongoing sector adjustment dialogue in tariffs provides a point of reference to- ing explicit and thus subject to periodic Zaire. The study received outside finan- ward which less comprehensive reforms scrutiny. cial support from SIDA, NORAD, and the may be directed: This paper - a product of the Public U.S. Agency for International Develop- * Auniform basic customs duty of no Economics Division, Country Economics ment. It was presented at a seminar in more than 10-15 percent and an exemp- Department - is part of an ongoing pro- April 1990. Copies of this paper are avail- tionfromdutyforimportedinputsentering gram in the Public Economics Division to able free from the World Bank, 1818 H export production. explore the relationship between trade Street NW, Washington DC 20433. Please * A basic uniform VAT (preferably liberalization and the public finances in contact Karol Brown, room J9-112, exten- on consumption) - the rate determined revenue-constrained economies. The pa- sion 35073. by revenue requirements - on both do- per was prepared for the World Bank mestic production and imports with ag- Conference on Tax Policy in Developing ri culture exempted, particularly Countries, heldin March 1990.Copiesare 490. The Coordinated Reform nonmarketed food consumed by the poor. available free from the World Bank, 1818 of Tariffs and Domestic Indirect * A luxury or excise tax applied at a H Street NW, Washington DC 20433. Taxes common rate to both domestic production Please contact Ann Bhalla, room N10- and imports of selected items. 059, extension 37699 (47 pages). Pradeep Mitra * Zero rating of exports under the VAT. Tariffreformfortradeliberalization must * Taxes on selected exports either 491. How Well Do India's Social be seen as part ofa broaderprogram oftax where world demand for the country's Service Programs Serve the Poor? reform. Customs duties on imports should exports is expected to remain inelastic or begearedchiefly toprotection. Reductions where the country is subject to export Nirmala Murthy, Indira Hirway, in such duties to promote an outward- quotas. P. R. Panchmukhi, and J. K. Satia oriented development strategy should be It is important to view the foregoing offset by increases in sales/ value-added elements as part of an interrelated pack- Reaching India's poor calls for greatly taxes applied equally to imports and do- age: for example, attempts to unify cus- improved social service delivery systems, mestic production. That would maintain toms duties at levels higher than the better targeting of the poor, more coordi- public revenues and avoid exacerbating recommended range would create admin- nationbetweenagencies, policies aimedat macroeconomic difficulties. istrative problems in implementing duty income generation, and more involvement exemptions on inputs entering domestic of the poor and of nongovernmental orga- Tariff reduction designed to move toward production. nizations. an outward-oriented development strat- Coordinated reform of an existing egy will work only if alternative revenue distorted structure of tariffs and domestic This literature review was initiated to fill sources can be found to offset revenue taxes would include the following: the research gap on how well social ser- 42 Policy Research Working Paper Series vice programs serve India's poor. ernment has been reluctant to involve likely to be curbed in developing coun- The authors found that India's social NGOs in its housing program. tries. Possible actions and countermea- services were used relatively little by the The review found no evidence to link sures to control automotive air pollution poor - whether they were programs for social service inputs to labor productivity. encompass energy efficient and environ- the general public (such as education), This paper - a product of the Public mentally clean vehicles, clean fuels, traf- programs targeted to the poor (welfare Sector Management and Private Sector fic management, and a policy framework and social security), or programs meant Development Division, Country Econom- including regulatory, pricing, and taxa- especially to help the poor (nutrition). ics Department-is part of alarger effort tion measures. The most promising ap- The health and education of the poor in PRE to improve the management of proach in developing countries, however, has improved but not as much for the poverty reduction programs. Copies are is through clean fuels, sound traffic man- population as a whole. Children's nutri- available free from the World Bank, 1818 agement, and administratively simple tional status has changed little in the last H Street NW, Washington, DC 20433. policy measures - such as a tax on leaded 20 years. Legislation to protect the poor Please contact Ernestina Madrona, room gasoline combined with a rebate on the cannot be enforced. N9-061, extension 37483 (73 pages). use of ethers as octane boosters. This The reasons that all social service could encourage refineries to change their programs did so little to alleviate poverty products and encourage users to substi- are similar: 492. Automotive Air Pollution: tute more appropriate vehicles. Owners * Physical access to education and Issues and Options for Developing of bus and taxi fleets could be given in- health services has improved but in- Countries centives to run vehicles on alternative equalities exist because of biases in lo- fuels - such as LPG, GNG, or alcohol - cating facilities. The access of the poor to Asif Faiz, Kumares Sinha, Michael Walsh, andvehicletaxesandlicensefeescouldbe housing, social security, and social wel- and Amiy Varma designed to discourage the ownership and fare services has been limited partly be- use of polluting vehicles. cause these services were inadequate Automotive airpollution will intensify with Appropriate response measures relative to needs and partly because ser- increasing urbanization and the rapid should be based on sound information vices leak to the nonpoor. Existing social pace of motorization in developing coun- and cost-effective programs. They should service programs tend to maintain the tries. Without effective measures to curb be equitable in their impact on industry statusquoandsometimesevenstrengthen air pollution, some 300-400 million city and consumers and introduced with class differences. dwellers in developing countries will be- enough lead time to give enterprises and * Social service policies are not com- come exposed to unhealthy and dangerous consumers time to adjust - to reduce prehensive enough, reflect little under- levels of air pollution by the end of the widespread evasion and gain public ac- standing of demand, and ignore difficul- century. Administratively simple policies ceptance. ties of implementation. that encourage cleanfuels andbetter traffic An emissions control policy should * The quality of services is low, their management are the most promising ap- include an emissions inventory to assess pattern not uniform. Issues common to proach to controlling vehicle pollutant the relative contribution ofmotor vehicles the social sector delivery systems are weak emissions in developing countries, to overall pollution; emission standards management, ineffective targeting, and based on a realistic evaluation of costs inflexible service delivery systems that Automotive air pollution, once largely a and expected compliance; identification result in a mismatch between perceived problem ofdeveloped countries, will spread of specific problems and appropriate needs and services delivered. The bureau- to the developing countries in the next countermeasures based on their cost-ef- cracy is inadequate to reach the poor. decade because of the rapid pace of ur- fectiveness; design of a policy framework Existing capacity and resources are in- banization and motorization there. to ensure success of control measures; an adequate, particularly for education and Rising incomes, combined with more appropriate institutional set-up; and ap- health. desire for travel and personal mobility, propriate monitoring and evaluation. Evidence from the government and will increase automobile ownership and Although there is a consensus on the NGO programs suggest that the poor can bus transport in Asia, the Middle East, need to reduce lead in gasoline and sulfur be reached effectively if: Eastern Europe, and parts of Africa. The in diesel fuels, knowledge of the cost and * Policies focus on them and are needforfast, reliable distribution ofgoods, effectiveness of various control measures linked more closely to income generation. the increasing pace of containerization, is inadequate. More research is needed in * An appropriate service delivery and the selection of transport options on the following areas: system is designed and implemented and the basis of service rather than price alone * The characteristics and amount of efforts to alleviate poverty are integrated will increase reliance on trucks for freight automotive air pollution in urban areas in into it. transport. As motor vehicle ownership ap- developing countries. * Services of different agencies are proaches saturation levels in North * The environmental characteristics coordinated. America, Western Europe, andJapan, most of reformulated and substitute transpor- * The poor and nongovernmental or- growth will be in developing countries. tation fuels. ganizations (NGOs) areinvolved and given Automotive air pollution will be worst * The cost-effectiveness of various an appropriate role. NGOs'ability to serve in big cities, particularly in Latin America measures to control motor vehicle emis- the poor varies. Their coverage is 25 to 30 and Asia - but also in Eastern Europe sions. percentineducationandhealth,butnearly and the Middle East. * Anevaluationofvehicleinspection 100 percent in welfare services. The gov- The growth in road transport is un- and maintenance programs. Policy Research Working Paper Series 43 * The environmental management de facto VAT was created through the random shocks to domestic food produc- of urban buses and paratransit vehicles. manufacturing/import stage by introduc- tion. This paper is the result ofan informal ing a crediting mechanism in the existing collaboration between the Bank's Trans- surtax. The change was intended to re- Lavy compared the role of food aid and port Division, Infrastructure and Urban duce production distortions arising from commercial foodimportsin offsetting food Development Department, and the In- the taxation of inputs. The tax was also "shocks" and covering the shortfall in food dustry and Environment Office of the applied to large agricultural and trading consumption in 26 countries in Sub-Sa- United Nations Environmental Program establishments. The import surtax was haran Africa. on transport-related environmental is- modified to be consistent with the domes- Food aidtolow-income countries with sues. It is part of a larger effort in PRE to tic surtaxandthe non-protective elements transitory or chronic food insecurity has address environmental concerns in the of import tariffs were merged with the been criticized on the grounds that: 'Bank's operational work. Copies are avail- reformed surtax. These changes helped * The international response to food able free from the World Bank, 1818 H shift the base of taxation from production crises is slow, meager, and inefficient. StreetNW, Washington DC 20433. Please and trade to consumption. Equity fea- * Food aid is discriminatory, de- -contact Pamela Cook, room S10-063, ex- tures were introduced through a redesign pending on the recipient country's politi- tension 33462 (109 pages with tables). of excise taxes and their merger with the cal and economic orientation. surtax. For companies, existing invest- * Food aid discourages domesticfood ment credits and allowances were amal- production and encourages dependence 493. Tax Reform in Malawi gamatedintoa single allowance atahigher on donors. rate to benefit new investment, keeping * Food aid depresses commercial Zmarak Shalizi and Wayne Thirsk the average effective tax rate high for imports of food, reducing the amount of revenue reasons. Small changes were food available. Malawi's comprehensive reform of its tax made to simplify personal income taxes. * By alleviating shortages food aid system in the 1980s illustrates many ofthe The ground was laid for improving proce- allows countries to postpone or cancel issues that developing countries must ad- dures and computerizing tax administra- politically costly economic reform. dress when altering the way they levy tion and creating a tax analysis unit. But Lavy found that: taxes. Most of the recommendations have Food aidandcommercialfoodimports been successfully implemented over a stabilize food consumption andneutralize Malawi embarked on a comprehensive three year period despite difficult eco- the effects of random shocks to domestic tax reform in the mid to late 1980s with nomic circumstances in the country. The food production. Food aid compensates World Bank assistance. This paper looks new system has even raised more revenue for up to half of the drop in food produc- at the problems in Malawi's revenue sys- than the old, though that was not a spe- tion; imports make up an additional 30 tem that prompted the reform, and ex- cific goal of the reform. However, since the percent. amines the nature of the solutions offered budget deficit remains high and infla- In other words, every one-ton drop in and their rationale. tion continues to be a problem, further cereal production is offset by the delivery In the early 1980s, the flow of exter- base expansion will be necessary before of 0.8 tons of cereal and dairy products nal funds dropped precipitously. This de- the currently high statutory company tax from abroad. There is a lag in this re- cline coincided with the loss of Malawi's rates and basic surtax can be reduced. sponse over a four-year period, but most primary foreign trade artery (80-90 per- This paper - a product of the Public of the aid is received in one to two years. cent of exports and imports) due to the Economics Division, Country Economics Surprisingly, the pattern of aid flows closure ofraillinesin neighboring Mozam- Department -is part of a larger effort in provides no evidence of discrimination by bique. These shocks resulted in a sharp PRE to evaluate tax reform efforts in donors. Countries classified as socialist ,increase in the servicing of Malawi's ex- developing countries (RPO 674-52). Cop- with military governments, and countries ternal debt and defense spending, thereby ies are available free from the World Bank, that do not protect human or political creating a pressing need for more rev- 1818HStreetNW, WashingtonDC 20433. rights, receive an equal amount of aid enue. At first the Government raised the Please contact Ann Bhalla, room N10- during acute food shortages. rates on those tax bases that were admin- 059, extension 37699(55 pages, including This paper - a product of the Wel- istratively the easiest to tax, such as trade. tables). fare and Human Resources Division, By 1985, the tax to GDP ratio had in- Population and Human Resources De- creased by almost 50 percent. However, it partment - was written under the aus- was increasingly apparent that the ad 4134. Alleviating Transitory Food pices of the African Food Security Unit of hoc, temporary measures were inconsis- Crisis in Africa: International the WorldBank, asabackgroundpaperto tent with the creation of a more liberal Altruism and Trade the Bank's study, Food Aid in Sub-Sa- economic environment in the long run. haran Africa. Copies of this paper are This led to a reexamination of the tax Victor Lavy available free from the World Bank, 1818 system as a whole. H Street NW, Washington, DC 20433. It was decided that the reformed tax Food aid compensates for up to half the Please contact Brenda Rosa, room S9- system should build as much as possible drop in food production during food crises 114, extension 33761 (25 pages). on existinginstruments, generate atleast in Sub-Saharan Africa; imports make up as much revenue and be at least as equi- another 30 percent. Both stabilize food table. With these constraints in mind, a consumption and neutralize the effects of 44 Policy Research Working Paper Series 495. The Changing Role of the point is crucial - otherwise the new de- ferent instruments affect risk-sharing State: Institutional Dimensions velopment strategy will fail. Ingredients between the government and the pro- ofa more effective political process include ducer. Applying criteria for ranking rev- Arturo Israel along-term perspective in policy design; a enue instruments to three typical in- minimum level of stability in policy; a low struments - royalties, income taxes, and The quality - not the size -of the state is level of corruption; and a general sense resource rent taxes - they conclude that what counts. Andaprerequisitefor chang- that political control does not necessarily although profit- and rent-based taxes are ing the role of the state is an improved imply public ownership or operation. gaining in popularity over production- political process. Without that, any new These points are widely accepted in prin- based taxes, no single instrument can be development strategy will fail. ciple but not in practice, says Israel. presumed to be superior for mineral-de- This paper - a product of the Public pendent developing countries. Each coun- Most countries struggling to achieve eco- Sector Management and Private Sector try has different endowments and faces nomic growth and broader development Development Division, Country Econom- different risks. These factors must be objectivesin thelast l0yearshave changed ics Department - was produced as back- taken into account when selectinginstru- their strategies to incorporate two basic ground material for the Conference on ments and determining rates. In some thrusts: a consistent macroeconomic and Institutional Development held in De- cases production-based payments, such sectoral policy framework and a dimin- cember 1989. Copies are available free as royalties, may be justified and should ished role for the public sector, with more from the World Bank, 1818 H Street NW, not be systematically deemphasized as reliance on the private sector. Washington, DC 20433. Please contact they are now. Israel emphasizes four points in this Zeny Kranzer, room N9-051, extension Using simple models of the type de- paper: 37494 (35 pages). scribed in the paper will enable govern- First, the argument that the size of ments to engage in reasonably sophisti- the public sector must be drastically re- cated risk analysis at a relatively low cost duced has probably been taken too far, 496. Issues in Evaluating Tax whendesigningtaxandpaymentarrange- with no real analysis of the full conse- and Payment Arrangements ments. Further work is required to de- quences of the shift. Often the disman- for Publicly Owned Minerals velop a practical framework which mod- tling of some functions implies the estab- els additional tradeoffs. lishment of others. (The existence of a Robert Conrad, Zmarak Shalizi, and This paper - a product of the Public competitive market is more important Janet Syme Economics Division, Country Economics than private ownership.) Department-is part of a larger effort in Second, a prerequisite for successful No single revenue instrument can be as- PRE to identify mineral payment/tax development of the private sector is a sumed to be superior for mineral-depen- systems in developing countries that are modernized, highly efficient public sector dent developing countries. And more than simple, fair, and efficient. Copies are avail- - particularly in key areas of policy one instrument may be needed to meet a able free from the World Bank, 1818 H management and regulation. The quality governments multiple objectives. Street NW, Washington DC20433. Please of the state is at issue, not its size. That contact Ann Bhalla, room N10-059, ex- quality depends on the state's being able Many developingcountries dependheavily tension 37699 (50 pages with figures and to do at least five things in economic on mineral extraction to generate fiscal tables, plus 19 pages of appendices). management: revenue and earn foreign exchange. Are * Design, monitor, and implement these countries collectingenough in return consistent macroeconomic and sectoral for depleting their reserves? Are they car- 497. The Measurement policies. ryingtoomuchofthe risk? Conrad, Shalizi, 47 TheMaree n * Provide an enabling environment and Syme describe work in progress to f Budgetary Operations in Highly for competition, private or public. develop a practical framework for analyz- The Case of Angola * Privatize wisely and effectively. ing these questions. * Conduct an effective dialogue with In the first part of the paper they the private sector. review the central issues that must be Carlos Elbirt * Operate the remaining public en- addressed in designing mineral tax and terprises more effectively, payment schemes. They note the need to A proper measurement of Angola's 1989 To do each of these things, govern- determine both the opportunity cost of budget should reflect the tremendous dif- ment will need fewer mid-level employees mineral extraction (including externali- ference between official and poarallel mar- and more high-level professionals. ties vis-a-vis other sectors ofthe economy) ket prices at which transactions are un- Third, the number of activities the and the costsborne by the country through dertaken. If all transactions are valued public sector can safely and effectively risk-sharing arrangements. at parallel market prices, the budget defi- undertake is limited. To force additional Observing that at present there is no cit for 1989 would drop fm 22 percent to functions on the public sector increases practical analytical framework toanalyze 12percent. exponentially the chances of failure and tradeoffs or determine the rate structure poor performance. for different revenue generating instru- In a highly distorted economy such as Fourth, a prerequisite for changing ments, they introduce a simple cash-flow Angola's, budget accounts can be mis- development strategy is a more effective model in the second part of the paper. leading - because prices in the parallel political process. Seldom mentioned, this With this model they illustrate how dif- market, including the exchange rate, rep- Policy Research Working Paper Series 45 resent up to 100 times official prices. wages, if price liberalization and wage the late 1970s in response to constrained Parallel prices are the real opportu- remonetization are strictly synchronized. developing country budgets and a down- nity costs for consumers and guide them This paper - a product of the Coun- turn in work available for international in their decisions. So budget accounts try Operations Division, Southern Africa construction firms. Construction firms may not truly show the resources they are Department, Africa Regional Office - is may no longer be as interested in promot- supposed to measure. part of a larger effort in the World Bank to ing BOT projects as they were earlier. Angola's government collects taxes study a highly distorted economy with a Many BOT projects have been proposed, and pays expenses in two currencies: view to identifying appropriate develop- but few have proceeded to financial clo- strong kwanzas (with attached buying ment policies. Copies are available free sure, let alone full implementation, in rights, such as access to hard currencies from the World Bank, 1818 H Street NW, developing countries. or goods) and weak kwanzas (which must Washington DC 20433. Please contact The BOT formula for infrastructure be used in the parallel market). Terry Gean, room J11-250, extension projects is by no means a panacea, con- In adjusting Angola's 1989 budget, 34247 (16 pages). clude Augenblick and Custer. BOT Elbirt assumed that all tax revenues or projects are exceedingly complex, finan- -transfers from oil companies were in cially and legally. If countries can imple- strong kwanzas, all other taxes and rev- 498. The Build, Operate, ment the same project in a more tradi- enues in weak kwanzas, and expendi- and Transfer ("BOT") Approach tional way - with sovereign borrowings tures varied. He found the composition of to Infrastructure Projects financing aturnkey construction contract revenues in the adjusted budget to be In Developing Countries - the time saved and the greater cer- totally different from the nonadjusted one. tainty of the project going forward may Oil revenues represent 98 percent of rev- Mark Augenblick and B. Scott Custer, Jr. warrant the more traditional approach. enues, not 48 percent, as in the original But if a country is unable - or for budget. So dependence on oil revenues is In a typical BOT infrastructure project, a budgetary or policy reasons prefers not - underestimated. pnvate-sector project company builds a -tofinance all neededinfrastructurefrom The composition of spending also project, operates it long enough to pay budgetresourcesorsovereignborrowings, changes, but not as radically. Wages re- back project debt and equity investment, the BOT approach is one option. And in main the largest item. Extrabudgetary then transfers it to the host government. theright contextitappearstobe workable. items rank second, rather than third, Does the BOT approach work? It can. But Moreover, BOT projects should be- among expenditures - at 24 percent, not if the same project can be implemented as come easier to negotiate and implement 12 percent. a turnkey construction contract financed as their basic structure is better under- Should Angola's exchange rate and by sovereign borrowings, the time saved stood andasstandard solutions tocommon prices be liberalized, the budget for 1989 and the greater certainty of the project issues become more accepted by host wouldtendtolooklike this adjustedbudget going forward may warrant the more tra- governments and in the marketplace. - because the conversion prices used to ditional approach. A BOT project may provide some adjust the budget resemble market prices. "additionality" in tapping sources of pri- So the impact of policy adjustment would Augenblick and Custer review the BOT vate financing that otherwise might be be as follows: (build, operate, and transfer) approach to unavailable. The sponsors' commitment * The deficit would decline from 22 building and financing such infrastruc- of substantial equity to a project assures percent of GDP toward 12 percent, de- ture projects as power plants, toll roads, that they will remain committed to the pending on the extent of price and ex- port facilities, transmission lines, and project's successful operation over the change rate adjustments. Nominally the water supply systems in developing coun- concession period. Their "at-risk" invest- budget deficit would increase, but that tries. ment provides a strong incentive to have .would be a mere accounting change. In BOT projects, private-sector spon- the project perform above its minimum * Any additional reduction of the sors-usuallyinternational construction expectations. If the project is properly budget deficit would require active bud- contractors, heavy equipment suppliers, structured, the benefits of such enhanced get policies. In Angola, the wage bill and and plant and system operators, often performance will be shared with the host extrabudgetary expenditures account for together with local partners - make eq- government. Having the design, imple- more than half of government spending, uity investments (typically 10-30 percent mentation, and operation ofaBOTproject so those items would have to be cut. Per- ofthe total projectcost) in aprivate project largely in the private sector': hands may sonnel costs account for more than 16 company that will build the project, oper- provide economies and efficiencies that percent of GDP: cutting them by 10 per- ate it long enough to pay back the project balance or even outweigh the higher fi- cent would reduce the deficit by more debt and equity investment, and then nancing costs of nonsovereign borrowing than 10 percent. transfer it to the host government. and equity investment. * Wageremonetizationshouldbeneu- The project company raises debt fi- But a host government that wants to tral in terms of the nominal deficit of the nancing(typically 70-90 percent ofproject promote BOT projects must understand consolidated public sector (the central costs) from commercial sources, usually and be willing to accept the complexity government, parastatals, and financial backed by export credit guarantee agen- and time-consuming nature of the pro- institutions). The extra benefits ciesandbybilateral andmultilateral lend- cess, the extensive host government sup- parastatals would enjoy from price liber- ers. Substantial support from host gov- port that must be provided, and the rates alization would compensate for the cen- ernments is required. of return that commercial lenders and tral government's extra spending on The BOT approach was developed in private equity investors will expect. 46 Policy Research Working Paper Series This paper - commissioned by the Also of interest to the host are firms' and recent trends - and examine trends Bank's Legal Department and co-spon- international tax planning opportunities. separately for each group of countries. A sored by the Technical Department, Eu- First, in an increasingly integrated world basic assumption underlying the analysis rope, Middle East, and North Africa Re- economy, firmshave considerable freedom is that fertility will fall in all countries gional Office and by the Infrastructure in redeploying capital across countries. from high levels during the pre-transi- and Urban Development Department - Second, thereis substantial scope forfirms tional stage, to declininglevels during the is part of a larger effort in the World Bank toreallocate income and expenses between transition, and to low levels during the to review different techniques of the host and the home countries through post-transitional stage. The start of this privatization of traditional public sector internal pricing policies. Third, firms can fertility transition process is identified in activities, examine how they have been devise an advantageous financial struc- the analysis by a decline in the total applied in practice, and evaluate their ture by choosing appropriate debt-equity fertility rate of atleast 0.5 points over five strengths, their shortcomings, and the ratios and by borrowingin a country where years. conditions for their successful application treaty provisions are favorable. These stra- Focusing on the transition stage, Bos in World Bank member countries. Copies tegic decisions can circumvent the host's and Bulatao analyze trends for countries are available free from the World Bank, effort to raise taxes. or economies that experienced at least 1818 H Street NW, Washington, DC Thailandhascometogripswithmany part of the fertility transition after 1955. 20433. Please contact Dolie Schein, room of the issues. It has sought and achieved They use three data sets: World Bank F4-026, extension 70291 (51 pages, plus double-taxation agreements withmostof estimates of fertility in the latest 46 pages of annexes). its trading partners. It has attracted sub- quinquennium; survey, census, and reg- stantial foreign investments and collected istration-based fertility estimates; and the attendant revenue. Its tax policy re- World Bank estimates corresponding to 499. Taxing Foreign Income mains vulnerable in many areas, how- the two decades immediately following In Capital-Importing Countries: ever. There are, for example, inadequate initial transition. The three datasetspro- Thailand's Perspective safeguards against excessive leverage, duce somewhat different estimates of the transfer pricing, and treaty shopping. Its rate of decline. The average rate of total Chad Leechor and Jack M. Mintz strategy concerning tax incentives could fertility decline across all the data, 0.12 also be strengthened to remove the barri- annually, is subsequently used as the Disregarding the international dimension ers for extending the treaty network and medium decline pattern. Slow and rapid of tax policy is risky. Foreign tax regimes enhancing regional coordination. fertility decline are defined as half and and international tax-planning practices This paper - a product of the Public twice the medium decline rate. ofcompanies can frustrate domestic goals Economics Division, Country Economics Regression analysis is used to esti- of taxation. Department - is part of a larger effort in mate therelationship between the current PRE to understand the impact oftax policy rate of decline in fertility and a number of In this paper, Leechor and Mintz propose on capital formation in an open economy. socioeconomic variables. Differences in a framework for analyzing international- Copies are available free from the World the rate of fertility change during the income taxation. The standard approach, Bank, 1818 HStreetNW, Washington DC transition are partly explained by socio- involving the user cost of capital, is ex- 20433. Please contact Ann Bhalla, room economic indicators, but the addition of tended to incorporate the role of tax policy N10-059, extension 37699 ( 97 pages with the previous rate of change as a predictor implemented by the home country. The tables). improves the model significantly. Models usual presumption that only taxes of the with just the previous rate of change fit hostcountrymatteris shown tobeinvalid, almost as well as those including the except under very restricted circum- 500. Projecting Fertility socioeconomic indicators. stances. The authors also apply this new for All Countries Focusing on the pre- and post-tran- framework to an empirical analysis of sitional stages, the authors carry out ad- Thailand's policy issues. Eduard Bos and Rodolfo A. Bulatao ditional analyses of fertility patterns. Pre- Tax provisions ofhome countries vary transitional fertility trends show little significantly. Of particular relevance are New procedures for projecting fertility for pattern. The start of the transition cannot - (1) whether remitted earnings are taxed all countries incorporate past trends to be reliably predicted but appears, from at home, (2) if so, whether they receive generate short- and long-term population previous analyses, to be subject to a mor- any unilateral tax relief, thatis, deduction projections. tality threshold. Post-transitional fertil- orforeign tax credit, (3) whether the home ity trends also show little pattern. The country accepts tax sparing, which allows As part of its worldwide population pro- shift from transitional decline to the post- firms to retain the tax benefits provided jections, the Bank annually provides transitional stage involves slower fertil- at source, and (4) the scope and extent of projections of fertility in each country. ity decline, and alternative patterns of deductible expenses, which generally dif- This paper reviews and updates the pro- slowing are distinguished. fer from those of the host. These provi- cedures for making fertility projections. The results of the analysis are trans- sions may counteract the host's tax mea- Bos and Bulatao classify countries as lated into rules for projecting future fer- sures, particularly the use of tax conces- pre-transitional, transitional, and post- tility rates. These rules allow future fer- sions. transitional on the basis ofcurrent fertility tility trends to be defined from previous Policy Research Working Paper Series 47 trends country by country - and incorpo- rate changes in total fertility with pro- jected reductions in high levels of primary sterility. To allow long-run projections, the rules assume that all countries even- tually converge to replacement fertility. The results of applying the rules are illustrated for eight countries and com- pared with previous World Bank projec- tions and projections ofthe United Nations Population Division. This paper - a product of the Popu- lation, Health, and Nutrition Division, Population and Human Resources De- partment - is part of a continuing effort in PRE to produce sensible and fully docu- mented population projections. Copies of this paper are available free from the World Bank, 1818 H Street NW, Wash- ington DC 20433. Please contact Otilia Nadora, room S6-065, extension 31091 (28 pages, with figures and tables). Volume VI Numbers 501 - 600 빼 Policy Research Working Paper Series 51 501. Tax Systems Several countries of Eastern Europe very poor innovative capabilities - pro- in the Reforming Socialist are now movinginto the third stage,post- vide weak or no patent protection for Economies of Europe so6alist transition. The tax changes pharmaceutical drugs. Moreover, some needed to adapt to a market economy are countries have not signed international Chezyl W Gray fundamental and systemic. But three sets patent agreements, and they provide no of problems - related to macroeconomic enforcement or dispute settlementmecha- As socialist countries move toward market concerns, enterprise ownership and struc- nisms. To confront this situation, indus- systems, tax policy is an importantpart of ture, and institutional weakness - im- trial countries have resorted to bilateral the reform agenda. pose constraints on the design oftax policy and multilateral pressures. For example, during the transition. Maintaining rev- industrial country negotiators at the Uru- This paper lays out some of the broad enues to insure budget balance is crucial guay Round (especially Japan, the EC, trends andissues now emergingas social- for-macroeconomic stabilization. However, and the United States) have proposed ist economies attempt to reform their sys- institutional weakness combined with the that patents be offered in all fields (in- tems of taxation. Particular attention is demands of rapid privatization threaten cluding pharmaceuticals), that they last paid to Hungary and Poland, the most to erode the traditional revenue base 20 years from date of application, that advanced in the reform process, but short (based as it has been on high rate and compulsory licenses be applied only in discussions of Czechoslovakia, Yugosla- often ad hoc and discretionary taxes that extraordinary circumstances, and that a via, and the U.S.S.R. are also included. are incompatible with private sector de- strong dispute settlement mechanism be Although the fiscal system of every velopment). These constraints are well- established. Byhistorical standards, these socialist country has its unique charac- illustrated in the current fiscal situation homogeneous proposals are unique. In teristics, there appears to be a distinct in Hungary and Poland, and they are general, developing countries have op- series of stages through which these sys- likely toarise in other countries -includ- posed these reforms. Some of them, such tems have passed or will pass on the road ing Czechoslovakia, Yugoslavia, and the as Brazil and India, have done so explic- from full central planning to a largely free U.S.S.R. - as they move toward funda- itly. market economy. The first stage, classi- mental fiscal reform. Nogu6s indicates that the R&D-in- cal socialism, prevailed in the first two to This paper -aproductofthe Socialist tensive pharmaceutical industry is one of three decades after World War Il and was Economies Division, Country Economics few for which patents are a major in- characterized by central control of many Department - is part of a larger effort in strument for protecting the returns from economic variables -includinginput and PRE to study the process of transition in innovations. In this industry, investment output mix, pricing, and income distribu- reforming socialist economies. Copies are in R&D is comparatively high, and drugs tion. Tax systems tended to be very rudi- available free from the World Bank, 1818 are easily copied. Under these circum- mentary tools to capture economic sur- H Street NW, Washington DC 20433. stances, the legal protection of patents is plus and transfer revenues to the state. Please contact Lois Lockyear, room N6- of crucial importance in determining the Taxes consisted primarily of a mixture of 040, extension 36969 (29 pages). market performance oftheR&D-intensive turnover taxes and taxes on factors of pharmaceutical industry. production. They were paid almost exclu- Stringent regulations introduced in sively by firms in the socialized sector. 502. Patents and Pharmaceutical the 1960s - to protect consumers from The second stage, reform socialism, Drugs: Understanding risky drugs -increased the costs of R&D began in the 1960s and early 1970s in the Pressures on Developing in the U.S. pharmaceutical industry and many socialist economies and remains Countries reduced effective patent life (because the until today in some. It has typically coin- time needed on testingforcomplying with cided with expanded decentralization of Julio Nogu6s drug safety regulations has increased economic decisionmaking and greater au- quite significantly). Thisreduces the prof- tonomy for enterprise managers - and 1,engthen effective patent protection in in- its per dollar invested in R&D. Also dur- been characterized by the emergence of a dustrial countries and press developing ing the 1980s, several institutional fledgling independent role for the tax countries to introduce patent protection. changes seeking to reduce medical costs system in directing economic activity. In These two tactics have become important facilitated competitionfrom generic drugs this stage the traditional sources of rev- parts of the R&D-intensivepharmaceuti- and squeezed the sales of the R&D-inten- enues - the turnover, company profits, cal industry's strategy to regain losses in sive industry. Finally, the potential mar- and payroll taxes - remain the most market share associated with more strin- ket for patented drugs in developing coun- important taxes, but they become more gent drug safety regulations and increased tries is no longer trivial. fine-tuned. They are often joined by new cc)mpetitionfromgenericdrugcompanies. So this powerful industry is lobbying and unique taxes that attempt to mimic strongly for longer patent protection do- market forces, such as a levy on fixed For legal and economic reasons, patents mestically and stronger protection in de- assets, an excess wage tax, and a tax to allow drug-inventive companies to appro- veloping countries. extract rents from CMEA trade. The in- p:date the returns from their innovations. This paper - a product of the Inter- centive effects of taxes in this stage tend Patents sustain highmonopoly prices that national Trade Division, International to be mutedby the very ad hoc, discretion- provide rents to undertake further R&D Economics Department - is part of a ary, individually negotiated nature of tax and allow the invention of new drugs. larger effort in PRE to understand the liabilities. Much of the developing world - with economic impact of intellectual property 52 Policy Research Working Paper Series rights. Copies are available free from the equivalent) household income or con- same amount of revenue, the results can World Bank, 1818 H Street NW, Wash- sumption as an indicator of welfare. This be compared across sectors to show which ington, DC 20433. Please contact Maria paper-a product ofthe Women in Devel- ofthem arebetter candidatesforincreased Teresa Sanchez, room S8-040, extension opment Division, Population and Human taxation in an overall reform package. 33731 (41 pages). Resources Department - is part of a The revenue and incidence effects larger effort in PRE to determine if and are then combined in a single measure how women's productivity (and thus fam- that allows one to rank the sectors by the 503. Household Production, Time ily welfare) are improved when women efficiency-cum-equity cost of raising rev- Allocation, and Welfare In Peru are given more access to education, exten- enue. Those rankings are used tocompare sion, training, credit, health care, and traditional with general-equilibrium- John Dagsvik and Rolf Aaberge other public resources. Copies are avail- based approaches to incidence analysis, a able free from the World Bank, 1818 H comparison that underlines the impor- Simulation exercises suggest that it is StreetNW, Washington, DC 20433. Please tance of assumptions about the labor difficulttoreduceinequalitiesinpercapita contact Maria Abundo, room S9-125, ex- market and about substitutability in consumption by changing wage and edu- tension 36820 (46 pages with figures and production in formulating tax policy pro- cation policies, tables). posals. In their second example, Dahl and Dagsvik and Aaberge use data from the Mitra use a tax policy model based on data Peruvian Living Standard Survey (PLSS) 504. Applying Tax Policy Models In from China to examine the desirability of to analyze (1) inequality in the distribu- Country Economic Work: recommending broad uniformity of tax tion of income, (2) men and women's Bangladesh, China, and India ratesamongsectors.Suchuniformitymay participation in the labor market and yield acceptable outcomesinmarket-based variations in their work hours, and (3) the Henrik Dahl and Pradeep Mitra economies, but the model shows thatlosses relationship between variations in the from uniform taxation can be very signifi- labor supply and income inequality. Applications ofgeneral equilibrium mod- cant in a decentralizing socialist economy Their purpose: to study the effect of els to different problems arising in tax - where some production is centrally changes in education and wage rates on policy - such as identifying desirable tax planned and subject to price controls and production, consumption, and allocation bases in Bangladesh, analyzing price con- some is subject to decentralized decision- of time. For example, how many men and trols in China, and coordinating tax-cum- making and transacted at market prices. women would participate in wage work if tariff reform in India -show how useful Their third example, drawn from an education were increased? How would they can be in supplementing more quali- ongoing study in India, shows how two policy changes affect the mean level and tative judgments. But they are useful only models - one sectorally disaggregated degree of inequality in the distribution of ifsubstantial effortisdevotedto establish- but macroeconomically simple, the other economic welfare? ing a consistent data set and to choosing macroeconomically richer but sectorally They conclude: the structure of the model in a way that aggregated - can be implemented on a Entrepreneurial income is the most makes its behavior consistent with what common data base to help study the coor- important source of income in rural and good economic analysis would suggest. dinatedreformoftariffsandindirecttaxes. other urban areas. Male wage earnings The combined models can be used to cal- contribute almost 40 percent of the While general principles can guide the culate how much indirect taxes must be household's consumption, which seems to design of the overall contours of a tax increased, after a reduction in tariffs un- reflecttheirshareoftotalhouseholdhours reform package, models for tax policy dertaken to promote an outward-oriented of work. Women's earnings contribute analysis can complement analysts' judg- development strategy, to produce enough about 17 percent of consumption. ments in important and replicable ways. revenue for the government to meet its But consumption and welfare are Dah1 and Mitra show their usefulness expenditures without changing the cur- considerably less equally distributed than with three examples. rent account deficit. hours of work. They use a tax policy model for Finally, Dahl and Mitra discuss the Proportional wage changes have only Bangladesh to show how one can analyze costs of constructing general equilibrium a small effect on behavior. Remarkably, the revenue and incidence effects of a tax models for tax policy analysis - and im- wage increases also have little effect on reform proposal of the kind that arises in plications for data requirements and the unequal distribution of per capita country economic work. For each sector of judgments about modeling strategy. The consumption. Even when wage rates are the economy, the model is asked: how most effort must be devoted to (1) estab- increased by the same amount the indirect much must an ad valorem excise tax be lishing a consistent data set and (2) cali- effect is small - but the increase does raised in that sector to generate an addi- brating the model in a way that allows its moderately reduce the inequality in dis- tional one percent of total indirect tax behavior to be consistent with what good tribution of per capita consumption. revenue? The results show how the bur- economic analysis would lead one to ex- Dagsvik and Aaberge use a decom- den of tax increases in each sector is pect. These costs must be set against the posingmethodtoanalyzeincomeinequal- distributed across different rural and benefits of the modeling approach to tax ity. They use a structural neoclassical urban socioeconomic groups and how it policy analysis in developing countries. model to analyze household production, affects such variables as the consumer This paper - a product of the Public consumption, welfare, and allocation of price index and the trade deficit. Since Economics Division, Country Economics time. They use per capita (or per adult each sector is asked to contribute the Department - is part of a larger effort in Policy Research Working Paper Series 53 PRE to develop techniques to help policy- In principle, central planning ended 506. Changes in Food makers in developing countries identify in Hungary in 1968, and the system of Consumption Patterns the implications of different tax reform "market socialism" was introduced to In the Republic of Korea packages for revenue, efficiency, and eq- encourage a decentralized domestic mar- uity. Copies ofthe paper are available free ket economy and a western orientation in Merlinda D. Ingco from the World Bank, 1818 H Street NW, international trade. When the socialist Washington DC 20433. Please contact political monopolyendedin 1990, however, Diets have been changing rapidly in the Ann Bhalla, room N10-059, extension "market socialism" had yielded neither a Republic of Korea, where fast income 37699 (46 pages, including tables). western-oriented nor a western-type growth and urbanization favor the con- market economic system. sumptionofbeef, pork,chicken, and wheat CMEA trade was intimately linked flour and discourage the consumption of 505. Creating the Reform- to the failure of reform to take hold in rice, barley, and fish. The result could be Resistant Dependent Economy: Poland, to the lack of progress under rice surpluses and higher beef prices. The CMEA International Trading Hungarian market socialism, and to the Relationship other Eastern European economies' lack Urbanization and income growth explain of interest in western-oriented reform. the increasing consumption of beef, pork, Arye L. Hillman and Adi Schnytzer Once the dependence relation was estab- chicken, and wheat flour, and the pro- lished, the costs of disengaging from the portionate decline in the consumption of How the CMEA system of international CMEAwere high, asAlbaniaexemplified. rice, barley, and fish. trade affected enterprise incentives and Eastern European economies ben- Continuingurbanization and income inhibitedmarket-orienteddomestic reform efitedin the 1980s from preferential terms growth should simply reinforce these in the Eastern European socialist econo- of trade that provided an implicit subsidy trends. The same phenomenon is occur- mies. from the Soviet Union. But the Soviet ring in other rapidly growing Asian coun- Union also provided "hard" goods poten- tries with similar dietary profiles. In analyzing the framework for interna- tially saleable for hard currency (oil, The implications for estimating de- tional trade of the Eastern European so- natural gas, and raw materials) and took mand are important. cialist economies - the Council ofMutual in exchange "soft" goods (machinery, First, there is a declining trend in the Economic Assistance (CMEA) - Hillman equipment, etc.) that were notofsufficient income elasticity of rice, which became and Schnytzer depart from the traditional quality to be marketable in the west (if at negative in the 1980s. So, rice surpluses focus on distortions in socialist interna- all) at prices that would recover costs. will grow if production growth rates are tional trade. This trading pattern made the capital of not reduced. Instead they analyze the CMEA the Eastern European enterprise trans- Incomeelasticitiesofdemandforbeef trading relationship using the standard action-specific: the capital could produce are relatively high, so expected increases concepts of (1) specialization in accord goodsthatwere acceptable,specifically, for in real income will continue to putupward with comparative advantage, and (2) the CMEAtransactions only. The consequence pressure on beefprices, unless beefimport incentives to resist trade liberalization was the very dependence and potential quotas are expanded more rapidly or (or any change) because of rents accruing for opportunism in CMEA trade that in eliminated. to industry-specific factors of production the Westis avoidedbyinternalizingtrans- Second, the relatively high own-price (including job security that sustains hid- actions within the firm. Reflecting the elasticities for meats - particularly beef den unemployment). prior dependence relationship and enter- andpork-implythatreducedprotection Hillman and Schnytzer describe how prise incentives to resist western orienta- for Korean meat producers would signifi- CMEA trade was negotiated, and dem- tion, the abolition of the CMEA trading cantly increase per capita meat consump- onstrate that the CMEA system of trade system and the transition to world prices tion. sustained a dependency relationship be- will impose a substantial terms-of-trade This paper - a product of the Inter- tween the Eastern European economies loss on the Eastern European economies, national Commodity Markets Division, and the Soviet Union that inhibited mar- and the integration of CMEA and western International Economics Department - .ket-oriented liberalization and adjust- markets will undermine the value of do- is part of a larger effort in PRE to under- ment. mestic CMEA transaction-specific capi- stand the changes in food markets in They focus particularly on Poland tal stock of the enterprises. developing countries, especially in those and Hungary, wherein during the 1970s This paper - a product of the Social- countries experiencing rapid income and 1980s governments sought to intro- ist Economies Reform Unit, Country Eco- growth. Copies are available free from the duce market-oriented reform. The Polish nomics Department - is part of a larger World Bank, 1818 H Street NW, Wash- government designed several programs effortin PRE toinvestigate how thelegacy ington DC 20433. Please contact Aban to "rationalize" domestic economic activ- of the past institutional arrangements in Daruwala, room S7-042, extension 33713 ity and in the early 1970s made a con- the Eastern European economies affects (47 pages with figures and tables). certed effort to upgrade Polish industry restructuring and liberalization opportu- using imported western technology and nities. Copies are available free from the capital. But the Polish economy did not World Bank, 1818 H Street NW, Wash- depart much from the centrally planned ington DC 20433. Please contact CECSE socialist system and remained firmly staff, extension 37176 (28 pages with embedded in the CMEA. tables). 54 Policy Research Working Paper Series 507. Poverty In Poland, Hungary, 508. A RMSM-X Model for Chile are being developed in collaboration with and Yugoslavia in the Years Country Operations divisions. Copies of of Crisis, 1978-87 Luis Serven this paper are available free from the World Bank, 1818 H Street NW, Wash- Branko Milanovic A simple macroeconomic model is applied ington DC 20433. Please contact Susheela to macroeconomic data for Chile. Jonnakuty, room N11-039, extension The deep economic crisis in Eastern Eu- 39074 (105 pages including tables). rope in the 1980s substantially increased The RMSM-X model for Chile is one of a the number of people living below the sequence of models that also includes, in poverty line. Before the crisis, most of the increasingorderofcomplexity, theRMSM- 509. The Childbearing Family poor lived in rural areas. Now most ofthe XX and MACOR models. The three mod- In Sub-Saharan Africa: Structure, poor (as many as 70 percent in Poland) els share the same budget accounts for an Fertility, and the Future live in cities. economy disaggregated into several sec- tors - such as private, public, financial, Odile Frank The deep economic crisis in Eastern Eu- and foreign - and organized in a flow-of- rope between 1978 and 1987 greatly af- funds framework. Sub-Saharan Africa has not joined the fected average incomes and increased the The models differ in their represen- global demographic transition. Africa's proportion of people living below the tation of economic behavior. RMSM-X eventual transition tofertilitydecline may poverty line. combines a simple behavioral structure depend more than it has elsewhere on The situation deteriorated most with the basic accounting framework and functional changes in the family and sharply in Poland, where declining in- can be solved recursively to obtain changes in the family structure. comes caused the percentage ofpoor people macroeconomically consistent projections to increase from less than 10 percent of for a set of endogenous variables. RMSM- Sub-Saharan Africa is lagging behind the the population (before the crisis) to more XX will more completely specify the links rest of the world in what otherwise seems than 20 percent. In Yugoslavia the pro- among economic variables and will require to be a global - encompassing even the portion of poor people increased from 17 a simultaneous solution procedure. giant, China-demographictransitionto percent to 25 percent. In Hungary poverty MACOR will be a standard medium-size fertility decline. remained at about the samelevel as before macroeconometric model that will intro- Representing as it does only9 percent the crisis (less than 15 percent). duce a more sophisticated behavioral of the world population, one might ignore The distribution of poverty changed structure into the basic accountingframe- Africa's departure from the norm, as- in all three countries. Urban poverty be- work. suming it would inevitably catch up with came dominant, as the economic condi- The model presented in this paper is the other countries. But it is not so clear tion of state sector workers-manual and solved recursively but incorporates some that fertility decline will occur in Africa, nonmanual - deteriorated much more simple behavioral rules to determine where the structures underlying demo- than that of agricultural and mixed (ru- private consumption, money demand, graphic behavior are different from struc- ral-urban) households. Before the crisis, imports, and exports. tures not only in the developed world but most of the poor lived in rural areas. Now Serven describes two possible solution in other developing countries as well. most of the poor (as many as 70 percent in procedures (or closure rules) for the model, As wives and mothers, African women Poland) live in cities. which allow it to address two types of seem tobemoreeconomicallyindependent Increases in poverty are explained policy questions. and autonomousin their households than entirely by declining incomes; overall, The first, the "normative" closure, in any other region - yet in terms of income distribution did not change and in canbeusedtoinvestigatewhatmacroeco- family structure and status they are as some cases even "improved." But when nomic policies (fiscal, monetary, or ex- dependent as women are anywhere else. such redistribution did occur, it was in- change rate policy) would be required to So, houses headed by women in Africa are sufficient to offset the impact of declining achieve given targets in terms of growth, not as handicapped economically as in incomes. inflation, and the like. other regions. This paper - a product of the Social- The second, the "positive" closure, At the same time, since the wife and ist Economies Reform Unit, Country Eco- can be used to examine the effects of a mother bears the economics of nomics Department, and the first such given set of economic policies (including childbearingrather than the husbandand Bank study done for Eastern Europe - fiscal, monetary, and exchange rate poli- father, Africa's eventual transition to was prepared as a background paper for cies) on growth, inflation, and the like. fertility decline may depend onfunctional the World Development Report on pov- Other closure rules can be implemented changes in the family and changes in erty. It is part of a larger PRE effort to but are not described in detail in this family structure more than demographic understand the factors that contribute to paper. change elsewhere has. poverty. Copies of the paper are available The macroeconomic model for Chile Drawing on literature about Africa free from the World Bank, 1818 H Street described in this paper - a product of the andhousehold dataon C6te dIvoire, Frank NW, Washington DC 20433. Please con- Macroeconomic Adjustment and Growth describes the structure and characteris- tact Angelica Bretana, room N6-025, ex- Division, Country Economics Department tics of the childbearing family in Africa; tension 37176 (30 pages with tables). -is part of a series of models for analyz- their implications for fertility, fertility ing macroeconomic policy options that regulation, and demographic trends; and Policy Research Working Paper Series 55 their relevance to Africa's future. This paper - a product of the Wel- spending and (2) personnel and Typically, for example, the African fare and Human Resources Division, nonpersonnel spending. childbearing family is segmented, con- Population and Human Resources De- * PERs should follow up sectoral sisting of a husband and father who is partment - is part of a larger effort in diagnosis with concrete policy options, head of the household but not necessarily PRE to understand fertility and family focusing not only on intrasectoral but also a breadwinner, and an economically au- formation issues as they relate to the on intersectoral reallocation ofresources. tonomous wife and mother. Each parent living conditions of households in the de- Many PERs - particularly for resource- is more strongly affiliated by lineage than veloping world. Copies are available free rich countries that spend a lot on educa- by marriage bond, so there is a cleavage in from the World Bank, 1818 H Street NW, tion - fail to provide concrete options, the "nucleus" of the family - and norms Washington DC 20433. Please contact perhaps feeling less need than resource- for breadwinning and childbearing are Brenda Rosa, room S9-137, extension poor countries to improve the efficiency separately reinforced and not necessarily 33751 (54 pages). and equity of resource use. considered relevant to each other. * PERs are no substitute for country Women have the primary responsi- and economic sector work. If data are hility for sustaining their families, which 510. Public Expenditure Reviews inadequate, more sector work is needed they do primarily through subsistence for Education: The Bank's for PERs to link macroeconomic and farming -yet African women rarely own Experience sectoral issues. Single-sector or possibly land. Men own the land and their children social sector PERs are more appropriate are granted use rights. A woman is granted Antoine Schwartz and Gail Stevenson for in-depth analysis of cost and financing land use rights so she can provide for the issues. family of her husband. This guarantees Bank experience with - and ways to * Extensive detail is no substitute the husband's rights not only to the wife's improve - the analysis of education is- for focused analysis of education issues children but to many years of her labor - sues in public expenditure reviews (PERs). and priorities in relation to the country's which may continue even when the hus- overall development program. band takes other wives - so although the The Bank'sincreased focus on policy-based * PERs should be attentive to the initial cost to the husband of commanding lending lies behind the Bank's shift from different time frames needed to attain abrideprice is high, childbearing becomes traditional public investment reviews macroeconomic andeducational goals;the virtually costfree to him. One outcome of (PIRs, to identify sector or investment often substantial education funds outside this economic arrangement is that in- priorities) and toward public expenditure the control of the Ministry of Education; comes and budgets are not pooled in the reviews (PERs), which include recurrent the imbalance between, and low ratio of, childbearing family unit. expenditures. The shift to PERs has in- capital to recurrent education spending; The economicindependence of women creased attention to the cost and financ- the low ratio of nonwage to wage expen- often makes then de facto heads of ing of education, which is overwhelm- ditures in the sector's recurrent budget; household, a situation that is reinforced ingly financed from the public sector's and the large, capital-intensive foreign by the migration of males to cities for recurrent budget. financing component of sector funding in wage labor. Data in this area reveal that AccordingtoSchwartzandStevenson: many (especially low-income) countries, the proportion of women participating in * Cost and financing analysis (and often fragmented among donors and the labor force (especially agriculture) in- format) in PERs should be more stan- projects. creases rather than decreases with age; dardized so conclusions needn't be based This paper - a product of the Educa- headship of household is often attributed on ad hoc international comparisons, and tion and Employment Division, Popula- to men, possibly on the grounds of their so the conclusions are more credible. Re- tion and Human Resources Department social status and presence; women who ports should focus more on the - is part of a larger effort in PRE to are heads ofhousehold are not particularly sustainability of proposed, as well as understand the education sector in the at a disadvantage; and women have more achieved, reforms, and on the political broader context of Bank operations, par- access to land when they live in a man's and institutional (as well as economic) ticularly adjustment programs, which household. impediments to sustainability. Few re- form the background for public expendi- * Frank analyzes the present types of ports acknowledge that more efficient ture reviews (PERs) in two-thirds of the family structure and divisions of respon- educational processes usually require in- countries reviewed. It is the first step in a sibility and forecasts four scenarios, what vestments in quality improvements, the research agenda that includes analysis of she calls the feminist, impoverishment, added costs for which initially outweigh how adjustment-related operations affect Americas, and Caldwellian scenarios. the resulting savings. And it should be the education sector, how the education She also discusses the importance of made clear whether savings from effi- sector should be treated in PERs in the gender roles and fertility-regulating be- ciency measures are to remain within the context of adjustment, and how cost and havior in Sub-Saharan Africa - particu- subsector or be reallocated elsewhere. financing issues should be treated in the larly the importance in the African family * PERs should include all sources of context of the macroeconomy. Copies are structure of child fostering. financing - public and private, local and available free from the World Bank, 1818 Finally, she addresses the method- central government - in the assessment H Street NW, Washington DC 20433. ological difficulties ofconductingresearch of the adequacy of sector funding. Please contact Cynthia Cristobal, room on family structure and fertility if Africa, * PERs should address the imbal- S6-035, extension 33640 (81 pages with and outlines an agenda for research. ance between (1) recurrent and capital figures and tables). 56 Policy Research Working Paper Series 511. The Macroeconomic form, has been an important focus of the 512. Social Security Reform: Underpinnings of Adjustment Bank'sadjustmentlending.Relativelyless The Capital Accumulation Lending emphasis has been given to monetary and and Intergenerational Distribution exchange rate policies which have been a Effect Fred Jaspersen and Karim Shariff central focus of IMF programs. Imple- mentation of supply-side sectoral policies Patricio Arrau Macroeconomic policy and sequencing is- has been strongly affected by macroeco- sues increasingly have been addressed ex- nomic performance. Where macro bal- Substituting the pay-as-you-go social se- plicitly in the design of recent adjustment ance has not been reestablished, imple- curitysystembyafullyfundedindividual- loans, but there still is scope for: (1) mentation rates have been lower for all accounts system may generate long-run strengthening the analytical framework conditions. Where progress in eliminat- capital accumulation, but often at the cost and macroeconomic policy conditionality ing imbalance is taking place, reform in- of income redistribution away from the in adjustment loans, and (2) greater real- ertia has strengthened even after loan elderly. Different deficit-financingachemes ism about the time and external resources disbursement has been completed. are studied having this issue in mind. needed to achieve adjustment and growth Loan design has also been an impor- objectives. tant determinant of implementation and Using the Auerbach-Kotlikoff model, sustainability of reform. Where issues of Arrau studies a switch from an unfunded, Drawing on conditionality and imple- sequencinghavebeen builtinto the design defined-benefit (pay-as-you-go) social se- mentationinformationfor 184WorldBank of adjustment programs, the implemen- curity system to afullyfundedindividual- adjustment loans to 62 countries during tation of sectoral reform has been stron- accounts system. the 1980s, Jaspersen and Shariff exam- ger. Adjustment loan conditions which Important questions arise about the ine the macroeconomic underpinnings of are precisely defined and legally binding transition period. Contributions to the Bank-supported adjustment programs. for tranche release have had the highest old system by currently active workers They conclude that macroeconomic policy rates of implementation. For adjustment disappear as pensions, so the government reform andimproved macroeconomic per- loans with a large number of conditions, must assign a value to those past contri- formance are critical to successful imple- implementation has been highest for the butions and finance their deposit into the mentation and sustainability ofstructural "core* conditions that have been the most new accounts. reform. critical for success of the program. It must also finance the transitional Reducingmacroeconomicimbalances After looking at recent experience social security deficitfrom the old system. isespeciallyimportantfor trade reform. If with macroeconomic conditionality, the That deficitarisesbecause thegovernment inflation is not reduced to a manageable authors conclude that macroeconomic must pay pensions to current retirees level, there is a danger that the exchange policy and sequencingissues increasingly without collecting the social security tax rate will be used as a nominal anchor for have been addressed explicitly in the de- that now goes to individual savings ac- domestic prices. If sustained over a long sign ofrecent adjustment loans, but there counts. period, this may precipitate a balance of still is scope for: (1) strengthening the Arrau quantifies the impact of social payments crisis andmake it impossible to analytical frameworkandmacroeconomic security reform on capital accumulation liberalize trade. policy conditionalityin adjustment loans, and intergenerational distribution using Reducing macroeconomic imbalances and (2) greater realism about the time amodekalibratedforMexico. There seems also has an important bearing on imple- and external resources needed to achieve to be confusion about the effect of the mentation of sectoral reforms. To the ex- adjustment and growth objectives. reform on capital accumulation and a tent that the government cannot reduce This paper is a product of the Macro- complete neglect of the effect on its fiscal deficit by increasing its own economic Adjustment and Growth Divi- intergenerational distribution. savings, there is a greater likelihood that sion, Country Economics Department. It Arrau also explores the implications. it will cut investment in infrastructure to was prepared as part of a larger effort in of tax incentives for pension funds. He support sectoral restructuring. Prolonged PRE to assess the World Bank's experience studies the effects of two alternatives: (1) high real rates ofinterest that result from with adjustment lending and was a back- if the social security contribution is de- unsuccessful stabilization efforts canhurt ground paper for the Bank's Report on ductible from income tax and pensions' private investment and the restructuring Adjustment Lending II: Policies for the are taxable, and (2) if contributions are ofsectoral production. Iffiscal imbalances Recovery of Growth, submitted to the not deductible and pensions are exempt. have not been eliminated before liberaliz- Bank's Board on March 6, 1990. The pa- Option 1 provides a higher taxable ing the financial system, it is likely that per deals with the theoretical macroeco- base than option 2 and a flatter path of the government will continue to rely on nomic underpinning of adjustment pro- income tax during the period of transition administrative controls to finance the grams and presents the results of empiri- - which is important if one wants to public sector deficit, undermining finan- cal work on the design and implementa- prevent substitution of future consump- cial sector reform. tionofBank-supportedadjustmentloans. tion by present consumption. Option 2 Analysis of the Bank's adjustment Copies of this paper are available free provides revenue earlier than option 1. loans indicates that macroeconomic con- from the World Bank, 1818 H Street NW, The simulations, however, seem to favor ditionality has been relatively important Washington, DC 20433. Please contact option 1. - and has increased over time. Fiscal Aludia Oropesa, room N11-019, exten- This paper - a product of the Coun- policy, including public expenditure re- sion 39075 (41 pages with tables). try Operations Division, Country Depart- Policy Research Working Paper Series 57 ment II, Latin America and the Carib- The authors relate the foregoing phe- ments within groups that prevent spe- bean Regional Office - analyzes impor- nomena to recent theoretical modeling of cialization, work-extending practices, re- tant policy issues using new approaches. stabilization which are perceived, rightly strictive work hours, and restrictions on Copies are available free from the World or wrongly, as temporary. This brings in output. Bank, 1818 HStreetNW, Washington DC the issue ofcredibilityin the stabilization Harding analyzes how restrictive 20433. Please contact Sheilah King- process. The paper concludes with a dis- practices increase shipping costs - by Watson, room S8-025, extension 31047 cussion of the pros and cons of the ex- increasing ship turnaround time and di- (53 pages with figures and tables). change-rate-based stabilization and ofthe rect labor costs and by reducing labor desirability of switching nominal anchors productivity. He also analyzes how em- in the course of stabilization. ployment would be affected if these prac- 513. The Business Cycle This paper -a product of the Macro- tices were abolished - or what these Associated with Exchange-Rate- economic and Growth Division, Country practices are worth in terms of compen- Based Stabilization Economics Department - is part of a sation payments to displaced workers. larger effort in PRE to examine stabili- He gives examples of three ap- Miguel A. Kiguel and Nissan Liviatan zation policies. It was funded by the re- proaches to abolishing restrictive prac- search project "Stopping High Inflation" tices - gradual, reformist, and drastic. Disinflation programs in chronic infla- (RPO 674-24). Please contactEmilyKhine, He emphasizes that major changes in tion countries do not normally follow the room N11-061, extension 39361(54 pages, restrictive practices are normally associ- usual Phillips curve tradeoff in the me- including figures and tables). ated with changes in a port's cargo-han- dium run. Instead ofhavinga sharp reces- dling organization - by privatization or sion in the early stage of stabilization, concession, for example. there often is an initial expansion of out- 514. Restrictive Labor Practices The Bank, concludes Harding, must put followed by a recession and balance of In Seaports enter the difficult area of labor organiza- payments difficulties. This pattern is re- tion if Bank-funded investments and lated to programs that use the exchange Alan S. Harding trade-related projects are to succeed. At rate as an instrument of disinflation. appraisal, the Bank should analyze the Restrictivepractices maypreventdevelop- extent to which changes in labor ar- Kiguel and Liviatan studied the effects of ing country seaports from benefiting from rangements may be needed to realize disinflation on economic activity in investments in containerization and bulk project benefits, and should examine la- "chronic inflation" countries based on a handling. Port loan appraisals should bor organization, collective agreements sample that includes major Latin Ameri- assess the changes needed in labor ar- and other labor arrangements, legal im- can countries and Israel. rangements and organization - and esti- plications, and the investment's impact Their purpose was to document the mate compensation payments needed for on the work force. main features of the business-cycle phe- displaced workers. The cost of compensation payments nomenon in countries following an ex- should be included in the economic and change-rate-based stabilization program, Containerization and modern bulk han- financial evaluation of a project. Efforts to understand its causes, and to analyze dling methods can substantially increase involving labor must be seen in the con- their policy implications for future stabi- ship and labor productivity. Early debate text of a move toward greater private lization of this type. about whether these methods are appro- sector participation in port operations. Their main finding was that stabili- priatefordevelopingcountrieshaslargely And where privatization is an issue, it is zation processes in chronic inflation coun- ended. At least on routes for which one or essential to analyze what associated tries - most of which use the exchange more partners is a developed country, changesinlabor organization are implied rate as the main nominal anchor - do not costs are minimized by modern, produc- and what opportunities these might offer normally follow the usual Phillips curve tive ships and appropriate port technol- to improve working practices. tradeoff in the medium run. ogy. This paper - a product of the Trans- Exchange-rate-based stabilization But, Hardingargues, manyportshave port Division, Infrastructure and Urban programs in these countries are often failed to change their labor practices and Development Department in conjunction associated with a business cycle that be- to accept the inevitable reduction in their with the Infrastructure and Energy Divi- gins withaboom and ends with recession. labor force that technological advances sion, Technical Department, Latin (Stabilization programs that use the call for. Those ports are doubly penalized: America and the Caribbean Regional Of- money-supply anchor tend to follow the by incurring investment costs and con- fice - is part of a Bank-sponsored re- usual Phillips curve relationship.) These tinuing to pay labor as if earlier labor- search project, "Labor Redundancy in the programs are associated with real appre- intensive methods still applied. Transportation Sector." Copies are avail- ciation, an increase in real wages, and a Harding analyzes productivity-lim- able free from the World Bank, 1818 H tendency to generate a balance of pay- iting or high-cost practices known generi- StreetNW, Washington, DC 20433. Please ment crisis. Most of these features appear cally as "restrictive practices," especially contact Ann Joseph, room S10-029, ex- not only in failed stabilization processes the following: limits on entry to work in tension 33743 (42 pages). but also in those which turned out to be the port, an exclusive definition of dock eventually successful, as in Chile or Is- work, job demarcation to prevent inter- rael. changing labor, work-sharing require- 58 Policy Research Working Paper Series 515. Stock Markets in Developing Drawing on recent experiences in They show analytically that when Countries: Key issues India and Korea, Dailami and Atkin con- the induced effects of terms of trade and and A Research Agenda sider key issues that arise in connection rental rates are considered, the qualitative with the development of equity markets influence of capital mobility on the costs Mansoor Dailami and Michael Atkin in developing countries. Under what con- of protection cannot be ascertained un- ditions does it make sense to encourage ambiguously. (Thus the importance of an- With foreign capital funds dwindling, the development of equity markets? Is a swering this question empirically.) governments in many developing coun- functioning equity market a prerequisite They use a computable general equi- tries - with increased Bank support - for liberalization of the banking system? librium model of the United States to are looking to develop capital markets to Is it useful to think in terms of an optimal estimate these effects empirically. These provide risk capital for the corporate sec- debt/equity mix for a developing economy, estimates indicate the practical impor- tor. But first, some basic issues must be or for a corporation in a developing tance of capital mobility - and of terms- empirically explored. economy? of-trade and rental adjustments -in de- What is the appropriate regulatory termining the ultimate welfare effects of The International Finance Corporation regime for a developing country securities import restraints. (IFC) is heavily involved in developing market? Without effective regulation, in- This paper - a product of the Trade capital markets in developing countries - ternational investors will not have the Policy Division, Country Economics De- - through technical assistance, through confidence to commit resources to devel- partment - is part of a larger effort in direct investments (equity and loans) in oping country markets. PRE to understand the effects of trade financial marketinstitutions, and through Good management skills are scarce policy on industrial efficiency. Copies are its activities (with the Emerging Markets in developing countries. How can matters available free from the World Bank, 1818 Database and various country funds) to be arranged to make optimal use of those H Street NW, Washington DC 20433. stimulate portfolio investment in stock management resources? The stock Please contact Sheila Fallon, room N10- markets in developing countries. market's role in effecting changes in cor- 017, extension 37947 (24 pages). The Bank's increased concern with porate governance could be enormously capital market issues is recent. This con- helpful to economic development. cern reflects growing dissatisfaction with This paper - a joint product of the 517. Do Wage Distortions Justify the paradigm of bank-based finance with World Bank's Financial Policy and Sys- Protection In the U.S. Auto heavy government intervention - and tems Division, Country Economics De- and Steel Industries? awareness of the need for a more inte- partment and the Economics Department grated approach to financial sector devel- of the International Finance Corporation Jaime de Melo and David Tarr opment, resource mobilization, and the - is the first in a planned series of re- promotion of investment and economic search on the performance of capital No. Wage premiums in those industries growth. markets and their role in providing risk may even exacerbate the welfare costs of Several financial sector loans have capital to the corporate sector in devel- protection. included policy recommendations sup- oping countries, funded by the Bank's porting capital market development, a Research Committee (RPO 675-84). Cop- De Melo and Tarr examine the welfare trend that should accelerate as Bank staff ies are available free from the World Bank, effects of protection in two high-wage sec- gain competence handling the complex 1818 H Street NW, WashingtonDC 20433. tors - autos and steel - to determine if issues involved. To the extent that prob- Please contact MariaRaggambi, room N9- protection is justified to correct for the lems in the banking sector originate in 041, extension 37657 (49 pages). misallocationoflabornecessitatedbywage unbalanced capital structures at the cor- distortions. porate level and failure to develop equity If wage premiums are exogenous, markets, capital market development 516. International Capital Mobility under most product market structures clearlyis essential tobankingreform.The and the Costs of U.S. Import labor misallocation is too small to justify complementarity of the banking sector Restraints protection. and securities markets needs exploration. But de Melo and Tarr argue that There is much debate - in both de- Jaime de Melo and David Roland-Holst because of union influence, the wage pre- veloped and developing countries -about mium is endogenous in the auto and steel what kinds of financial institutions and Model estimates indicate the practical im- industry - so wage premiums may even markets best serve economic growth. To portance of capital mobility - and terms- exacerbate the welfare costs ofprotection. what extent, one might ask, can the supe- of-trade and rental adjustments - in de- This paper - a product of the Trade rior performance of Japanese and Ger- termining the ultimate welfare effects of Policy Division, Country Economics De- man economies be attributed to their import restraints. partment - is part of a larger PRE re- market-based system (with a focus on search effort to understand the effects of short-term gains)? Prominent in current De Melo and Roland-Holst evaluate the trade policy on industrial efficiency. Cop- debates about the competitiveness of in- general-equilibrium welfare effects oftar- ies ofthe paper (or of an appendix describ- dustrial nations are issues of corporate iffs, quotas, and voluntary export re- ing the model) are available free from the financial structure and financial market straints under different assumptions World Bank, 1818 H Street NW, Wash- organization. about international capital mobility. ington DC 20433. Please contact Sheila Policy Research Working Paper Series 59 Fallon, room N10-017, extension 37947 ports) have contributed far more to growth rate fell sharply, export growth was nega- (32 pages). than have direct measures (mainly corpo- tive, and there was talk of a new "eco- rate tax rebates for exporters). nomic crisis." Despite these changes in tax policy, 518. Industrial Organization Trela and Whalley use an applied general Korean growth has consistently achieved and Trade Liberalization: equilibrium model to investigate the con- high levels since the early 1960s. Evidence from Korea tribution of outward-oriented policies to This paper - a product of the Public the earlier years of Korean growth. Economics Division, Country Economics Jaime de Melo and David Roland-Holst They conclude: One should look be- Department - is one of a series com- yond tax policy for the main factors un- missionedbytheDivision'sTaxIncentives The welfare gains Korea would realize derlyingstrongKoreangrowth. Taxpolicy Evaluation Project. An earlier draft of -from abolishing the tariffs and equivalent accounts for 6.2 to 7.9 percent of Korean this paper was presented at aWorld Bank import restraints prevailing in 1982 are growth between 1962 and 1982, and only conference on Tax Policy in Developing likely to be substantial. 6.7 percent between 1962 and 1972. Tax Countries. Copies are available free from policy in Korea has accommodated high the World Bank, 1818 H Street NW, Drawing on evidence about industrial or- growth in Korea rather than driven it. Washington DC 20433. Please contact ganization and market structure, de Melo Indirect tax exemptions (rebates of Ann Bhalla, room N10-059, extension and Roland-Holst develop a computable sales and excise taxes on exports) have 37699 (51 pages with tables). general equilibrium model in selected in- contributed far more to Korea's growth dustrial sectors with increasing returns than have direct measures (mainly cor- to scale. porate tax rebates for exporters). But 520. Trade Reform, Policy They use this model to estimate the nontax measures (tariff rebates, interest Uncertainty, and the Current welfare gains Korea would realize from preferences, direct cash subsidies, and Account abolishing the import restraints (tariffs export premia) have played an even and equivalent measures) prevailing in greater part in Korea's development pro- Sweder van Wijnbergen 1982. cess. Under constantreturnsto scale, they Highsavingsrates(almost38 percent Permanent changes in trade policy do not estimate welfare gains to be 1 percent of of GDP in 1988) and high investment affect intertemporalprices and should thus GDP. rates have been central to Korean growth leave private savings unaffected. But if With increasing returns to scale in performance. So have significant trans- trade reform will not be reversed and the three industrial sectors, they estimate fers of labor from rural to urban sectors, government cannot credibly communicate welfare gains ranging from -0.5 percent to especially in the early phases of growth. that intent, consumers trade on the wrong 10 percent of 1982 GDP, depending on Export promotion policies, which stimu- assumption -soprivate savings are lower assumptions about the pricing behavior late manufacturing, moved labor from than they should be. This justifies policy (markup pricing or Cournot competition) the low-efficiency rural sector to the high- intervention to increase private savings. and profit levels that existed under pro- efficiency urban sector. tection. During the period of Korea's extraor- Rapid trade liberalization is often fol- This paper - a product of the Trade dinary growth since the early 1960s, tax lowed by a surge of imports and a deterio- Policy Division, Country Economics De- policy has been used to promote changing ration in the current account. The macro- partment - is part of a larger effort in economic objectives in different ways. economic counterpart of this is a decline PRE to understand the effect of trade In the outward-oriented phase of eco- in private savings. policy on industrial efficiency. Copies are nomic expansion (1961-72), rebates of di- The expectation that tariffs will be available free from the World Bank, 1818 rect and indirect taxes on exports were reimposed lowers the expected consump- H Street NW, Washington DC 20433. used to encourage growth. tion rate of interest (makes current goods Please contact Sheila Fallon, room N10- In the second phase, when Korea was cheaper in terms of future goods). So an- 017, extension 37947 (31 pages with fig- promoting the growth of heavy industry ticipation of a future tariff increase will ures and tables). (steelandchemicals),investmenttaxcred- increase current consumption if the its, tax holidays, and other tax incentives intertemporal substitution elasticity is were used to facilitate sector-specific capi- higher than 1. If consumers internalize 519. Taxes, Outward Orientation, tal accumulation. the impact of future tariff revenues on and Growth Performance In Korea In the most recent trade liberaliza- their after-tax income, the effect on say- tion and structural adjustment phase ings will always be negative - even for an Irene Trela and John Whalley (1980-89), the revenue-raising potential intertemporal substitution elasticity be- of the value-added tax has played an im- low 1. Tax policies have contributed relatively portant part in the move toward policy What is the impact of policy uncer- little to Korea's extraordinarygrowth: less neutrality. tainty on private savings? To deal sepa- than 10percent ofKoreangrowth between Mean growth rates have remained rately with the impact of shifts in 1962 and 1982, and about 3 percent of high in each phase, and have seemedtobe intertemporal prices and with risk aver- export growth. Indirect tax exemptions resilient in the face of frequent policy sion, van Wijnbergen uses the Ordinal (rebates of sales and excise taxes on ex- changes. In 1989, however, the growth Certainty Equivalence approach. He es- 60 Policy Research Working Paper Series tablishes that trade policy uncertainty by 521. World Bank Treatment in SAL design and carefully designed tar- itself will further reduce savings if (1) of the Social Impact geted projects. Longer-term investments there is positive risk aversion and (b) the of Adjustment Programs in the economic and social sectors can be intertemporal substitution elasticity ex- addressed in sector and project lending. ceeds 1. Helena Ribe and Soniya Carvalho Given existingknowledge and data,a This result is interesting for two rea- better treatment of social impact can be sons. First, it shows how policy uncer- Given existing knowledge and data, a bet- achieved, in most cases, at little additional tainty about tariffs reinforces the nega- ter treatment ofthe social impact ofBank- cost and without sophisticated databases. tive effect on savings of an expected policy supported adjustment programs can be The design and implementation of future reversal exactly when intertemporal sub- achieved. Even a modest analysis ofalter- targeted projects can be improved on the stitution elasticity is high. So the two native policy choices can help improve basis of the experience gained so far. effects go in the same direction exactly program design and foster more equitable This paper - a product of the Review when they matter most. growth. Groups that may be adversely and Analysis Division, Policy and Review Second and more academic, in the affected can be protected with targeted Department -is part of a larger effort in standard expected utility approach, risk projects. PRE to help improve the treatment of aversion is low when intertemporal sub- social impact issues in adjustment pro- stitution is high, because the relevant Since 1987 the Bank's operational guide- grams supported by the Bank. Copies are elasticities are each other's inverse - so lines have required President's Reports available free from the World Bank, 1818 whenever the uncertainty effect is impor- supporting structural adjustment loans H Street NW, Washington DC 20433. tant, the direct anticipation effect is not, (SALs) to pay particular attention to an Please contact Marilou Abiera, room S13- and vice versa. This result is reversed in analysis of the short-term impact of the 033, extension 31262 (58 pages with an- the non-expected utility approach, as van adjustment program on the poor and to nexes). Wijnbergen found out: the two effects are measures proposed to alleviate negative complementary where the direct antici- effects. Ribe and Carvalho review how pation is important. SAL President's Reports prepared be- 522. A Survey of the Costs These results have important policy tween July l986 and December l988have of World Sugar Policies implications. If trade reform will not be addressed the social impact issue. reversed but the government cannot They find that most efforts to address Brent Borrell and Ronald C. Duncan credibly communicate that to the private the social impact of adjustment programs sector, consumers effectively trade on the have focused on targeted projects, in- Liftinggovernmentcontrolsonsugarprices wrong intertemporal prices. So, private cluding special employment programs, and production would probably increase savings are lower than they should be. nutrition projects, resettlement projects, world sugar prices. World prices would This justifies policy intervention to in- and credit, severance pay, and retraining definitely be less volatile, and the end of crease private savings, preferably through projects for displaced workers. A great intervention would certainly improve a temporary increase in consumption deal of experience has been gained in world welfare, especially in the sugar- taxes. If this is not feasible, the second designing and implementing targeted exporting developing countries. best is a temporary tariff - the equiva- projects and this can help toimprove their lent to gradual rather than "cold turkey" future effectiveness. By contrast, there The world sugar market has long been liberalization. has been little analysis of the impact of characterized by volatile prices and wide- The case for such intervention is the chosen policymixon major sub-groups spread intervention. strengthened by the possibility that the in poverty. Design modifications other Controls on domestic prices, demand, private savings response could create such than reallocations of social expenditures, and supply have created an inefficient a large current account deficit that the have received relatively less attention. pattern ofworldproduction, consumption, trade reform itself would indeed get re- For example, the composition, incidence, and trade. Without government controls, versed - in a self-fulfilling prophecy. and effectiveness of public expenditures production would shift from the subsi- This paper is a product of the Coun- and their implications for reducing pov- dized, higher-cost countries (especially try Operations 1 Division, Country De- ertyhave not generally been examined. In Japan, the European Community, and - partment II, Latin America and the Car- more recent Bank-supported adjustment the United States) to the lower-cost coun- ibbean Regional Office. Copies are avail- programs, however, more attention is be- tries (such as Australia, Brazil, and able free from the World Bank, 1818 H ing paid to the social impact of policy Thailand). Street NW, Washington DC 20433. Please decisions. The resources saved couldbe directed contact Margaret Stroude, room 18-159, In preparing for adjustment opera- to other activities, and with lower sugar extension 38831 (10 pages). tions, Bank staff should explore policy prices, consumers wouldhavemore money choices that eliminate economic distor- to spend on other goods and services. tions in a way that creates a basis for a Borrell and Duncan describe how more equitable pattern of long-term government support of sugar producers growth. To the extent that some adjust- exacerbates the volatility of sugar prices. ment measures may hurt the poor in the Government-controlled increases in pro- short term, this should be mitigated duction have come only after price peaks through both appropriate modifications (as in 1963, 1974, and 1980). The result- Policy Research Working Paper Series 61 ing surges in production far exceeded nornic integration in 1992 provides an exporters $0.03, and the world economy steady growth in consumption. opportunity to reform those policies and $0.02. Production increases greatly when find more efficient mechanisms for pro- Andtheaid-receivingcountrieswould world prices are high but does not con- viding aid. getalargernetbenefitbecausetheywould tract greatly when they are low. When not incur the costs of producing bananas world prices fall because of a surge in Banana import and pricing policies vary above the free trade level to qualify for production, protective policies are acti- widely among the members of the Euro- aid, as is presently the case. Those re- vated to supportthe expanded industries, pean Community. The EC Commission sourcescouldbe usedin other enterprises, causing world prices to remain depressed intends to replace national markets with and the direct aid payments could be for several years. a single market in 1992. At that time a efficiently targeted (to modernize the ba- Because so many domestic markets uniform policy toward banana imports nana industries or perhaps to diversify are insulated, the burden ofadjustmentis must be adopted. these economies) - rather than lock re- borne by the relatively small unprotected Special import and pricing arrange- sources into inefficient economic sectors, exporting countries (such as Thailand). ments presently confer large subsidies to as presently happens. -Moreover, to induce needed adjustments specific African, Caribbean, and EC ter- This paper - a product of the Inter- in supply and demand, the world price ritorial dependencies - to the disadvan- national Trade Division, International must vary more than is otherwise neces- tage of other exporting (mainly Latin Economics Department - is part of a sary. American) countries. A"common"banana larger effort in PRE to understand the Borrell andDuncan surveyestimates regime and single EC market could sub- implications for developing countries of of the economic costs of various forms of stantially alter world trade in bananas changes in the industrial countries' trade government assistance to sugar indus- and the welfare of banana-exporting re- policies. Copies are available free from tries. gions. the World Bank, 1818 H Street NW, The impact ofpolicies in the high-cost Borrell and Yang have simulated Washington, DC 20433. Please contact countries (Japan, the EC, and the United policy options open to the EC in forming a Sarah Lipscomb, room 87-062, extension States) is to reduce world sugar prices in single banana market, to illustrate the 33718 (31 pages). the long run (perhaps by more than 30%), implications of change for trade and wel- to increase price variability by as much as fare. They found that: 28%, and to increase the probability of * EC adoption of free trade in ba- 524. The Kuwaiti NGOs: very low prices. The impact of production nanas would lead to a 9% increase in EC Their Role in Aid Flows controls in Australia and Brazil is to in- imports, a decline of 46 percent in exports to Developing Countries crease world prices and the instability of by favored countries (equal to an annual world prices. welfare loss of US$209 million), a 12 per- Nural Abdulhadi What would happen if all interven- cent increase in banana exports by tions ceased? It cannot be concluded un- nonfavored exporters (equal to an annual A substantial amount of Kuwaiti private ambiguously that average world sugar welfare increase of $60 million), and an aid flows to developing countries - an prices would increase, but they probably annual increase in EC welfare of $386 example ofSouth-to-South aic. More con- would. World prices would definitely vary million (in 1987 prices). tact and collaboration between Kuwaiti less, and world welfare would definitely * Current policies (compared to free NGOs and otherNGOs, donors, and inter- improve, especially in developing coun- trade) cost EC consumers about $1.85 and national organizations might be mutually tries that dependheavily on sugar exports. nonfavored countries $0.29 for every dol- beneficiaL This paper - a product of the Inter- lar of "aid" received by preferential sup- Abdulhadi reports that the Kuwaiti non- national Trade Division, International pliers. The inefficiencies involved in this governmental organizations (NGOs) are -Economics Department - is part of a transfer cost the world economy an esti- more active than is widely known. larger effort in PRE to understand the mated $0.92 for each dollar of aid. Kuwaiti NGOs provide substantial implications for developing countries of * Imposing a tariffof16.7percenton amounts of private aid to developing changes in the industrial countries'trade (the landed C value of) all EC banana countries - an estimated $70 million to policies. Copies are available free from imports to finance a deficiency payment $90 million in 1987-88. This compares the World Bank, 1818 H Street NW, scheme aimed at maintaining aid to pref- favorably with Kuwait's official develop- Washington, DC 20433. Please contact erential suppliers after 1992 would make ment assistance of $316 million in 1987 Audrey Kitson-Walters, room S7-053, ex- aid more efficient. Every dollar of aid (down from about $1 billion in the first tension 33712 (26 pages). would cost EC consumers an estimated half of the 1980s). $1.27, nonfavored countries $0.24, and Much of this external aid goes to the world economy $0.34. Africa, the Middle East, and Southeast 523. EC Bananarama 1992 * But direct payment ofaid would be Asia- particularly to poorer segments of the most efficient method for delivering the population in rural areas. Kuwaiti Brent Borrell and Maw-Cheng Yang aid. A tariff of 16.1 percent on all imports NGOs provided aid, for example, after the would cover the current level of aid trans- floods in Bangladesh, the wars in Leba- The EC countries' banana import policies fer. Every dollar of aid received by prefer- non and Afghanistan, the uprising in the are costly mechanisms for aiding prefer- ential supplying countries would cost EC West Bank and Gaza Strip, and the ential supplier countries. European eco- consumers an estimated $1.01, nonfavored droughts in Africa. 62 Policy Research Working Paper Series But Kuwaiti NGOs have little con- ily social class background, and the num- association of industrial employers). tact with other NGOs - international, ber of hours students spent working. This paper- aproductofthe Educa- bilateral, or in developed and developing tion and Employment Division, Popula- countries. Most Kuwaiti NGOs would Lockheed and Bruns use a multilevel tion and Human Resources Department welcome contacts and cooperation with modeling procedure to explore (1) the - is part of a larger effort in PRE to others working in similar areas and sec- percentage ofvariance in secondary school understand differences in educational ef- tors. achievement in Brazil that could be at- fectiveness. Copies are available free from As "South-to-South" NGOs, Kuwaiti tributed to the types of school attended, theWorldBank, 1818HStreetNW,Wash- NGOs add significantly to private aid, (2) differences between schools in stu- ington DC 20433. Please contact Cynthia which is otherwise dominated by NGOs dents' achievement in mathematics and Cristobal, room S6-033, extension 33640 from industrial countries. Portuguese, and (3) differences between (26 pages). Kuwaiti NGOs - especially those schools in reducing achievement differ- working in the field, in close proximity to ences based on students' socioeconomic beneficiaries and local communities and status. 526. Rural Poverty In India, NGOs -- could benefit the donor Studentsin federal technical schools 1973-86 community's discussions with local NGOs outperformed students in general sec- about community participation in sus- ondary, SENAI,* and teacher training Nanak Kakwani and Kalinidhi Subbarao tainable, flexible programs. schools in both mathematics and Portu- And more external contacts would guese, after holding constant for gender, Growth (trickle-down) and poverty alle- help Kuwaiti NGOs improve their insti- age, family size, and the number of hours viation (pull-up) programs are not sub- tutional development efforts and their the student spent working. This could stitutes for each other, but complements, effectiveness in rural areas. reflect differences in students'entry-level the Indian data on poverty show. Most Kuwaiti NGOs support pro- performance as admission to federal grams both inside and outside of Kuwait. technical schools in Brazil is highly selec- The effects of economic growth can trickle Only three Kuwaiti NGOs are totally tive. down - but it rarely happens automati- outward oriented. A list of NGOs pro- For mathematics only, students in cally, conclude Kakwani and Subbarao, vided by Kuwait's Ministry of Social Af- private schools outperformed those in after assessingthe impactofconsumption fairs and Labor suggests that much of public schools. growth on India's poor and ultrapoor be- Kuwaiti private aid supports development To explain why students in federal tween 1973 and 1986. effortsin developingcountries. This trend technical and private schools outper- Conversely,growth'sbeneficialeffects is expected to persist even if there is a formed students in other schools, on the incidence of poverty can, but need shift toward support of lower-income Lockheed and Bruns explored variations not,be offsetoreven nullifiedbyincreased groups in Kuwait. in their organization, quality, and social inequality of consumption. In India, in This paper - a product of the Policy composition. 1973-77, they were. and Review Department - is part of a Factors significantly related to aver- The policy response - a series of larger effort in PRE to understand and age mathematics achievement were class antipoverty (consumption-equalizing) in- promote the contributions of nongovern- size (achievement was higher in larger terventions since the mid-1970s, aimed at mental organizations to development. classes) and the number of hours math raising the income and consumption lev- Copies are available free from the World was taught (the more time, the higher els of the poor and the ultrapoor - was Bank, 1818 H Street NW, Washington, average achievement), and the school's basically sound. DC 20433. PleasecontactRosettaGrimm, average student socioeconomic status In 1977-83, average consumption room S12-018, extension 31129(17 pages). (family social class background), suggest- grew slowly but inequality of consump- ing that student selection into the schools tion fell in many states - and poverty accounted for much of the observed differ- and the poverty gap were reduced more 525. School Effects ence. than in the earlier period. Why is not on Achievement in Secondary Factors significantly related to aver- clear, but the role of direct interventions Mathematics and Portuguese age achievement in Portuguese were the cannot be minimized. In Brazil school's organizational complexity, the Program effectiveness is clearly average socioeconomic status, and the weaker in the poorer states, however, and Marlaine E. Lockheed and Barbara Bruns average number of hours students spent needs to be strengthened. Employment working. programs especially - which substan- Students in Brazil's federal technical Performance was not different for tially increased rural employment and schools outperformed students in other schools payinghigher salaries, day schools, income growth - require more effort in schools in both mathematics and Portu- high-fee schools, or schools where teach- Bihar and West Bengal. guese. Important factors were class size ers attended university. The Kuwaiti Just as increased inequality hurts (achievement was higher in larger NGOs. the ultrapoor disproportionately, so a de- classes), the number of hours math was *SENAI secondary schools are financed by the cline in inequality benefits the ultrapoor taught (the more the better), the school's federal government but administered by the more than the poor. From 1983 to 1987, organizational complexity, average fam- National Confederation of Industry (a private growth was high and there was almost no Policy Research Working Paper Series 63 change in inequality between states. The When sovereign debt trades at a discount This paper - a product of the Debt growth effect dominated a substantial on secondary markets, a market buyback and International Finance Division, In- decline in poverty. increasesthe secondarymarket price. The ternational Economics Department - is Between 1973-74 and 1986-87, rural wealth of private creditors increases be- part of a larger effort in PRE to under- poverty declined substantially. The inci- cause part of the funds used in the repur- stand the costs and benefits of various dence of poverty declined from 60.6 per- chase is a transfer payment to them. mechanisms of debt settlement in the cent to 41.5 percent and its severity (the This transfer of resources can be context of the international debt crisis. gap between the poverty line and an aver- mitigated by imposing a capital gains tax Copies are available free from the World age poor person's income) fell from 18.8 on the remaining debt. Diwan and Kletzer Bank, 1818 H Street NW, Washington, percent to 10.5 percent. Even the absolute showhow this can be achieved byincluding DC 20433. Please contact Sheila King- number of poor declined by about 37 mil- exit and new-money options in a menu of Watson, room S8-025, extension 31047 lion. The poverty ratio has become more options from which creditors can freely (33 pages). responsive to (1) growth and (2) changing choose. The menu approach imposes an inequalityinconsumption, exceptinBihar implicit tax on the capital gains on the and West Bengal. remaining debt by requiring lenders that 528. Monetary Policy Instruments Both growth and poverty alleviation do not exit to extend new loans in pro- for Developing Countries efforts contributed to this success, con- portion to the debt they retain. clude Kakwani and Subbarao. But on the It is enough to make the buyback Gerard Caprio, Jr. and Patrick Honohan whole investments and performance in price equal to the earlier predeal price. health, education, and nutrition are Any new-money call will do the job. In Rapidly changing financial markets have unimpressive. It is their impression that equilibrium, creditors will provide enough led many industrial and some developing the social policies that can raise the capa- new money to stabilize the post-deal price countries to change to indirect methods of bilitiesofthe Indian people have generally at a level that leaves them indifferent to monetary control. More developing coun- beenrelegated tothe backgroundin Indian the exit option. Increasing the new money tries can be expected to follow their lead. policymaking. call increases the cost of the menu as well Thispaper-aproductofthe Welfare as the extent of the debt reduction In the last few years, many industrial and Human Resources Division, Popula- achieved. countries have considerably changedtheir tion and Human Resources Department The menu approach Diwan and approach to formulating monetary policy. - is part of a larger effort in PRE to Ietzer describe does not require that These changes have accompanied-been understand better the impact of general particular choices from the menu be as- a response to and a catalyst for - rapid and targeted policies on poverty. Prelimi- signed to each lender. Instead, it imple- changes in the sophistication and depth of nary results of this study were reportedin ments debt reduction through a price financial markets. the paper "Poverty and Its Alleviation in system, allowing different creditors to In developing countries, both the India,"in Economic andPolitical Weekly, select different portfolios in equilibrium evolution of financial markets and grow- 1990. This version was extended to cover from a common set of options. ing disenchantment with directed credit 1986-87 and was substantially revised to With heterogeneous banks, some re- programs and bank-by-bank credit ceil- accommodate the new evidence. Copies sources will be transferred when partici- ings have increased the interest in at are available free from the World Bank, pation in the debt reduction plan is vol- least examining and possibly moving to 1818 H Street NW, Washington, DC untary - and the buyback price will indirect methods of implementing mon- 20433. Please contact Brenda Rosa, room generally need to be higher than the etary policy. S9-137, extension 33751 (79 pages). prebuyback price. These developments have implica- Diwan and Kletzer illustrate some of tions beyond their direct impact on the their results by analyzing the recent effectiveness of macroeconomic stabiliza- 527. Voluntary Choices In Mexican debt agreement. They show how tion and control of inflation. They can Concerted Deals: Mechanics and to read through the complex financial strongly influence the efficiency andlong- Attributes of the Menu Approach acrobatics to estimate the net debt reduc- term development of the financial system tion. Funds provided by international fi- and its contribution to economic growth. Ishac Diwan and Ken Kletzer nancialinstitutionsbenefitedbothMexico Caprio and Honohan provide an andits creditors. Mexico directly retained overview of the policy issues developing When lenders participate voluntarily in a about 62 percent of these resources and countries face in light of industrial coun- buyback ofdebt claims, both thepricepaid the banks 34 percent. try experience in the last two decades. for repurchased claims and the secondary When creditors are heterogeneous They discuss the objectives of monetary market price ofthe remaining debt rise - and possess private information about policy and how these have evolved in so all creditors realize a net benefit. In the value of debt reduction to them, a recent years, and they describe the differ- contrast, the menu approach to debt re- mechanism is needed to elicit that infor- ent policy instruments that have become duction allows the debtor to reduce its debt nation. Researchers should analyze how available tomonetaryauthorities andhow at cheaper prices. a menu can be combined with an auction these instruments can be used to cope of new money or exit instruments to elicit with the main shocks affecting monetary that information policy - those related to government Policy Research Working Paper Series deficit financing and to external flows. to the rural sector allowed Indonesia to This paper - a product of the Agri- Shifting from direct ways of control- maintain the momentum ofits progress in cultural Policies Division, Agriculture and ling monetary policy is by no means uni- poverty alleviation during the difficult Rural DevelopmentDepartment-is part versally appealing, they conclude. Direct 1980s. of a larger PRE research effort: "Policy controls are simple to operate and seem to Analysis and Poverty: Applicable Meth- offer a sure handle on overall credit or Huppi and Ravallion examine the struc- ods and Case Studies." Copies are avail- money growth. Several observers have ture of poverty in Indonesia by sector of able free from the World Bank, 1818 H noted that moving away from direct con- employment - and how it changed dur- Street NW, Washington DC 20433. Please trols often involves a fundamental ing the adjustment period, 1984 to 1987. contact Cicely Spooner, room N8-039, reorientation of central bankers and gov- They find that, while aggregate pov- extension 30464 (47 pages, with tables). ernment officials, not only toward directed erty decreased during the period, the gains credit but toward the financing of gov- to the poor were quite uneven across re- ernment debt. gions and sectors. Gains to the rural sec- 530. The Menu Approach But monetary officials in some coun- tor in key regions were quantitatively to Developing Country External tries have found that there is no foolproof important to Indonesia's success in alle- Debt: An Analysis of Commercial way to guarantee the achievement of any viating poverty, they found. Most poverty Banks' Choice Behavior overall monetary target. Bank-by-bank exists - and most gains in alleviating credit ceilings suffer the same limitation: poverty were made - in the rural farm- Ash Demirgig-Kunt and Ishac Diwan eventuallynonbanksarisetoescapecredit ing sector. These gains were associated limits, and banks have every incentive to with crop diversification and continued Suppose that each creditor bank to a evade controls. Moreover, such ceilings growth in off-farm employment. particular debtor country is confronted limit competition and - by choking off The aggregate distribution of con- with a choice: each dollar of country debt innovation and prompting excessive sumption changed little around its grow- held can be either rescheduled or sold at a holdings ofliquidity - can curtail growth ing mean, but substantial shifts in distri- given price. What choice will they make? both in the financial sector and in the rest bution occurred within sectors - so there Relatively strong banks will take advan- of the economy. was virtually no correlation between tage ofa debt workout toexitfromthedebt. Not all countries are now in a position sectoral growth rates and rates of poverty Relatively weak banks will relend. to apply the experience already gained by alleviation. This has important implica- industrial countries immediately in op- tions for applied general equilibrium DemirgiV-Kunt and Diwan explore what erating indirect methods of monetary models of the effects of adjustment on determines the choice banks will make control, but more and more monetary poverty. Two features ofthe government's when confronted with a "menu" of exit authorities can be expected to follow the adjustment program favored rural areas instruments and new-money options, as lead taken especially by several Asian and were crucial to Indonesia's evident is now typical in debt workouts for devel- economies. success at maintaining momentum in al- oping countries. This paper - a product of the Fi- leviating poverty: In particular, they examine how de- nancial Policy and Systems Division, * Devaluations increased agricul- posit insurance and rules on capital ad- Country Economics Department-is part tural exports (largely nonfood crops). The equacy affect a commercial bank's exit of a larger effort in PRE to examine the poor shared in sizable gains in cash crop decision - arguing that these exit deci- effects of economic regulation on the fi- incomes. sions are influenced mainly by the struc- nancial sector. The paper draws on dis- * The government and others argue ture of the banks' balance sheets and by cussions at a May 1990 seminar on mon- that a serious attempt was made to pro- the regulatory systems within which they etary policy instruments sponsored by tect fiscal allocations to programs that operate. this Division, with the assistance of the directly benefited the poor. The real cuts The FDIC insurance subsidy is more International Monetary Fund. A volume in public spending were on development valuable to weak institutions, they argue, - of seminar proceedings will be published spending - especially in more capital- so a bank's valuation of the debt claims it in 1991. Copies of this paper are available intensive industrial and mining projects. holds is inversely related to the bank's free from the World Bank, 1818 H Street Programs that directly benefited the poor financial strength. For a given menu, the NW, Washington, DC 20433. Please con- - including labor-intensive rural infra- relatively weak banks choose to relend. tact Wilai Pitayatonakarn, room N9-003, structure projects- were sheltered in an The banks that choose to exit are extension 37666 (21 pages). attempt to expand rural employment op- those that are financially "strong" and portunities during the adjustment. have relatively high exposure to the coun- The adjustment package undoubt- try whose debtisbeingrecontracted. Con- 529. The Sectoral Structure edly helped, conclude Huppi and trary to common belief, bank size alone of Poverty During An Adjustment Ravallion, but one should not underrate doesnotsignificantlyaffectexitbehavior. Period: Evidence for Indonesia thefavorable conditionsin Indonesiawhen Demirgaq-Kunt and Diwan testtheir in the Mid-1980s adjustment started. Aperiodofsustained, results using individual banks' choices in fairly equitable growth for several years the 1988 Brazil rescheduling deal, the Monika Huppi and Martin Ravallion before adjustment created the circum- first package specifically based on the stances in which, by the mid-1980s, the menu approach to debt workouts. Their Favorable initial conditions, a timely ad- momentum of poverty alleviation could empirical results statistically link com- justment program, and associated gains be maintained at lower growth rates. mercial banks' characteristics to their Policy Research Working Paper Series 65 portfolio choices - with 83 percent pre- ment officials and program managers, Apart from greater price flexibility dictability in this sample. mainly through discussions, Bank-spon- and the dilution of some monopolies, SEE Among the implications for the new sCred seminars, and project development. reform has not made much headway - debt reduction strategy: Population sector work, which ana- mainly because the government has been * Larger debt reductions negotiated lyzes the population sector in a particular reluctant to adopt and pursue an effective on a market basis are more costly, per country, provides a base for operational reform program. unit of debt reduced. To increase debt activitiesandforinitiatingpolicydialogue Emphasis has instead been put on reduction, weaker banks must be per- with program managers. privatization broadly defined, with the suaded to exit, increasing the needed exit Population research in recent years additional objectives of developing the price. has focused on alternative policy and domestic capital markets and generating * The exit price depends on the program strategies. revenue for the treasury. The initial op- strength of the banking industry. So the The Bank's work in policy develop- erations were in the form of sales of rev- effectiveness (and cost) of the present ment has contributed greatly to shifts in enue-sharing bonds and minority share debt strategy is affected by changes in the government population policy in many sales. The first attempt at stock sales world economy. In boom periods, banks countries, and its operational strategies flopped, because it took place in a falling are stronger and exit prices reduced. have helped shape population programs market. The approach was then quietly * Regulators can affect the cost of in others. Its work program in the coming switched to block sales without thorough debt reduction by altering the regulatory years will continue to stress policy work. preparation of the legal ground. The sales framework within which the banks oper- This paper - a product of the Popu- went to foreigners, the highest bidders, ate. lation, Health, and Nutrition Division, but this generated much controversy * Debt reduction in the developing Population and Human Resources De- among unions, opposition parties, and countries is beneficial to the deposit in- partment - is part of a larger effort in industrialists. surance agencies of the major creditor PRE to disseminate the Bank's population Privatization became a contentious nations. activities to a broad Bank and non-Bank political issue that the opposition parties This paper - a product of the Debt audience. Copies are available free from exploited, often in a populist manner. and International Finance Division, In- the World Bank, 1818 H Street NW, They got the block sales canceled by court ternational Economics Department - is Washington, DC 20433. Please contact orders - on the grounds that the switch partofalargereffortinPREtounderstand Otilia Nadora, room S6-065, extension to foreign sales was illegal. bank choices in debt restructurings. Cop- 31091 (23 pages). The government had not prepared ies are available free from the World Bank, the legal, institutional, and political base 1818 H Street NW, Washington, DC for privatization. It had no clear strategy 20433. Please contact Sheilah King- 532. Privatization In Turkey and concrete program for privatization Watson, room S8-025, extension 31047 and its assumption that privatization (35 pages). Sven B. Kjellstrom could be treated as an administrative matter was proven wrong. Much was said, Turkey's privatization effort has shrunk little done. Excessive claims, without due 531. The World Bank's Role to being a technique for financing the safeguards, generated a malaise among in Shaping Third World Population budget deficit, with loftier targets for groups that privatization could adversely PolIcy greater efficiency pushed into the back- affect. ground. The cancellation of block sales coin- Fred T. Sai and Lauren A. Chester cided with a boom on the stock market. State capitalism has been a basic tenet of Moreover, the treasury came under pres- The Bank's comparative advantage in the the developing strategy of the Turkish sure to generate revenue to contain a population field lies in policy develop- Republic for half a century, with import- growinglbudget deficit. The sales strategy ment, which it pursues through three main substituting industrialization through thus switched back to stock market sales strategies: policy dialogue, sector work, state economic enterprises (SEEs) as a of minority shares. The share sales pro- and policy-oriented research. guiding principle. But by 1980 a serious gram has so far been a success, and the economic and political crisis called for a proceeds could finance a large part of the Since the World Bank became involved in reassessment of economic policies. The 1990 budget deficit. At least for the mo- population work in 1969, it has sought to policy reorientation was radical: from ment, privatization has thus shrunk to a influence Third World population policy import substitution to export promotion, budget-deficit financing technique, with by undertaking several types of activity: from interventionism to market forces, the loftier targets of enhanced efficiency lending, policy dialogue, economic and and from the promotion of SEEs to the pushed into the background. sector work, analysis and research, and promotion of the private sector. This paper - a product of the Resi- collaboration with other international The state's role in the economy was to dent Mission in Turkey, Country Depart- agencies. be reduced. SEEs were to be streamlined ment I, Europe, Middle East, and North The Bank's comparative advantage and made more efficient by operating in a Africa Regional Office - is part of the lies in policy development. It uses three more competitive environment under Bank's effort to evaluate the experience main strategies: policy dialogue, sector greater cost and price awareness. Greater with privatization. Copies are available work, and policy-oriented research. efficiency would come from either SEE free from the World Bank, 1818 H Street Policy dialogue occurs with govern- reform or privatization. NW, Washington, DC 20433. Please con- 66 Policy Research Working Paper Series tact Thouria Nana-Sinkan, room H4-091, between fiscal policy and macroeconomic are available free from the World Bank, extension 36026 (73 pages, with graphs development. Copies are available free 1818 H Street NW, Washington, DC and tables). from the World Bank, 1818 H Street NW, 20433. Please contact Joseph Israel, room Washington DC 20433. Please contact S7-218, extension 31285 (26 pages). Ann Bhalla, room N10-059, extension 533. Government Revenue 37699 (46 pages, with figures and tables). from Financial Repression 535. Shared Investment In General Training: The Role of Information Alberto Giovannini and Martha de Melo 534. Risk Facing U.S. Commercial Banks Eliakim Katz and Adrian Ziderman In theory, governments should not resort to financial repression when they face no Menahem Prywes Making it difficult for a (recruiting) firm constraints on taxation. In fact, countries to know how much a worker has been obtain substantial implicit revenue from Heavy exposure to risk in bank loan port- trained increases a (training) firm's in- financial repression. folios, together with the introduction of centive to offer workers general training. higher capital requirements, suggests a Both minimum wage legislation and Giovannini and de Melo explore the slowdown in the growth of credit. That training certification discourage on-the- theoretical underpinnings and empirical means weaker U.S. investment and con- job-training. relevance to public finance of financial sumption may be expected as well as less repression - of controls on international credit to the highly indebted countries. Katz and Ziderman take issue with the capital flows and on domestic financial prediction - now standard - that firms intermediaries. They conclude: Prywes examines the financial condition will be unwilling to finance training in * In principle, countries should not of the U.S. commercial banks and of the transferable skills, given the absence of resort to financial repression when they main private borrowing sectors -- property rights over these investments face no constraints on taxation, but such households and corporate nonfinancial and the possibility of workers being re- constraints as administrative cost and businesses. cruitedbynontrainingfirms.GaryBecker income distribution objectives might jus- He finds that the bank's loan portfo- has argued that for such training to take tify an implicit tax on domestic financial lios expose them to the risk of high losses. place, workers must themselves bear the markets. That risk - together with the forthcom- burden of financing: without freely work- * The revenue from financial repres- ing increase in the required ratio of capi- ing capital markets, market failure re- sion, measured as the difference between tal to assets - gives banks the incentive sultsin toolittle training being demanded the foreign and domestic costs of govern- to build capital, which they may do by and provided. ment borrowing, can be substantial. The slowing down the growth of credit. Extending an approach presented in unweightedcross-countryaverageisabout One consequence would be weaker PRE Working Paper 170, Katz and 2 percent of GDP and 9 percent of total U.S. investment and consumption. Ziderman argue that potential recruiting government revenue (excluding the rev- Moreover, credit would probably be firms possess only limited information enue from financial repression), but var- directed away from higher risk borrowers about the type and level of general train- ies significantly among countries. such as the highly indebted countries. ing that workers will have received in * Reform aimed at liberalizing fi- Suchlendingis unlikelytorecover rapidly other firms. The informational asymme- nancial markets - removing interna- - except at exorbitant rates. If this cycle try between a training and a recruiting tional capital controls and price and follows its historic pattern, there will be firmreducesthenetbenefitsaworkercan quantity rationing in domestic financial an upswingin the growth of bank lending obtain by moving to another (recruiting) intermediation - should first estimate in the longer term, providing new oppor- firm - which increases the (training) what amount of government revenue tunities for creditworthy developing firm's incentive to finance general train- comes from financial repression and pro- countries. ing. vide for the revenue shortfall that will Financial problems are likely outside The cost to the recruiting firm of result from financial liberalization. the United States, partly because of links discovering a trained worker's potential * In general, countries with higher between real interest rates and the cova- productivity is high. Katz and Ziderman rates of inflation, and therefore higher riance of equity prices. This suggests pro- discuss the role of the options value of rates of currency depreciation, tend to tracted high global rates and limited pri- general training in raising information raise more revenue from financial repres- vate credit flows for development. This asymmetry. They show Becker's training sion -because therelative costs offoreign conclusion needs to be sharpened by com- model to be a special case of zero asym- anddomesticborrowingareinfluencedby parative research on the industrial metrical information - rather than a the domestic currency's rate of deprecia- countries. general model of training finance. tion, since domestic nominal interestrates This paper - a product of the Inter- This finding has important policy im- are normally fixed administratively. national Economic Analysis and Prospects plications. Asymmetrical information This paper - a product of the Public Division, International Economics De- counters the deleterious effects on gen- Economics Division, Country Economics partment - is part of a larger effort in eral training of such market imperfec- Department - is part of a larger effort in PRE to identify trends which underlie the tions as minimum wagelegislation(which PRE to explore in more detail the links international economic outlook. Copies makes it difficult for a training firm to Policy Research Working Paper Series 67 recover training costs) and a restricted and a nutrition problem may or may not be It has often been argued that if several capital market. the result of an inadequate supply of food. developing countries expand exports, they Katz and Ziderman suggest that The fact that nutrientintake does not are likely to experience a decline in their training certification - by facilitating increase with income is not itself a cause terms of trade, export revenues, and real interfirm mobility - discourages on-the- ofconcern, though itis viewed that way by incomes. The general case for this export job training. Certification, by awarding some who identify nutrition exclusively pessimism has lost much of its force, but workers property rights over their general with nutrient intake. Such a view over- remains very much alive for some specific training, limits company-financed train- looks the fact that households have the countries and commodities - particu- ing and places a heavier financing burden choice of spending increments in food ex- larly the export from Africa of cocoa, cof- on workers. Certification makes the work- pendituresonnutrientsbutpreferiospend fee, and tea, which exhibit low price ers'trainingvisible-butdecreasesasym- it on other food attributes. It also ignores elasticity. metric information between firms. the fact that these other food (and nonfood) Panagariya and Schiff systematically This paper - a product of the Edu- attributes may also contribute to nutri- analyze this issue for cocoa, a commodity cation and Employment Division, Popu- tional status (for example, food freshness for which many African countries have a lation andHuman Resources Department and cleanliness, refrigeration, and so on). large share in world exports. Their con- - is part of a larger effort in PRE to In urban areas, nutritional and cern is chiefly with the problems that develop policies to improve private and health status can probably best be raised arise from low price elasticity of demand public skills training in developing coun- through the provision ofpublicly provided in the world market and their implica- tries. Copies are available free from the inputs (sewerage, potable water, and so on). tions for trade policy. World Bank, 1818 H Street NW, Wash- Inrural areas, nutritional andhealth They find that increasing productiv- ington, DC 20433. Please contact Valerie status dependlargelyonhouseholdinputs ity in one African country through new Charles, room S6-049, extension 33651 - which depend on income. So raising investments would benefit that country- (28 pages). the rural household's income can raise its - but the other African countries would nutritional and health status. lose. On the whole the African countries One of the best ways to raise farm would gain, however, so the gains to the 536. The Link Between Poverty and income is to reduce taxes on agricultural country with expanded output would Malnutrition: A Household production; another is to increase public dominate the losses for the other coun- Theoretic Approach spending on factors that raise land and tries. The return on the new investments labor productivity in rural areas. Schiff for Africa as a whole would be positive - Maurice Schiff and Alberto Vald6s and Vald6s argue that agricultural ex- although significantlylowerthan returns port-led growth has real potential for cre- for the country in which the new invest- Past studies have identified nutrition ex- ating jobs, reducing poverty, and thereby ments were made. clusively with nutrient intake. A better contributing to improvements in the nu- Panagariya and Schiff: definition of nutrition (as the one used tritional status of the poor. * Examinehowrealincomesand tax here) would critically affect the link be. This paper - a product of the Trade and export revenues compare under ex- tweenpovertyandmalnutritionandwould Policy Division, Country Economics De- isting and some alternative (Nash, myo- affect the implicationsforpolicies designed partment - is part of a larger effort in pic) taxes. to improve the nutritional status of the PRE to study the impact of agricultural * Analyze the impact of export ex- poor. pricing and trade policies, and is a by- pansion (through increased efficiency) on product of the Comparative Study of the real income, export revenues, and tax A household's nutrition level or status Political Economy ofAgricultural Pricing revenues, under alternative tax regimes. depends only partly on its nutrient intake Policies in Developing Countries. Copies * Compare the effects of export ex- (calories, protein, vitamins, and the like). are available free from the World Bank, pansion by African countries with thatby It is also a function of: 1818 H Street NW, Washington, DC non-African countries. * Non-nutrient food attributes that 20433. Please contact Sheila Fallon, room Their results - highly tentative - affect nutrition, such as the freshness, N10-025, extension 37947 (15 pages). are based on calibrated equilibria that cleanliness, and storability of foods pur- use specific functional forms and existing chased. point estimates of various elasticities. * Privately provided inputs such as 537. Commodity Exports This paper - a product of the Trade the time and care taken to prepare food to and Real Income in Africa and Policy Division, Country Economics ensure that it is not contaminated or Department - is part of a larger PRE spoiled. Arvind Panagariya and Maurice Schiff effort to examine the question of whether * Publicly provided inputs, such as the simultaneous expansion of exports by potable water, sewerage, electricity, nu- In providing policy advice and support of several developing countries would lead tritional information, and the like. investment projects for commodities such to a decline in their terms of trade, export No matter how closely related, food as cocoa, the donor community should revenues, and real income. Copies are adequacy (measured by nutrient intake) take into account the effects on, and pos- available free from the World Bank, 1818 and nutrition level are not the same thing. sible reactions of, the other countries pro- HStreetNWWashington,DC20433.Please The problem offood adequacy may or may ducing that commodity. contact Sheila Fallon, mom N10-25, exten- not reveal itself as a nutrition problem; sion 38009 (37 pages, with tables). 68 Policy Research Working Paper Series 538. Agricultural Reform make it harder in the short run for these agement, with special emphasis on East- in Developing Countries: economies to meet the needs of their most ern Europe. This paper was presented at Reflections for Eastern Europe vulnerable consumers. the August 1990 annual meeting of the In Eastern Europe and the USSR, American Agricultural Economics Asso- Avishay Braverman and J. Luis Guasch the political and administrative problems ciation in Vancouver, Canada. It will be ofintroducing a new tax system are formi- published in the American Journal ofAg- The experience of developing countries is dable, but do not justify substituting ricultural Economics. Copies are avail- relevantforthecountriesofEasternEurope commodity taxes for amore modern fiscal able free from the World Bank, 1818 H and the USSR, but offers no magic formu- system. The difficulties with the StreetNW, Washington, DC 20433. Please las. The scope of change is greater than changeover to a new tax system are contact Cicely Spooner, room N8-037, that attempted in structural adjustment transitional, rather than endemic, and extension 30464 (22 pages). programs, and so are the opportunities for delay in introducing more appropriate success and failure. taxes will simply build new distortions into the reformed economies. 539. Maternal Health In Jamaica: The countries of Eastern Europe may be * The needs of vulnerable groups Health Needs, Services, able to benefit from the lessons learned must be monitored and addressed. In de- and Utilization from structural adjustment in developing veloping countries, policy reforms in agri- countries although the two reform experi- culture often imply raising food prices to Chris Naschak Feifer ences differ in major ways. For one thing, provide better incentives to producers. markets were suppressed more in the Eliminating food subsidies reduces urban The main causes of death in Jamaican formerly socialist countries than in the income in relation to rural income, be- women are largelypreventable. Jamaican developing countries. Distortions in the cause food prices must go up. And price healthcare for women should be improved agricultural sector were more massive, reform can hurt vulnerable parts of the by providing more family planning ser- and the urban bias was less - because population. The challenge during the ad- vices;goodcommunity-basedprenataledu- large-scale subsidies allowed producer justmentprocessisto see that large sums cation and screening; more training for prices and earnings to rise even though of money targeted to help the poor are healthcareworkers;bettercommunityedu- labor productivity was low. appropriately distributed to the needy. cation; better health record-keeping; and Four issues must be addressed to get In this important look at what the bettertransportation for healthcare work- the prices nearly right: reforming countries of Eastern Europe ers and women seeking health care ser- * A credible correction of the ex- can (and cannot) learn from the develop- vices. change rate must be achieved. The intent ing countries, Braverman and Guasch of devaluating the exchange rate is to discuss these and other issues involvedin Unstable unions contribute significantly increase the price of tradables relative to reforming prices; credit, financial insti- to the high fertility levels in Jamaica. nontradables. Devaluation will achieve tutions, and marketing boards; property Women are often the sole financial, social, its original purpose only if there is politi- rights, land tenure, and privatization; and emotional providers for their fami- cal commitment - manifested through research, extension, and technology; and lies. Multiple responsibilities make it dif- fiscal discipline - to change the rural- efforts to remediate environmental deg- ficult for them to seek health care. urban distribution of income. If the gov- radation. High fertility is a particular problem ernment offsets devaluation by spending A central dilemma in the reform of among teen women. Jamaican teens have that increases the income of the urban the Eastern European economies is the limited knowledge of reproduction and sector, the result will be cost-push infla- tension between commitment and flex- conception, and apronatalistattitude (one tion. ibility. Economic agents must believe that must have a baby to attain womanhood)is * Relative prices must be adjusted the government will playby the new rules reinforced by widespread misperceptions within the agricultural sector. The re- and will force others to do so too. Yet the about contraceptive methods. - sponse to a uniform price shift and to rules must occasionally change or be ad- Women often fear contraception will changes in relative prices will be modest justed as circumstances change. Modern altertheirmenstrualpatterns,makethem unless the instruments of bureaucratic economic theory is of little help in the art irreversibly sterile, or in other ways harm intervention are removed. In the former of merging flexibility with credibility them. Many women believe, for example, socialist countries, price reform and in- Western technical assistance and inter- that intrauterine devices can get lost in stitutional change are linked: removing national financial help can be effective their body or will hurt their sexual part- bureaucratic constraints on agents' deci- only if professionals of the East and West ners; some visualize tubal ligation (tying sions is essential to price reform. work together, as this is a process ofjoint the tubes) as tying the vagina so they can * The transmission mechanism that learning, not a pure transfer of knowl- no longer have sex. There is a great need links domestic to international prices and edge. for health education to overcome such consumer to producer prices must be This paper - a product of the Agri- misperceptions, which mayblock demand changed. Strengthening the momentum cultural Policies Division, Agriculture for family planning services. of the negotiations on trade liberalization and Rural Development Department - The main health issues for Jamaican is important to the long-term success of is part of a larger effort in PRE under the women arenutrition(anemiasignificantly reform in Eastern Europe. But removing Bank's program objective for private sec- affects pregnant women), fertility, infec- relatively cheap subsidized imports will tor development and public sector man- tion, chronic diseases, and stress and so- Policy Research Working Paper Series 69 cial problems. The two leading causes of World Bank, 1818 H Street NW, Wash- tem or marketing strategies. New busi- adult death for women are cerebro-vascu- ington, DC 20433. Please contact Otilia ness opportunities are likely to emerge in lar accidents andcoronaryheart disease- Nadora, room S6-065, extension 31091 deregulating industries, the transfer of - of which high blood pressure is a major (27 pages). technologies, and the marketing of ideas component among black women. Infec- already tested in developed countries. In tions that affect women include those the smaller LDC markets, exports may resulting from sexually transmitted dis- 540. Venture Capital Operations provide the potential for growthfor manu- eases, inappropriate care for abortions and Their Potential Role factured products. and childbirth, and poor hygiene associ- In LDC Markets What role should government play? ated with menstruation. In terms of direct financial support, the Congenital anomalies and perinatal Silvia Sagari and Gabriela Guidotti record of development banks with ven- morbidity are common causes of infant ture capital funds has been dismal. Sagari mortality and are believed to be the result Venture capital may play an important and Guidotti suggest that a more appeal- of high fertility in older women and teens. role in supporting entrepreneurial devel- ing alternative might be for governments Prematurity is a problem, as are opment and small business growth. But to set aside a small "pilot" fund to be intrapartum asphyxia, diarrheal diseases, institutional arrangements and instru- managed under contract by a private and malnutrition. Early weaning was ments must be carefully chosen, taking group, with a remuneration scheme de- identified in the late 1960s as the most into account the lessons from countries pendent on the performance of the portfo- important cause of malnutrition and in- where venture capital has been a reality lio. Otherwise, the government's main fant mortality in Jamaica. now forafewyears. TheBank's role should role should be to provide appropriate tax The main factors causing stress for be largely to disseminate these lessons. incentives, support the establishment of Jamaican women include unemployment, sound organized markets for new com- economic inadequacy, separation of part- Venture capital attempts to cater to the panies, and ensure that the regulatory ners, male promiscuity, limited availabil- financial and managerial needs of new framework for pension funds, insurance ity of schooling for children, unreliability opeirations through arrangements that companies, and other institutional inves- of goods and services, and violence. Pro- involve essentially the investor's equity tors does not unduly prevent them from posedreformsincludematernal education, participation in a firm, through the direct investing in venture capital firms of rec- directed economic development, targeting purchase of stock or through warrants, ognized performance. women's ability to gather resources and options, or convertible securities; a long- WhatroleshouldtheBankplay?Ven- lower the burden of household responsi- term investmenthorizon (five to l0years); ture capital activities are essentially bilities, and sociopolitical campaigns to and the investor's active involvement in small-scale, so making them the focus of increase women's ability to attain ideal the invested company. Typically, venture major Bank operations would not be rec- fertility levels at appropriate ages and to capital finances start-ups and the expan- ommended. The Bank's main role should get medical care when they need it. sion of existing operations in terms of be to disseminate the lessons learned in The Jamaican health care system advancing into new stages in the produc- countries where venture capital has been needs more family planning services for tion and/or the distribution process. a reality for some years. The Bank might those who want them; good community- What role can venture capital be ex- also have a role in continuing research in based prenatal education and screening pected to play in financial markets in some aspects that are still largely unex- and hospital delivery for high-risk preg- developing countries? For one thing, say plored; examples are the financial perfor- nancies; better training of health profes- Sagari and Guidotti, it makes little sense mance ofventure capital firms in the East sionals and paraprofessionals, including merely to transplant techniques directly Asian markets or the interaction between midwives, with special attention to the from the developed to the developing universal banks and venture capital ac- professional isolation of rural health care world. The difficulties that traditionally tivities. .workers; better community education, conceived venture capital operations may This paper - a product of the Finan- including better training of professionals face in these markets appear many and cial Policy and Systems Division, Coun- to communicate with their patients; bet- varied. They have to do with the charac- try Economics Department - is part of a .ter health record-keeping; and better teristics of the projects being generated, larger effort in PRE to explore different transportation, somidwives can visittheir the size and purchasing power of the do- options for financing the productive sec- patients more often and so women can mesticmarkets, thelackofadequate skills, tor and promoting private sector develop- spend less time getting to health care entrepreneurs' attitudes toward sharing ment. The paper explores the potential of providers, control, difficulties with exit mechanisms, venture capital operations as a way to This paper is a product of the Popula- and so on. finance start-ups and to expand existing tion, Health, and Nutrition Division, It may be difficult in many LDC operationsintermsofadvancingintonew Population and Human Resources De- markets to find a series of innovative stages in the production and the distribu- partment, in cooperation with the Human "high-tech"enterprises that can capture a tion processes. Copies are available free Resources Division, Technical Depart- business niche in which to grow. Yet ven- from the World Bank, 1818 H Street NW, ment, Latin America and the Caribbean ture capital operations could flourish in Washington DC 20433. Please contact Regional Office. It is part ofalarger effort low technology and in the service sector, Zena Seguis, room N9-005, extension in PRE to improve women's reproductive where competitive advantage might re- 37665 (63 pages). health. Copies are available free from the sult from an innovative distribution sys- 70 Policy Research Working Paper Series 541. Pricing Average Price Options recapture clauses in the 1990 Mexican This positive factor was largely offset by for the 1990 Mexican and and Venezuelan debt restructuring expected increases in metals production. Venezuelan Recapture Clauses agreements. Much of the boom was attributable to The current values of the recapture such transitory factors as changes in the Stijn Claessens and Sweder van Wijnbergen clauses are less than one-quarter of the exchange rate, supply shocks, and low maximum contractually possible and de- stocks. Pricing models are developed to value the crease as the standard deviation of the oil * Depreciation of the U.S. dollar was recapture clauses in the 1990 Mexican price increases, the dominant contributor to the price in- and Venezuelan debt restructuring agree- This paper - a joint product of the creases in the earlier part of the boom - ments. The current values ofthe recapture Debt and International Finance Division, particularly for nickel, lead, and zinc. clauses are less than one-quarter of the International Economics Departmentand Changes in interest rates were relatively maximum contractually possible and de- the Country Operations 1 Division, unimportant. crease as the standard deviation ofthe oil Country Department II, Latin America * Supply disturbances and low stocks price increases. and the Caribbean Regional Office - is significantlyincreased prices, particularly part of a larger effort in PRE to study the in 1988. Low stocks have been a more Making restructured sovereign debt obli- benefits and costs of contingent external important, consistent factor than supply gations contingent on exogenous factors debt contracts and debt and debt service disruptions. (such as world oil prices) allows some of reduction operations. Copies are avail- * Marketfundamentalsexplainmost the risk to be transferred to creditors who able free from the World Bank, 1818 H of the price boom but a substantial com- have comparative advantage in carrying StreetNW, Washington, DC 20433. Please ponent remains unexplained, suggesting the risks - as they can diversify them in contact Sheilah King-Watson, room S8- that excessive speculation ("bubbles")may capital markets. 025, extension 31047 (14 pages). have contributed to the price increases, Contingencies also increase the bor- particularly for nickel in 1988. rowers' likelihood of fulfilling their (new This paper - a product of the Inter- or restructured) external obligations - 542. The Metals Price Boom national Trade Division, International and can improve the heavily indebted of 1987-89: The Role of Supply Economics Department - is part of a countries'incentives toinvest and adjust, Disruptions and Stock Changes larger effort in PRE to understand the increasing further the likelihood they will short- and long-run behavior of primary service their external obligations. Boum-Jong Choe commodity prices and the implications of The 1986 agreement between Mexico movements in these prices for the devel- and commercial banks included some Supply disruptions and low stocks, both oping countries. Copies are available free contingency facilities where new money transitory in nature, had a strong impact from the World Bank, 1818 H Street NW, would be forthcoming if international oil on the boom in metals prices in 1987-89, as Washington, DC 20433. Please contact prices fell below a certain level or when did the growth of OECD industrial pro- Sarah Lipscomb, room S7-062, extension Mexico's growth rate was to fall short of a duction and depreciation in the U.S. dol- 33718 (21 pages). certain rate. In the 1990 Mexico and Ven- lar. ezuela agreements, future debt ser- vice obligations were indexed to factors Themarketsforbasemetalshavechanged 543. Development Assistance largely exogenous to the countries - the remarkably in the last few years. A long Gone Wrong: Why Support so-called recapture clauses. period of extremely low prices was fol- Services Have Failed to Expand Undertherecaptureclause in Mexico, lowed by a sustained price boom in 1987- Exports 30 percentofthe extraoil revenuesMexico 89- which continued into 1990 for cop- gets if the price of oil rises above $14 per per, nickel, lead, and zinc. Donald B. Keesing and Andrew Singer barrel (adjusted for U.S. inflation) will What caused the price increases and accrue to the banks that have granted what they portend for the future are Policies impeding and neglecting the de- debt service relief. (This amount is not to critically important for developing coun- velopment of commercial services are a exceed 3 percent of the nominal value of triesheavilydependentonexportsofthose significant cause of the difficulties devel the debt exchanged for these bonds, in commodities. oping countries experience trying to ex- any year.) The value of the recapture Choe examines the causes ofthe price pand exports. It is misguided to entrust clause at maturity depends on three vari- boom in terms of market fundamentals. public sector trade organizations withpri- ables: how much oil Mexico exports, how Because of the apparent importance of mary responsibility for providing export- oil prices behave, and the behavior of supply disturbances and low stocks, he ers with support services that are better inflation rates. developedasemistructural price equation provided by private commercial enter. Export volume is not a factor in to incorporate supply-side variables. The prises. Venezuela's 1990 recapture clause, which resulting estimates fit better and explain in other ways is similar to Mexico's. more than those in earlier studies. Esti- For more than 20 years, aid organizations Claessens and van Wijnbergen de- mation and simulation results suggest have helped developing countries supply velop pricing models for options written that: export promotion, marketing, and other on average prices and contingent con- * The growth of OECD industrial services to assist exports. Manufactured tracts used in sovereign debt restructur- production was the most consistently im- exports have been especially sought, ing. They use the models to price the portant factor in the higher metals prices. though typically the policy environment Policy Research Working Paper Series 71 for them remains no more than partly and rigid procedures contribute to their stacle to expansion of promising manu- satisfactory. Public sector trade promo- poor results. In some countries, system- factured exports. Provide consultant as- tion organizations, the main recipients of atic assistance to export marketing has sistance to promising firms in products this aid, turn out to be rarely satisfactory been worse than ineffective because ithas with strongexport prospects, tohelp them at providing practical information, assis- diverted attention from the fundamental improve their supply capabilities and per- tance, and support for export expansion need for policy reform. formance. Advice from consultants with in such a setting. Most developing countries assume export know-how can substitute for learn- Keesing and Singer identify four rea- that "export promotion" is inherently a ing from buyers and may be better. Most sons why external assistance to support government task. But what developing manufacturing firms in developing coun- services has been generally ineffective in countries need most is access to services tries are unaware of how far behind they expanding manufactured exports: from outside the firm that can compensate are in current practices in systems engi- - The legacy of import substitution for the limited expertise within it. The neering, productivity, qualitycontrol, and in developing countries includes deep- required expertise israrelyfound in public other aspects of production management. seatedattitudesthatworkagainstexports, sector organizations. New approaches in When they have been cut off for years along with outdated production technol- this field center on the provision of con- from international "best practice," help ogy, low product quality, poor services to sultants from more advanced countries to from outside consultants can provide dra- customers, and business skills unsuited work with exporters on their production matic results. to exports. Regulation still impedes mar- and supply problems. * Give exporters ready access to ket responsiveness, while unfavorable See also the companion paper, WPS commercial service suppliers abroad. As policies have deprived local businesses of 544. exports develop, systematically favor the export know-how. Thus, the task is huge. This paper - a product of the Trade development within the national economy * External assistance for support Policy Division, Country Economics De- of competing (primarily private) service services has rarely been directed toward partment - is part of a larger effort in suppliers, some of them foreign-owned. helping export firms overcome their pro- PRE to study export development and Encourage the establishment of local duction problems, improve their supply sup-plyresponse. Copies are availablefree branches or affiliates of multinational capabilities, or adapt what they supply to from the World Bank, 1818 H Street NW, service firms. Dismantle policy obstacles the requirements of the target market. Washington, DC 20433. Please contact to the use ofconsultants and other service Therehas been systematic neglectoffirms' Sheila Fallon, room N10-017, extension suppliers from abroad and encourage a need for expert advice in these crucial 37947 (44 pages). policy environment that supports vigor- areas. ous, diversified export growth. Abolish * Donor agencies that provide fund- protection of, and monopolies in, services ing and advice in this field almost never 544. How Support Services Can for exporters. Insist that public service insist on results or even require that Expand Manufactured Exports: organizations, if they continue to func- progress be monitored in terms of exports New Methods of Assistance tion, charge commercial prices for their achieved. Too many donor agencies with services and compete with private ser- money to give away chase too few good Donald B. Keesing and Andrew Singer vices. Encourageprivate supplierstocom- project opportunities. The International pete in providing information services, Trade Center is not in a position to reject Proposals for making support services ef- each with telephone access tomany online arequestfor an unpromisinguse ofUNDP fective through outside assistance. Espe- databases and other commercial informa- funds and is not allowed to recommend cially recommended based on experience tion services abroad. policies. And donor agencies are seldom are packages ofassistanceandpromotion * Rely on specific, time-limited successful at extending their impact be- built around grant funds that pay firms projects or project components involving yond government. haif the cost of commercial services sup- temporary infusions of specialized re- * Support for the marketing of pliers such as consultants from abroad, as sources, where and when needed, to chan- manufactured exports has usually been well as some of their marketing expenses. nel external assistance to services sup- provided through an inappropriate deliv- portingmanufactured exports. Directeach ery mechanism, a single public service Assistance to support services for exports project component at one export-ex- supplier in which officials try to provide has rarely boosted manufactured exports pandingobjective within that time-frame. many services, free of charge. This has from developing countries whose export Any project to expand exports should in- been ineffective in countries with only policies were less than fully satisfactory. clude specific measures directed at turn- partly satisfactory policies toward manu- This is particularly true of services that ing passive or nonexporters into active factured exports. Donors have been com- involve consultant advice, export promo- exporters. mitted to a strategy of institution-build- tion, marketing assistance, and provision * Create packages of assistancebuilt ing but permanent trade promotion orga- of export-related information. around one or more grant funds. Through nizations set up early in development Keesing and Singer make four rec- these funds, provide cost-sharing grants turn out to be poorly suited to a develop- ommendations for improving such ser- to firms to help pay the costs of services ing country's later export needs. They vices: from suppliers oftheir choice. Theinstitu- even become a vested interest against * Among support services, empha- tions such as banks that administer these needed change. The complexity of the size services that improve firms' know- funds promote to promising firms export- task, lack of competition in services, defi- how and performance in overcoming sup- ing and the use of service suppliers (typi- ciencies ofpublic officials in a service role, ply difficulties, which are the biggest ob- cally from advanced countries) to help 72 Policy Research Working Paper Series expand exports. They assist firms in pre- given the epidemiological and demo- States, strong executive power, bureau- paring export expansion plans and grant graphic transitions going on in virtually cratic reform, and a restructuring of the applications, and help identify suitable all developing countries. relations between the state and business. service suppliers. In funds set up with Better understanding of the political World Bank assistance in India, grant economy of health - especially of alter- In analyzing the turning point in Korea's funds come with all necessary govern- native financing and cost control mecha- transition in the early 1960s from a strat- ment approvals and are complemented by nisms - combined with work on the de- egy ofimport substitution to one ofexport- funds for term lending. terminants of adult health, will be critical oriented industrial growth, Haggard, Kim, See also companion paper, WPS 543. to public policy to deal with rising health and Moon examine notjust the economics This paper - a product of the Trade care costs, through the design and efficient of change but the politics of economic Policy Division, Country Economics De- financing of public and private health policy and reform - the incentives facing partment - is part of a larger effort in insurance, and through greater emphasis state and business elites and the institu-- PRE to study export development and on prevention of adult chronic and de- tional context in which they operated. supply response. Copies are available free generative disease. Their analysis shows that the transi- from the World Bank, 1818 H Street NW, More systematic analysis of the so- tion to export-led growth in South Korea Washington, DC 20433. Please contact cial returns on investments in health in was a product of the interplay of four Sheila Fallon, room N10-017, extension developing countries may be needed to factors: pressure from the United States, 37947 (44 pages). support continuing increases in ever cost- the dominance of the executive branch, lier health care. It is difficult to do cost- institutional reform within the bureau- benefit analyses, partly because of the cracy, and a restructuring of relations 545. Health and Development: difficulty of valuing human life - and of between the state and business. What Can Research Contribute? valuing a healthy, painfree life more than Their findings help reconcile the de- a sick and painful one. But other ap- bate between neoclassical and "statist" Nancy Birdsall proaches are possible, including analysis positions on Korea's economic transfor- of the effects of an individual's health mation. They also provide an example of The conclusions of past research and pri- status on productivity (at work or school) an institutional approach to economic orities for future research on the relation- and analysis of the social and economic development that is relevant for other ship between health and economic devel- costs of poor health for families and developing countries. opment: the effects ofdevelopment on health communities. They also draw some conclusions and the effects of health on development. Efforts to measure the returns on about the role ofoutside pressure in policy investment in good health are critical in a reform, about the importance to reform of This article will be published in a book of world of scarcity, where the benefits of administrative capability and organiza- proceedings (edited by Chen, Kleinman, many worthwhile investments must be tion, and about the politicsofpolicy change. Potter, and Ware) of a workshop on how compared. And such efforts are likely to Among those conclusions: social science research has contributed to change not only our sense of how much to * Economic development strategies the health transition-held in June 1989 invest in health but our sense of how to are not simply packages of discrete poli- at Harvard University. allocate such investments. cies - but involve the development of Birdsall's survey of the state of re- This paper was prepared by the au- administrative capabilities. search on the relations between health thor when she was Chief, Population and * The timing of political cycles af- and economic development discusses first Human Resources Operations Division, fects economic reform. research on how development affects Country Department I, Latin America * Economic policies are more likely health and then research on how health and the Caribbean Regional Office. It is to be effective if the private sector has affects development. Some areas covered: part of a larger effort in the Bank to set channels ofaccess to governmentbut does Research on the household-level de- research priorities in the economic man- not dominate the policy process. Some terminants of health could aid in the de- agement of social programs. Copies are mechanisms of insulation are required to sign of public programs to improve health available free from the World Bank, 1818 shield business from its own instinctive - especially in developing countries, H Street NW, Washington, DC 20433. tendency to exploit rent-seeking opportu- where improving health will require Please contact Livia Mitchell, room 14- nities. changes in individual and household be- 035, extension 38589 (39 pages). This paper - a product of the Macro- havior. economic Adjustment and Growth Divi- Research on the demand for health sion, Country Economics Department - care - including the price elasticity of 546. The Transition to Export-Led is part of a larger effort in PRE to analyze demand forhealth services and how using Growth In South Korea, 1954-66 the way that political and institutional health services affects health - could factors interact with economic policy re- make it easier to improve government Stephan Haggard, Byung-Kook Kim, form. Copies are available free from the pricing policies and design cost control and Chung-in Moon World Bank, 1818 H Street NW, Wash- mechanisms. ington, DC 20433. Please contact Emily Work on the determinants of adult South Korea's transition to export-led Khine, room N11-061, extension 39361 (not infant and child) health (morbidity growth was a product of the interplay of (43 pages). and mortality) should be a high priority, four factors: pressure from the United Policy Research Working Paper Series 73 547. Does High Technology available free from the World Bank, 1818 insurer can resolve bank failures in a Matter?: An Application H Street NW, Washington, DC 20433. variety of ways. to United States Regional Growth Please contact Milena Hileman, room S7- Deposit insurance systems are no 214, extension 31284 (12 pages). substitute for effective bank supervision Andrea Boltho and Robert King in maintaining a stable banking system. Moreover, they are likelytofounder sooner U.S. regional data show that jobs created 548. Deposit Insurance orlater withouteffectivebank supervision. through the birth of high-tech firms - In Developing Countries This paper is a product of the Fi- though small-scale - help explain why nancial Policy and Systems Division, growth rates differ between states. A high Samuel H. Talley and Ignacio Mas Country Economics Department, and the birthrate for firms is negatively correlated Industry, Trade, and Finance Division, with growth, but innovative activity at The pros and cons of deposit insurance Technical Department, Latin Americaand technology's frontiers seems to raise the systems -andguidelines for their design. the Caribbean Regional Office. Copies are standard of living. available free from the World Bank, 1818 About a dozen developing countries have H Street NW, Washington, DC 20433. The International Economics Department, deposit insurance systems and several Please contact Megan Pomeroy, room N9- International Economic Analysis and others are considering establishing them. 003, extension 37666 (116 pages, includ- Prospects Division (IECAP), prepares These systems are typically created to ing appendices). regular reports on the long-term pros- prevent contagious bank runs, to provide pects for growth of the global economy, aformal national mechanism forhandling and the implications for developingcoun- failingbanks, and to protect small deposi- 549. Intertemporal Substitution tries. This paper is part of IECAP's re- tors from losses when banks fail. In a Monetary Framework: search program on sources of growth, why Without a deposit insurance system, Evidence from Chile and Mexico growth rates differ, and how structural many developing nations in recent years changeaffects long-termgrowth prospects. have extended implicit deposit protection Patricio Arrau Boltho and King studied the influ- to depositors on a discretionary, ad hoc ence of high technology on output growth basis. The Euler approach seems to work better by using cross-section data on U.S. states. Deposit insurance systems have sev- when money is considered. For both Chile Drawing eclectically on the sources-for- eral advantages over these implicit pro- and Mexico the estimates of the growth literature, they estimated a base tection schemes. Deposit insurance prob- intertemporalelasticityofsubstitutionare equation that explains about half of the ably gives the banking system more pro- greater than one. differences in per capita gross state tection against bank runs, provides more product growth rates in the 48 contiguous protection for small depositors, and -by Arrau estimates amonetary Euler system states in the decade 1976-86. Using replacingdiscretionwithrules-provides of a utility-maximizing representative microdata on employment in high-tech a faster, smoother, more consistent ad- consumer from two inflationary Latin activities, they conducted tests to see how ministrative process. American countries: Chile in the late sev- important high-tech was - as measured On the other hand, deposit insurance enties and Mexico in the early eighties. by how many jobs were created by new probably creates more moral hazard for The results show that money is nec- firms - in explaining growth differences depositors, thereby contributing to the essary to get reasonable parameters of between regions. erosion ofmarket discipline andincreased the utility function. For both countries, They found that: bank risk-taking. Deposit insurance also tests of the overidentifying restrictions * Starting income levels, changes in tends to be a more expensive mechanism are satisfactory at usual levels of signifi- the investment share of output, and for protecting depositors because it offers canceandestimatesfor theintertemporal changes in the labor participation rate less freedom of action to policymakers elasticity of substitution are greater than influence regional growth rates. than an implicit scheme. Finally, devel- one. * Ahigheroverall birthrate for firms oping countries often do not adequately The results indicate that velocity o7n average for 1976-86 is negatively cor- fund their deposit insurance schemes. As sensitivity to the nominal interest rate is related with growth. aresult, the systems often lack credibility lower for Chile than for Mexico, but this * But the share of new jobs created in the marketplace and bank supervisors difference could be explained by a model in new high-tech activities has a power- may be unable to close insolvent banks of currency substitution. ful, positive effect on per capita income because the insurer would be unable to More important, a model of currency growth. This supports thehypothesis that pay off insured depositors. substitution may be the appropriate way innovative activity at technology's fron- Deposit insurance systems are rela- to explain the monetary puzzle observed tiers helps raise living standards. tively complex mechanisms that must be in Mexico after the stabilization attempt This paper - a product of the Inter- designed properly to be effective. They of late 1987. national Economic AnalysisandProspects generally function best if they are public, Despite the fact that inflation was Division, International Economics De- if they are adequately funded and have sharply (and permanently) reduced, ve- partment - is part of a larger effort in government backup support in a crisis, if locity did not go down. The model of cur- PRE to study long-term prospects for bank membership is compulsory, if de- rency substitution suggests that a good growth in the global economy. Copies are posits are not fully insured, and if the way to hedge against a discrete devalua- 74 Policy Research Working Paper Series tion would be to increase liquidity in for- they must compete against lower priced play in maintaining a liberal trading or- eign - not domestic - currency. imports. der, but that the process is being abused This paper - a product of the Debt Introducing an export subsidy alone for protectionist ends. and International Finance Division, In- wouldbe insufficient toincrease outputin Gary Banks uses Australia's experi- ternational Economics Department - is the tradable goods sector. The combina- ence in the last decade to shine light on part of alarger effort in PRE to apply new tion of an export subsidy with an import the issue. models of international finance to devel- tariff, which comes closer to mimicking Antidumping is a complex process opingeconomies. Copies are available free the effects of devaluation, would serve to with many rules that, depending on in- from the World Bank, 1818 H Street NW, counteract some of the adverse effects on terpretation or minor changes, can have Washington DC 20433. Please contact output of an overvalued exchange rate. important effects on the fortunes of home Sheilah King-Watson, room S8-025, ex- What the longer run effects would be industries. This means that the system tension 31047 (27 pages). remain to be seen. and how it operates will remain ofabiding Two methodological results emerged. interest to import-competing industries. First, the exercise of estimating firms' Lobbying for rule changes or favorable 550. Firms' Responses to Relative output supply and input demand func- interpretations will continue as long as Price Changes In Cdte d'Ivolre: tions using flexible functional forms was the expected returns from such lobbying The Implications for Export successful. The estimates satisfied theo- exceed the costs. Whether or not Subsidies and Devaluations retical curvature properties and the price antidumping serves as a protectionist effects were estimated precisely. device in Australia, says Banks, industry John L.Newman, Victor Lavy, Raoul Salomon, Second, estimating supply and de- sees it in that role. and Philippe de Vreyer mand jointly leads to considerably dif- It is difficult for industries to get the ferent estimates of export and output conventional border protection that was Firms in C6te d'Ivoire would sell more to supply responses than estimates based common 10 years ago. Under trade liber- the foreign market when it is more profit- on supply alone. alization, "protection" has become a dis- able todo so. Exports would respond posi- Thispaper-aproduct ofthe Welfare credited concept in Australia. But in the tively to increases in export prices and and Human Resources Division, Popula- United States and elsewhere, "fairness" negatively to increases in import prices. tion and Human Resources Department is always popular - and antidumping - is part of a larger effort in PRE to (the very term) is seen as being about Since the early 1980s, export subsidies analyze the relationship between trade achieving fairness. have been proposed as a way to counter- policy and industrial structure and per- It is the "low-track" route for getting act the adverse effects of an exchange rate formance. Copies are available free from protection against imports. It takes place overvaluation among member countries the World Bank, 1818 H Street NW, according to rules and procedures that of the West African Monetary Union. It Washington DC 20433. Please contact industry and specialist consultants soon was felt that one way to alter the relative Brenda Rosa, room S9-137, extension master, away from the public glare. More price of traded to nontraded goods was to 33751 (36 pages, including tables). "high-track" routes are more costly and attempt to mimic devaluation by raising more likely tomeetpersuasive opposition. import tariffs and export subsidies by the The demand for antidumping as a same proportion. 551. Australia's Antidumping protectionist device will continue and can Arguments on both sides of the issue Experience beexpectedtorise when times"gettough," were not based on extensive empirical says Banks. evidence. This paper models the short- Gary Banks Australia!s new Anti-Dumping Au- run response offirms toexogenous changes thority (ADA) has brought a fresh and in export and import prices, taking into The Australian experience suggests that more critical eye to the antidumping accountthe possibility that firms maysell antidumping is, at heart, about safe- process in Australia. In particular it has to both domestic and foreign markets. guarding the interests of particular in- tightened up on how the injury test is Contrary to prior expectations, the dustries. As long as this is true, there will implemented and has given a second pass results suggest that firms in Cbte d'Ivoire always be tension between antidumping at "normal value" arithmetic. Several do sell more to the foreign market when it policy and the broader interests of the times its assessments have differed from is more profitable to do so. Exports re- national economy and the world trading those of Customs - in a direction more spond positively to increases in export systems. sympathetic to the foreign importer. But prices and negatively to increases in im- that may have more to do with the port prices. One side of the debate on antidumping government's current attitude than with But the fact that exports would be argues that dumping is not a problem in the institutional innovation itself. lower if an export subsidy were combined international trade - that it is a normal The ADA operates within the same with an import tariff is not an argument business practice that benefits the im- industry-specific framework as the Cus- for introducing an export subsidy alone. porting country's consumers and user in- toms Service but is more attuned to the Firms producing tradable goods suffer dustries - and that antidumping is in- political environment in which technical from an overvalued exchange rate not herently protectionist. decisions are made. But that can cut both only because they would receive a lower The other side argues that an anti- ways. price for their exports but also because dumping system has a legitimate role to The antidumping system retains a Policy Research Working Paper Series 75 degree of administrative or ministerial dations for improving future country eco- strategies should give more attention to discretion that will always make it vul- nomic and sector work. the dynamics of urban informal and rural nerable tothebusiness andpolitical cycles. nonfarm activities in providing income; That is true whatever the country. The Since the establishment in 1987 of the the problems of urban poverty and their Australian government has at least Task Forces on Poverty and Food Secu- implications for poverty reduction strat- wrestled publicly with the issues to arrive rity, a good deal of country economic and egies; ways to enhance small-scale agri- at a more precise, objective position. sector work has analyzed poverty issues. cultural productivity; the relationship of But on the three touchstones of the Gillespie reviews this work toidentify poverty and land tenure structures; the antidumping process - definitions of the main policy issues it raises; describe role of the private sector in product and normal values, material injury, and cau- how the Bank approaches the study of service delivery in the social and agricul- sality-arbitraryjudgments will always povertyissues (is the focusmacroeconomic, tural sectors; the role of infrastructure 'need to be made at many points. These sectoral, or on target groups?); summa- provision in poverty reduction; and the judgments will inevitably be colored by rizethemainfindingsandlessonslearned complementarity of investments in the the political and economic climate of the from the country economic and sector work productive and social sectors. .day. Compared with the early 1980s, says reviewed; assess the extent to which coun- * Issues of political economy are too Banks, that climate is currently relatively try economic and sector work has identi- important to be ignored. At a minimum, "dry" - but that can change again. fled strategies, policy reforms, and pro- political issues shouldbe addressedin the The evidence from Australia's expe- grams to reduce poverty that could be initiating memorandum and studies rience, says Banks, suggests that dump- supported by the Bank's policy or project should identify and elaborate politically ing may be a problem in international lending;raiseadditionalissuesthatcould feasible strategies. trade but thatantidumping presents even be addressed in future poverty-related * Issues of how to finance poverty greater problems. Tinkering with the pro- country economic and sector work. reduction strategies are generally ne- cedures and criteria for taking Among other things, Gillespie con- glected. This is an important gap in the antidumping action can help reduce its cludes or recommends that: studies, particularly for more operation- protectionist tendencies somewhat * A poverty profile should assemble allyorientedcountryeconomicandsector (though such changes are reversible). But enough information about the poor to work. it does not resolve the fundamental prob- permit analysis of the causes of poverty. * Institutional findings from all sec- lem that antidumping is at heart about Income-based measures capture only one tors emphasize the need to make special safeguarding the interests of particular dimension of poverty. Information on the efforts toreach the poor-butfew studies industries. As long as this remains the economic activities and nutrition, health, offer guidance on how to do so. Such guid- objective, there will always be tension and education of the poor should also be ance should be a priority for operationally between antidumping policy and the included, with trend indicators. oriented country economic and sector broader interests of the national economy * Comprehensive studies produced work. and the world trading system. important policy conclusions. The more This paper - a product of the Review This paper - a product of the Trade narrowly focused studies tended to ne- and Analysis Division, Policy Review De- Policy Division, Country Economics De- glect potentially important aspects of partment-ispartofalargereffortinPRE partment - is part of a larger effort in poverty strategy, Studies that focus only to help improve the treatment of poverty PRE to understand the economics of the on targeting services in the social sectors, issues in the Bank's analytical and opera- emergence of "fairness" as a standard for for example, may fail to consider impor- tional work. Copies are available free from regulating international trade, its impli- tant macroeconomic or sectoral policy is- the WorldBank, 1818H StreetNW,Wash- cations for the continued openness of the sues that affect the income prospects of ington DC 20433. Please contact Marilou international trading system, and its poor people. Such issues are vital not only Abiera, room S13-033, extension 31262(79 continued functioning as an important to raising the demand for social services pages, including annexes). vehicle for development. Copies are but are central to any sustainable strat- available free from the World Bank, 1818 egy for poverty reduction. H Street NW, Washington DC 20433. * On balance, studies devote more 553. Money, Inflation, and Deficit -Please contact Nellie Artis, room N10- attention to improving the human re- In Egypt 013, extension 37947 (58 pages, with fig- sources of the poor and to devising short- ures and tables). term social sector safety nets for the Marcelo Giugale and Hinh T. Dinh poorest, than to identifying strategies to raise their incomes. Country economic Despite huge public sector deficits, Egypt 552. Selected World Bank Poverty and sector work should explore the de- has escaped high inflation by depleting Studies: A Summary terminants of poverty, not only access to three nonrecoverable assets: creditworthi- of Approaches, Coverage, welfare-enhancing goods and services. ness, money illusion, and enforceable for- and Findings * Particular priority should be given eign-exchange controls. Without a tough to analyzing links between economywide reform program, the country will soon be Nancy Gillespie policies thataffect growthin employment, in a serious crisis. the functioning of the labor market, the A review of country economic and sector role of complementary public spending Egypt has been able to escaps high infla- work on poverty issues - and recommen- and investments, and poverty. Poverty tion by depleting its stocks of creditwor- 76 Policy Research Working Paper Series thiness, money illusion, and enforceable market - and appeared to be highly pared for the project on "LaborMarkets in foreign-exchange controls. These vulnerable. And it had a history of walk- An Era of Structural Adjustment. Copies nonrecoverable assets are quickly becom- ing a tightrope between inflationary pres- are available free from the World Bank, ing extinct and the economy is on an sures and balance of payments deficits. 1818 H Street NW, Washington, DC unsustainable path. Korea's ability to keep the economy 20433. Please contact Marshall Schreier, Giugale and Dinh present a short- from derailing has been as remarkable as room M4-023, extension 36432 (55 pages, and medium-term dynamic model of the its achievement of high long-term growth including figures and tables). Egyptian economy and use it to simulate rates. the effects on output and inflation of a Mazumdar concludes that wage be- stabilization-cum-adjustment program. havior in the formal sector played a sig- 555. The Macroeconomics of Price Their conclusion: make the public nificant role in adjustment, but not be- Reform in Socialist Countries: sector live within its means, and do so at cause there was an elastic supply of labor A Dynamic Framework once. This is a demanding prescription; at a stagnant wage during expansion. On political and social pressure can become the contrary, real wagesrose impressively Simon Commander and Fabrizio Coricelli intolerable under adjustment. But Giugale throughout the period of growth. But real and Dinh show that both a slowdown in wage increases lagged behind the growth The macroeconomic consequences of output and the initial rise in inflation rate of labor productivity (except during adopting different price rules for adjust- associated with a tough reform program the "big push" of the late 1970s). And ing controlled prices in systems where will be short-lived (between one and two during the years after the oil shock real controlled and market prices coexist and years). wages stagnated or even declined some- the implications of varying the propor- And a do-nothing strategy will soon what despite a spurt in productivity. tions of controlled and market prices. push the country into a serious crisis, the The wage-setting mechanism seems correction of which will certainly be more to have been strongly influenced by state Commander and Coricelli analyze the painful. Among other things, Egypt de- guidelines, which encouraged wage in- macroeconomics of a system in which pends on basic imports such as food. creases as incentive payments but kept controlled and market prices coexist-as This paper is a product of the Coun- them within the limits of productivity happens in socialist countries carrying try Operations Division, Country Depart- increases - subject to the necessity of out gradual price reform. They refer in ment III, Europe, Middle East, and North dealing with short-run shocks. particular torecentexperiencein Hungary Africa Regional Office. Copies are avail- The key to the success of Korea's and Poland with price reform. able free from the World Bank, 1818 H labor policies was the high rate of total They analyze the macroeconomic im- Street NW, Washington DC 20433. Please factor productivity growth. This also al- plications ofadopting different price rules contact Vasantha Israel, room H10-027, lowed for continued nominal devaluation for adjusting controlled prices - and extension 36097 (49 pages). of the won without triggering secondary discuss the implications of varying the pressures on domestic costs or damaging proportions of controlled and market external competitiveness. prices. They find that: 554. Korea's Labor Markets Under The above points pertain to the be- * When expectations play an impor- Structural Adjustment havior of the large-scale "formal" sector of tant role, the slow adjustment of con- the economy. But wage employment in trolled prices can serve as an "anchor"for Dipak Mazumdar small firms and the self-employed consti- the rate of inflation. But since price con- tute a sizeable part of the labor market. trols generally have negative effects on Korea's ability to keep the economy from How did labor earnings in these sectors the budget, when money is passive and going offthe rails has been as remarkable perform relative to the wage gains in the hence accommodates budget deficits, as its achievement of high long-rungrowth formal sector? For lack of data Mazumdar gradually adjusting controlled prices may rates. The key to the success of Korea's focused on farm workers, wage earners in fuel inflation through the fiscal/monetary labor policy -state guidelines limited the small firms, and also a section of the channel. Consequently, expectations and wage increases under structural adjust- workforce whose relative earnings have budget adjustments may exert conflicting ment - was the high rate of total factor been low throughout - that is, female pressures on inflation, thereby compli- productivity growth. workers. catingthe management ofamixed system Women and workers in the farm sec- of controlled and market prices. Korea is an interesting case study in long- tor and small firms shared to some extent * In adjusting controlled prices, term and short-term adjustment. Korea's in wageincreases, but the long-termrecord being too responsive to macroeconomic rate of economic growth after 1965 was for these groups is not entirely satisfac- imbalances can destabilize the system; high at a time of rapid, fundamental eco- tory. giving heavy weight toreducing the wedge nomic restructuring. Korea's open, ex- This paper-aproduct of the Studies between controlled and free prices stabi- port-oriented economy - dependent on and Training Design Division, Economic lizes the system. imports of oil and intermediate inputs - Development Institute-is partofalarger * Forward-lookingbehavior on the was exposed to oil price shocks and interest effort in PRE to understand the behavior part of price-setters is conducive to stabil- rate hikes. of labor markets in the process of struc- ity; forward-looking behavior on the part To keep up the rate of investment, tural adjustment of the economy. The of consumers is destabilizing. Korea borrowed heavily in the world paper is one of the country studies pre- * Complete price liberalization is Policy Research Working Paper Series 77 superior to a mixed system in terms of deficitBrazil, Mexico, andPakistan should fers may be sending the wrong signals to stability but is likely tobe associated with try to raise revenues and curtail spending lower levels ofgovernment about laxity in substantial overshooting of the equilib- simultaneously. In Argentina and Chile, fiscal management. rium inflation rate. Rapid price liberal- however, the first priority should be to * Revenue-sharing constrains the ization tends to produce an inflation rate control spending. federal government's ability to fulfill its that isinitially higher, but less persistent, This paper - a product of the Public mandate as a national government and is than gradual price liberalization would Economics Division, Country Economics conducive to fiscal mismanagement as produce. Department-is part of a larger effort in local governments are shying away from This paper - a joint product of the PRE to investigate the causes and con- raising revenues from property taxes and National Economic Management Division, sequences of macroeconomic imbalances. usercharges. The municipal governments Economic Development Institute, and the Copies are available free from the World have more money than they need. The Macroeconomic Adjustment and Growth Bank, 1818 HStreetNW, Washington DC state governments also face a financial Division, Country Economics Department 20433. Please contact Ann Bhalla, room squeeze but it should be short-lived as - is part of a larger effort in PRE to N10-059, extension 37699 (24 pages). they have access to the value-added tax, a analyze the sources and dynamics of in- dynamic source of revenues. The federal flation in transitional socialist economies. government's problem is structural. Its Copies are available free from the World 557. The New Fiscal Federalism revenues fall far short of its spending Bank, 1818 H Street NW, Washington, in Brazil needs. DC 20433. Please contact Olga del Cid, * In short, existing fiscal arrange- room M7-047, extension 39050 (45 pages). Anwar Shah ments have created a vertical fiscal im- balance. Fiscal arrangements in Brazil severely Shah presents policy options to re- 556. Taxing Choices in Deficit constrain the federal government's ability solve these problems. Reduction tofulfill its mandate as a nationalgovern- This paper - a product of the Public ment. Municipalgovernments, meanwhile, Economics Division, Country Economics John Baffes and Anwar Shah have more revenues than they need, en- Department - is part of a larger effort in couragingfiscal mismanagement. Reform PRE to reform public sector management To control their deficits, Brazil, Mexico, is urgently needed to counteract Brazil's in developing countries. It is one of a and Pakistan should try to raise revenues fiscal imbalance. series of discussion papers prepared for and curtail spending simultaneously. In the Intergovernmental Fiscal Relations Argentina and Chile, the first priority Brazil is a three-tiered federation of 24 Project of the Public Economics Division. should be to control public spending. states, two federal territories, a federal Copies are available free from the World district (the capital), and 4,300 munici- Bank, 1818 HStreetNW,WashingtonDC Baffes and Shah use the cointegration palities. In 1989 less than half of all gov- 20433. Please contact Ann Bhalla, room approach to determine whether deficits ernment spending was controlled by the N10-059, extension 37699 (117 pages). are more effectively controlled by raising federal government. Brazil's new consti- taxes or controlling expenditures - or tution gave autonomous broad powers to both. They use long-term historical time states and municipalities on certain tax 558. Alternative Instruments series data for Argentina, Brazil, Chile, and spending functions, with municipali- for Smoothing the Consumption Mexico, and Pakistan. ties independent of and coequal to states. of Primary Commodity Exporters Many studies have examined cau- Shah reviewed and analyzed the sality in the relationships between taxes intergovernmental fiscal relationsin Bra- Kenneth M. Kletzer, David M. Newbery, andspendingindevelopedcountries.Some zil. He found that: and Brian D. Wright have found evidence that higher spending * Federal and state governments are tends to lead to higher taxes. Some have involved in purely local functions in an To reduce price risk caused by the instabil- foundthathigher taxesleadtomore spend- uncoordinated fashion. ity of primary commodity markets, coun- ing. Some find that causality runs both * The administration of sales tax by tries that depend for export earnings on a ways. all three levels creates duplication and single primary commodity can find sub- Baffes and Shah find that Brazil, confusion. stantial long-runprotection byrollingover Mexico, and Pakistan have continuously * Administration of the general one-period futures. The practical benefits tried to align revenues and spending to value-added tax by the state involves un- ofa substantially longer hedging horizon control the deficit and that spending and resolved issues about tax crediting on may often be small. taxes tend to feed each other in those interstate trade. countries. * The state and municipal revenue- Countries that depend on a single pri- In Argentina and Chile, they found sharing funds do not distribute revenues mary export for their foreign earnings are the deficit to be explosive - and caused fairly and equitably. likely to experience sharp fluctuations in by spending. There was no empirical evi- * Conditional transfers are arbitrary export earnings and their underlying dence of efforts to adjust revenues to con- and driven primarily by political consid- wealth, because of the instability of all trol the deficit. erations. Programs workatcross-purposes primary commodity markets. As part of They recommend that to control the and the subjective nature of these trans- structural adjustment, several countries 78 Policy Research Working Paper Series have liberalized their trade regimes, so 559. Fiscal Policy and Private do those variables affect private invest- domestic producers are no longer insu- Investment In Developing ment? How does public spending affect lated from international price fluctua- Countries: Recent Evidence private investment decisions? What ef- tions. on Key Selected Issues fect does inflation have when there is no Kletzer, Newbery, andWrightreview fully indexed tax system? the costs of export price instability and Ajay Chhibber and Mansoor Dailami Chhibber and Dailami conclude that consider the role of conventional instru- most developing countries have restricted ments(loans, price stabilization measures, The key to sustained recovery in develop- access to foreign financing so there is future contracts, and futures rollovers for ing countries is the revival of private in- direct competition between the public and longer-term price protection), as well as vestment. This revival requires a coordi- private sectors for limited financial re- instruments loosely called "commodity nated set of credible policies - fiscal, sources. Big fiscal deficits preempt funds bonds." They weigh the implications of exchange rate, tax,andpublicexpenditure and restrict private investors' access to. the risk of borrower default when the restructuring. In several countries the debt them. But spending cuts must be struc- borrower's aim is smoothing consump- overhang is also an obstacle to achieving tured to protect and even expand public tion. They conclude: that credibility. investments that help private sector in- * In principle, consumption- vestment and - more important - to smoothing contracts might be valuable to The importance of private domestic in- avoid physically crowding private firms countries dependent on an export com- vestment in growth and development out from product and factor markets. modity subject to price risk. Futures cov- strategies is important in the transition With reduced fiscal deficits and fi- erage could help iflonger maturities were to the 1990s. In most developing coun- nancial liberalization, market forces will available. They conclude that substantial tries in the 1980s, domestic investment play more of a role in the volume and long-term protection is possible by rolling bore the brunt of the total contraction in allocation ofprivateinvestment. Taxpolicy over one-period futures. The marginal net demand associated with external adjust- will be increasingly important in influ- benefits of lengthening the horizon be- ment. encingmarketinvestment decisions. This yond the one production period (roughly Increasinglythereis agreement about requires a better understanding of vari- observed in practice) depend upon trans- the desirability of increasing the private ous institutional, financial, and tax fac- action costs, the degree of serial correla- sector's share in total capital formation by tors that have led to so much corporate tion, and the discount factor. In practice, relying more on market forces and incen- indebtedness in developing countries. the extrabenefits ofa substantially longer tives. It is now widely accepted that ex- Chhibber and Dailami highlight the hedging horizon may often be small. pansion of private investment should be main elements of these factors that must * If production responds to incen- the main impetus for economic growth, be incorporated in determining the cost of tives with a one-period lag, the rollover and that public investment resources capital to firms and the after-tax rate of strategy does not provide perfect protec- should gradually focus on social areas, return to investors. tion at the time the hedge is made - even including the alleviation of poverty and This paper - a product of the Devel- if the production response to inputs is the upgrading of social capital and ser- opment Economics Vice Presidency - is nonstochastic, as opposed to the case of vices. Investment opportunities have im- partofalargereffortinPREtounderstand one-period hedging. proved in the industrial countries so it is the determinants of private investment. * When a sovereign exporter can offer foolish to assume any favorable response This paper is to be published in Richerche no collateral and is short of liquid re- by foreign investors to investments in Economiche. Copiesareavailablefreefrom sources, the use offutures is precluded by developing countries without a strong the World Bank, 1818 H StreetNW, Wash- the need to furnish the margins that guard commitment by indigenous private in- ington DC 20433. Please contact Bilkiss against default. The disadvantage ofstan- vestors. Dhomun, room S9-041, extension 33768 dard loans and buffer funds is that they Chhibber and Dailami investigate (44 pages). will probably reach crisis states in which several questions in connection with fis- the resolution of the crisis is ill-defined. cal policy, its connections with the pace of The lenders' recognition of this will private domestic investment and its role 560. The Persistence of Job dampen their enthusiasm. in the adjustment programs of developing Security in Reforming Socialist This paper - a product of the Inter- countries: How do choices between alter- Economies national Trade Division, International native sources of deficit financing affect Economics Department - is part of a private investment? How does private Milan Vodopivec larger effort in PRE to improve develop- investment in developing countries re- ing countries' management of the sub- spond, for instance, to devaluation of the The job security and overemployment that stantial commodity price risk which most exchange rate? To what extent does pub- characterize even the reforming socialist face. Copies are available free from the lic investment complement private in- economies are the result not of planning World Bank, 1818 H Street NW, Wash- vestment and to what extent does it crowd but of a complicated bargaining among ington DC 20433. Please contact Julie it out in the competition for resources? coalitionsthatresultsinamassivebailing Carroll, room S7-069, extension 33715 How does the size of the fiscal deficit and out of the ailing or less productive firms (69 pages). alternative ways offinancingit affect pri- and workers at the expense of the more vate investment? How do these options productiveonesandofthehouseholdsector affect the real interest rate, credit alloca- as a whole. tion, and the real exchange rate, and how Policy Research Working Paper Series 79 The quest for efficiency underlies the re- firms were informally pressed, and even 562. Anticipated Real Exchange- form effortsof the socialist economies, but legally obliged, tohire; part-time andfixed- Rate Changes and the Dynamics job security and overemployment (redun- term employment were legally discour- of Investment dant jobs) still characterize these econo- aged; hiring, reassigning within the firm, mies. Vodopivec argues that reforming and dismissing on disciplinary grounds Luis Serven socialist economies have maintained job were excessively bureaucratic; both wage security not through planning but mainly bills and wage rates were administra- Unanticipated changes in the real ex- through a complicated bargaining among tively regulated; and workers were entitled change rate affect investment through their coalitions (special-interest groups) that to many fringe benefits typically notfound impact on the desired capital stock, whose results in a massive redistribution. This in market economies. direction depends on a number of factors redistribution amounts to a bailing out of These rigidities produced what and is in general ambiguous. In contrast, the ailing or less productive firms and Vodopivec calls the full employment syn- anticipated changes can also have an im- workers at the expense of the more pro- drome -alabor market characterized by portant effect on the optimal timing of ductive firms and workers and of the inefficient labor allocation, suppressed investment, in a direction that depends on household sector as a whole. work incentives, and inherent wage drift the financial openness ofthe economy and Vodopivec substantiates his argu- tendency. At the heart of this syndrome is on the import content of capital goods. ment with an empirical analysis of the the lack of appropriate mechanisms to This issue is explored using a simple mac- redistribution associated with the soft enforce the exit of firms (workers) that roeconomic model. budget constraint in Yugoslavia in the results in a massive employment subsidi- 1970s and 1980s. He shows that redistri- zation. The impact of permanent real deprecia- bution to be the outcome of a confronta- Akey feature of the transition will be tion on a country's capital stock is uncer- tion among coalitions and explains its redundant labor and, almost certainly, tain. Whether total capital stock rises or compensatory nature. significant unemployment, together with falls depends on how depreciation affects This paper-aproductofthe Socialist labor shortages for certain skills. The aggregate demand, the real interest rate, Economies Reform Unit, Country Eco- challenge for these economies will be to and especially the import content of capi- nomics Department - is part of a larger massively reallocate labor at the least tal goods. In the long run, the capital effort in PRE to investigate the labor social cost. stock can be expected to rise in traded markets in socialist economies. Copies Active labor market policies will be goods and fall in nontraded goods. are available free from the World Bank, important - not just income support Despite this long-run ambiguity, an- 1818HStreetNW, Washington DC 20433. schemes but policies that improve labor ticipated (as opposed to unanticipated) Please contact CECSE, room N6-045, mobility and increase labor absorption. changes in real exchange rate have a extension 37188 (44 pages). These economies must improve their abil- predictable effect on the dynamics of capi- ity to train and retrain workers and to do tal accumulation. They provide an incen- such things as help small businesses, tive for speculative reallocation of invest- 561. The Labor Market and the improve schooling, link universities with ment over time, so they can greatly dis- Transition of Socialist Economies businesses, and help with technology tort the timing of investments. transfer. In the framework Serven presents, Milan Vodopivec To eliminate employment subsidies, the time profile ofinvestment is related to argues Vodopivec, requires imposing how financially open an economyis andto One challenge ofthe transition ofsocialist lasting financial discipline, including the import content of capital goods. economies to multiparty democracy and a transparent (individual) property rights, When a real depreciation is expected, market economy will be to reallocate labor an unselective and transparent fiscal sys- an investment boom is likely to develop if while minimizing the social costs ofunem- tem, and a multiparty political system (to the import content of capital goods is high ployment. Vodopivec identifies the key is- provide checks and balances for the rul- relative to the degree of capital mobility: sues of labor reform and makes policy ing party and thus contain its ability to the anticipated depreciation promotes recommendations. redistribute). flightinto foreign goods. Conversely, with Vodopivec also recommends policies high capital mobility, the opposite invest- All socialist countries of Eastern Europe for job security, incomes policy, wage dif- ment pattern is likely to emerge, as the except Albania are now starting to funda- farentials, nonwage labor costs, and wage anticipated depreciation promotes flight mentally restructure their economic and taxation. into foreign assets. political systems - with the clear goals of This paper -a product ofthe Socialist In the first case, the investmentboom a market economy and multiparty democ- Economies Reform Unit, Country Eco- will be followed by a slump when the racy. Reform of the labor market is essen- nomics Department - is part of a larger depreciation actually takes place, as it tial to these efforts, the reform that will effort in PRE to investigate the labor amounts toremovinga transitory subsidy set wages and employment solely in the markets in socialist economies. Copies to investment. In the second case, the interests of efficiency, and leave social are available free from the World Bank, predepreciation slump will give way to a protection to the cash benefit system. 1L818HStreetNW, WashingtonDC 20433. boom, since the depreciation amounts to The labor market in socialist econo- Please contact CECSE, room N6-045, removing a tax. mieswastraditionallyplaguedwithgrave extension 37188 (44 pages). Such a pattern could lead the unin- rigidities: most importantly, workers en- formed observer to conclude that the real joyed practically complete job security; depreciationis'contractionary"in thefirst 80 Policy Research Working Paper Series case and "expansionary" in the second. In Since the debt crisis, there has been in- or foreign exchange rationing, these fact, the sharp change in the investment creasing interest in the determinants of changes prevent use of a representative- trend could largely reflect the elimination investment in developingcountries. There firm approach. of the transitory (positive or negative) is plentiful literature on the topic for in- Finally, Rama proposes a method for investment incentive. These speculative dustrial economies but existing studies dealing with the effects on private invest- investment swings will be larger the on developing countries are scattered and ment ofthe economic instability typical in smaller the adjustment costs associated few. most developing countries. Applied re- with capital accumulation. Rama examined those studies with search would help decide whether the These results agree broadly with the an eye to answering two questions: Are suggested procedure improves the econo- experiences of Chile and Uruguay in the the variables that influence investment metric performance of empirical invest- late seventies and early eighties. The ex- decisions the same in developing as in ment equations in developing countries. change-rate-based disinflation attempted industrial countries, or should other fac- This paper -a product of the Macro- inbothcountriesledtoareal overvaluation tors be considered because the macroeco- economic Adjustment and Growth Divi- and growing expectations of real depre- nomic setting is different? And what can sion, Country Economics Department - ciation. Chile - which had a relatively be learned from the applied research that is part of a larger effort in PRE to un- closed capital account and a high import has been done on the subject? derstand the behavior of investment in content of investment - witnessed an Afterrevisiting the theoretical debate, adjustment programs. Copies are avail- investment boom. Uruguay, on the other Rama presents an integrative analytical able free from the World Bank, 1818 H hand, which is financially fairly open, framework, including different empirical Street NW, Washington DC 20433. Please experienced an investment slump. equations, that depend on the assump- contact Emily Khine, room N11-067, ex- Similar results apply to consumers' tions made about the economies' key fea- tension 39361(48 pages, including charts). spending on durable goods. These spend- tures (suchas marketstructure and credit ing fluctuations simply reflect changes in rationing). He classifies 25 empirical stud- the optimal timing of consumption and ies on investments in developing coun- 564. Costs and Benefits investment - but they obviously have a tries, classifying them according to their of Agricultural Price Stabilization strong destabilizing potential. This sug- chosen specification and comparing their in Brazil gests the importance of real exchange estimates. rate stability to avoid persistent over- or Rama concludes that investment de- Avishay Braverman, Ravi Kanbur, undervaluations. When exchange rate cisions in developing countries are not Antonio SalazarP. Brandao, Jeffrey Hammer, action is justified, it should be under- necessarily based on the same variables Mauro de Rezende Lopes, taken immediately to prevent distortions as in industrial countries. Analysts must and Alexandra Tan in the intertemporal allocation of spend- consider such additional factors as fi- ing. nancial repression, shortage of foreign The welfare gains from reducing risk This paper -a product of the Macro- exchange, lack of infrastructure, and through agricultural price stabilization economic Adjustment and Growth Divi- significant economic instability. are unlikely to be large relative to the sion, Country Economics Department - In general, the available empirical welfare gains from price reform that re- is part of a larger effort in PRE to study studies support these arguments some- duces market distortions for the six agri- the response of private investment to what, so their careful introduction into cultural commodities considered in this macroeconomic adjustment measures. the theoretical models from which invest- study. Copies are available free from the World ment equation are drawn deserves fur- Bank, 1818 H StreetNW, Washington DC ther research. This is particularly true In recent years, agricultural price stabili- 20433. Please contact Susheela for the intertemporal aspects of analysis, zation policies have been recommended Jonnakuty, room N11-039, extension restrained in Rama's analysis to a simple in Brazil as a way to reduce government 39076 (50 pages, with charts and figures). two-period framework. intervention and open the sectorforinter- - With a few exceptions the available national trade without internalizing the empirical studies are not satisfactory, instability of world prices. 563. Empirical Investment Rama finds. The endogenous variable is The proposal discussed (and eventu- Equations in Developing Countries seldom scaled, so it probably gathers a ally implemented in 1987) was to estab- timetrend. And some key exogenousvari- lish a system of price bands around a Martin Rama ables - such as the user cost of capital, moving average of past prices, with the the upper bounds on credit, and the government relying on stocks to defend Investment decisions in developing coun- availability of foreign exchange - are the bands. triesfacesomeadditional constraints than measured in misleading ways. The mea- Braverman and his associates in industrial countries. Analysts must con- surement issue deserves more research. evaluated the "band proposal" for six sider such additional factors as financial Rama stresses the importance of the commodities, using historical data and repression, shortage of foreign exchange, aggregation procedure when there is sig- posing this question: what would have lack ofinfrastructure, and significant eco- nificant economic instability. Sudden and happened ifprice bands had been adopted nomic instability. Rama suggests a method dramatic policy changes modify the rel- in the past six to ten years (compared with for improving empirical investmentequa- evant investment rule. By raising or re- free trade)? There were two major find- tions in developing countries. ducing the share of firms that face credit ings. Policy Research Working Paper Series 81 First, the implications of adopting a Cicely Spooner, room N8-035, extension the reform of socialist economies and re- band-rule policy depend heavily on the 30464 (40 pages, including tables). view experience in a comparative man- specific characteristics of the commodi- ner. Copies are available free from the ties. The results suggest that: World Bank, 1818 H Street NW, Wash- * For edible beans, the band policy 565. Issues in Socialist Economy ington DC 20433. Please contact CECSE, benefits producers. Risks associated with Reform room N6-037, extension 37188 (45 pages). this crop are great and the efficiency cost of interventions is smaller than the ben- Stanley Fischer and Alan Gelb efits to farmers in reduced risk. The band 566. Measuring Outward rule will not stabilize producers' income, Fischer and Gelb define the main compo- Orientation in Developing however, and will require an unreason- nents ofsystem reform programs aimedat Countries: Can it Be Done? ably high level of stocks. transforming a socialist economy into a * For corn, the risk benefits are low. private market economy and sketch an Lant Pritchett The best alternative for the government illustrative schedule for such a program may be free trade. for a representative country. The impor- That alternative objective summary mea- * For rice, free trade hurts produc- tant strategic choices, they say, arise from sures of outward orientation produce en- ers because it destabilizes income and the interplay between economics and tirely different country rankings is prob- reduces its mean. But the efficiency politics. ably not an astounding revelation. Trade cost of current policies (which protect regulations and barriers are generally producers)is large. The bandrule reduces Fischer and Gelb examine issues involv- complex legally and even more opaque in the cost of risk to producers significant- ing the, design and sequence of economic theiractual administration. Thehopethat ly and its efficiency costs are relatively reform in formerly socialist economies any reasonablystraightforward summary small. that have made the political decision to measure could produce a "correct" rank- * For wheat, the current situation is move to a private market economy. They ing of countries has always been treated riskier than free trade and large deficits also examine the potential role of foreign skeptically and - disappointingly - are incurred to support producer prices countries in providing aid, technical as- rightly so. and to subsidize consumers. The ineffi- sistance, and market access. ciencies caused by the band rule are larger In economies that are actually or po- Pritchett tries to move debate on the em- than the value attributable to reducing tentially unstable macroeconomically, the pirical cross-country relationshipbetween risks. first priority is macroeconomic stabiliza- trade policy and economic performance * For cotton, free trade will increase tion and measures to harden budget back one step by asking the question. Can risk. No calculations of the inefficiencies constraints and create an emergency so- the economists' intuitive notion of out- of current policies were made but other cial safety net. wardly oriented policy be captured em- studies indicate that they are great. At the center of the reform process pirically? Different authorshave used dif- * For soybeans, the band rule has are price reform, trade liberalization, en- ferentmeasuresas proxies fortrade policy virtually no effect on price instability, terprise restructuring, and privatization. stances and generally have come to simi- producer revenue, and producer surplus. Banking reform, training, and the devel- lar conclusions: that outwardly oriented The same conclusion on instability is seen opment of other financial markets must countries perform better. for soy oil and soy meal. begin immediately, but the ability of the Pritchett examines the relationship Second, the welfare gains for risk financial system to allocate resources ef- between four types ofempirical measures reduction through agricultural price sta- ficiently will remain limited until enter- of outward orientation across countries: bilization are unlikely to be large relative prise and price reform are sufficiently * Share oftrade (orimports)in GDP, to the welfare gains from price reform advanced, adjusted for the countries' structural that reduces market distortions for these In systemwide reform, the notion of characteristics or factor endowments. six agricultural commodities. sequencing should be replaced by that of * The average tariff and coverage More research is needed into the packaging. A large number of interre- ratio of nontariff barriers (NTBs). . macroeconomic implications of price sta- lated reforms - including those needed * Measures of the deviation of coun- bilization policies, particularly in coun- to create an appropriate legal structure tries'actual trade patternfromthepattern tries with unstable but moderate rates of and develop the skills needed in a market predicted from a model of resource-based inflation, countries in which agricultural economy - has to be put in place very comparative advantage. expenditures represent alarge proportion early, although the speed of implementa- * Ameasure ofreal price distortions. of the budget. tion will differ. Pritchett finds that these promising This paper - a product of the Agri- However rapidly the reforms are ini- candidates for measuring outward orien- cultural PoliciesDivision, Agriculture and tiated, their completion - especially tation are nearly completely unrelated in Rural Development Department -is part privatization - is bound to take many a cross-country data set. He concludes of a larger effort in PRE to analyze the years. that he cannot glowingly recommend one efficiency and equity implications of agri- Thispaper-aproduct ofthe Socialist measure over another. Nor can any of the cultural policies. Copies are available free Economies Reform Unit, Country Eco- candidates be rejected outright. The ab- from the World Bank, 1818 H Street NW, nomics Department - is part of a larger sence of correlation among them he skep- Washington DC 20433. Please contact effort in PRE to provide a framework for tically interprets as an indictment ofeach. 82 Policy Research Working Paper Series But that one (but only one) of the mea- The federal authority for macroeconomic in the Indian state of Maharashtra. In a sures best captures outward orientation management in Brazil changed profoundly typical year it provides about 100 million cannot be rejected. with the institutional changes that culmi- person-days of unskilled employment on He concludes that no reliable, robust nated in a new federal constitution in rural infrastructure projects, at an aver- estimate of the impact ofgeneral outward October 1988. age cost of about one dollar a day in the orientation on economic performance Bomfim and Shah analyzed the im- late 1980s. The demand for EGS work (economic growth or expert performance) plications of the new fiscal arrangements fluctuates enormously from year to year is likely to be possible from cross-country for the federal exercise of macroeconomic (depending on the vagaries of the mon- data. This is not to say that particular policies. soon) and across seasons in a given year. variables, such as the price distortion The literature on fiscal federalism In mid-1988 the piece rates paid to variable, won't perform well (have a high stresses that stabilization policies are best workers on EGS doubled, in line with new t-statistic) in explaining cross-country carried out by the federal government. So statutory minimum wage rates for agri- variation in economic performance. But it is interesting to find out to what extent cultural labor. Ravallion, Datt, and inferring that that type ofempirical result the federal control over macroeconomic Chaudhuri investigated the effects of this is due to the effects ofan outward-oriented management gets diluted in a highly de- sudden increase on the scheme's cost, the policy stance requires additional evidence centralized federation such as the one workers' wages, and their ability to find establishing a link between the measure that now exists in Brazil. work when needed. and policies. The authors found evidence that the They found that the impact of the Large changes in the NTB coverage new federalism has limited, but not im- wage increase on real cost was dampened ratio in a particular country are more periled, the scope of fiscal policy as a by inflation, adjustments in the composi- likely to indicate a movement toward stabilization tool. On the other hand, fed- tion of work, and, most important, by import liberalization than similar differ- eral control over monetary policy has im- falling employment. The aggregate real ences between countries at a point in proved. cost per month fell after the increase in time, but those relying on the NTB cov- This paper - a product of the Public wage rates. This partly reflected good erage ratio as the key indicator of liber- Economics Division, Country Economics monsoons but, controlling for monsoons, alization must recognize the lack of sup- Department - is part of a larger effort in there are signs that falling employment porting evidence linking the coverage ratio PRE to reform public sector economic reflected rationing; some poor people who to observable trade outcomes. management in developing countries. wanted relief work could not get it. The administrative and legal nature Copies are available free from the World Ravallion, Datt, and Chaudhuri found ofNTBs makes them an easily monitorable Bank, 1818 H Street NW, Washington DC that EGS met less than halfofthe demand indicator on which to base conditionality 20433. Please contact Ann Bhalla, room for work after the wage increase and that in liberalization programs, but the gen- N10-059, extension 37699 (40 pages). almost all of the fall in EGS employment erally discretionary nature ofNTB imple- was from rationing. The effects of the mentationmustberecognized, so that the initial wage increase on the poor are am- removal of a particular type of legal re- 568. Higher Wages for Relief Work biguous: some could get higher wages but striction not be considered synonymous Can Make Many of the Poor others went without desired relief work. with increased outward orientation. Worse Off: Recent Evidence The concept of assured employment, Dataandprogramsareavailablefrom from Maharashtra's "Employment albeit at a low wage, can be attractive in the author. Guarantee Scheme" terms of poverty alleviation: it generally This paper - a product of the Trade allows scarce resources to go to the poor- Policy Division, Country Economics De- Martin Ravallion, Gaurav Datt, est first (at least those able to work), it partment - is part of a larger effort in and Shubham Chaudhuri maximizes the insurance benefits to the PRE to examine the impact oftrade policy poor, and it helps undermine some of the on overall economic performance. Copies Guaranteed employment can be valuable possibilities for corruption on such are available free from the World Bank, insurance against poverty. But the recent schemes - and for exploitation in labor 1818HStreetNW, WashingtonDC 20433. experience in Maharashtra suggests that markets and tenancy contracts. Please contact Karla Cabana, room N10- raising the wage rate when you don't have But achieving these benefits with 037, extension 37947 (52 pages). the budget to pay for it is not in the inter- limited budgetary resources requires a ests of all the poor. Some get higher pay, low enough wage rate. The recent experi- but others must go without relief work. ence in Maharashtra suggests that im- 567. Macroeconomic Management posing a higher wage rate when you don't and the Division of Powers Reliefwork schemes provide well-targeted have the budget to pay for it is not in the in Brazil: Perspectives relief to poor people, and valuable insur- interests of all of the poor. for the Nineties ance against poverty. But their success This paper - a product of the Agri- may depend on the scheme's design - cultural Policies Division, Agriculture and Antulio N. Bomfim and Anwar Shah particularly the wage rate and coverage Rural Development Department-ispart offered. of a larger effort in PRE to research the Brazil's new federalism has limited, but The most famous and one of the most performance of poverty alleviation not imperiled, the scope of fiscal policy as successful of these programs is the Em- schemes and the implications for policy a stabilization tool. But the federal control ployment Guarantee Scheme (EGS) that design. Copies are available free from the over monetary policy has improved has been in operation since the mid-1970s World Bank, 1818 H Street NW, Wash- Policy Research Working Paper Series 83 ington DC 20433. Please contact Cicely producers, provide false signals, and pos- 571. Credit's Effect Spooner, room N8-039, extension 30464 sibly increase the costs of adjusting to on Productivity in Chinese (36 pages). liberalization. Agriculture: A Microeconomic This paper - a product of the Trade Model of Disequillbrium Policy Division, Country Economics De- 569. Domestic Purchase partment - was prepared as background Gershon Feder, Lawrence J. Lau, Requirements for import License material for the joint UNDP/World Bank Justin Y. Lin, and Xiaopeng Luo Allocations in Mail Trade ExpansionProgram, whichprovides technical and policy advice to countries Not all farmers - sometimes only a mi- Wendy E. Takacs wishing to reform their trade regimes. nority - are constrained in their farming Copies are available free from the World operations by inadequate credit. And part To obtain import licenses for sugar and Bank, 1818 H StreetNW, Washington DC offormalcreditisdiverted toconsumption tea, prospective importers in Mali were 20433. Please contact Sheila Fallon, room so the effect on output ofgreater supplies of required to purchase a certain amount of N10-035, extension 37947 (25 pages, in- formal credit might not be as large as one 4omestic output. The efficiency ofthis kind cluding figures). would expect ifone assumed that it would ofarrangement relative to that of a direct all be used productively. trade restriction such as a tariff depends on the policy's objective and whether the 570. Debt Concentration Many government programs want to pro- protected industry is competitive or a mo- and Secondary Market Prices vide more credit to the farm sector to nopoly increase agricultural productivity. If the Raqael Fernandez and Sule Ozler marginal effect on productivity is small, The government of Mali, as part of its those resources might be put to better use trade liberalization program, substituted The more concentrated the debt holdings elsewhere. an import licensing system for the state in large money center banks, the higher Feder, Lau, Lin, and Luo conducted trading agency that had held import mo- the secondary price of that debt. an econometric analysis of the effect of nopolies on a number of products. To get credit on output supply which recognizes licenses to import sugar and tea, prospec- Using amodel that distinguishes between that credit markets are not necessarily at tive importers were required to purchase large money center banks and smaller equilibrium - so that credit rationing given amounts of domestic output. The regionalbanks,FernandezandOzlershow (with unsatisfied demand) and volume of imports was thus "linked" to that the percentage of a country's debt nonborrowing (when credit could be domestic output ofthe imported products. held by the large banks affects the second- available) are both possible. Only about Takacs investigates the economic ary market price of that country's debt: 37 percent of the farmers in the study impact of these linking arrangements the higher the concentration of the debt, area were constrained by inadequate for- under two domestic market structures: the higher the secondary market price. mal credit. Informal credit sources pro- perfect competition and monopoly. The They also show that if debt is freely vided funds for specific non-agricultural arrangements have an effect equivalent tradedin the secondarymarket, theentire activities that were not fungible. to that of a tariff when the tariff revenue stock of debt will not eventually end up The results indicate that one addi- is transferred to the domestic industry as being owned by the large banks. tional yuan of liquidity (credit) yielded a subsidy. The cost of these linking ar- Theirempirical analysisincorporates 0.235 yuan of additional gross value of rangementstothe countryimposing them several potential determinants of sec- output. These results suggest that for the may be greater or smaller than the cost of ondary market prices: variables associ- area of China covered in the study, a good tariffs, depending on the policy's objective ated with a country's economic perfor- part of the short-term credit may actually and the structure of the protected indus- mance, variables that can be associated be used for consumption and investment. try. with the creditor country's regulatory Indeed, medium- and long-term formal If the protected industry is competi- structure, and the concentration of debt creditis practically nil among the agricul- tive, linking arrangements are less costly in the hands of the largest U.S. banks. tural households in the study area. Rolled- than tariffs if the objective is to increase This paper - a product of the Debt over short-term credit is sometimes used domestic production or maintain a given and International Finance Division, In- for small-scale investments. The diver- degreeofself-sufficiency (defined as main- ternational Economics Department - is sion of short-term credit for farm invest- taining a particular ratio of imports to part of a larger effort in PRE to analyze ment is about 40 percent for an average domestic production). The reverse may be the benefits and costs of voluntary mar- household in the study area. This implies true if the protected market is a mo- ket-based debt and debt service reduction that almost a third of the formal credit is nopoly. operations. Copies are available free from used for consumption (of current goods or Price controls on the products subject the World Bank, 1818 H Street NW, Wash- durables). to linking arrangements dilute the effec- ington DC 20433. Please contact Sheilah What conclusions does this suggest tiveness of the arrangements and cause King-Watson, room S8-025, extension in evaluating the probable effect of ex- disequilibrium in the market between 31047 (47 pages, including tables). panding agricultural credit? First, not all distributors and consumers. Removing farmers, and sometimes only a minority, price controls before the linking arrange- are constrained in their farming opera- ments in a liberalization program would tions by inadequate credit. And second, drive up prices for both consumers and greater supplies of formal credit will be 84 Policy Research Working Paper Series diverted in part to consumption, so the exchange, and real estate sensitivities of Asia prototype. Mazumdar analyzes the likely effect on output will be smaller than returns to bank stockholders. key relationships in this cyclical behav- what one might expect if all funds are Only the stock market sensitivities ior. He then focuses on long-term labor assumed to be used productively. prove significant, at 5 percent. Time-se- market issues of interest during the This paper - a product of the Agri- ries regressions show that the large Japa- economy's 20-year transformation. He con- cultural Policies Division, Agriculture and nese banks have developed stock market cludes: Rural DevelopmentDepartment-is part betas over two and that the value of the Events in Malaysia differed in im- of a larger effort in PRE to evaluate agri- bank's beta has come to increase with portant details from the standard se- cultural credit policies and review insti- measures ofits size and accounting lever- quence in "Dutch disease" models. The tutional designs so as to formulate better age. real exchange rate appreciated not because guidelines for Bank activities in rural Future research will investigate the ofmore spendingbutbecause ofthe inflow credit. Copies are available free from the sensitivity of these results to different of foreign capital to support the World Bank, 1818 H Street NW, Wash- waysofpoolingdatafromindividualbanks government's budget deficit. And the in- ington DC 20433. Please contact Cicely and to more sophisticated methods for crease in average wages in the period Spooner, room N8-035, extension 30464 estimatingvarious parameters. Theyalso leading up to the recession was not cor- (27 pages). plan to extend the analysis byimbedding rected with the rise in the domestic exi it in a model of how variations in bank- change rate (the ratio of the prices of customer contracting arrangements in nontradables to tradables) in a fully em- 572. Capital Positions of Japanese Japan affect the returns bank stockhold- ployed economy. Banks ers can earn. Wages increased more than labor This paper - a product of the Debt productivity did at a time when employ- Edward J. Kane, Haluk Unal, and International Finance Division, In- ment growth had slowed and the rate of and Ash Demirgaq-Kunt ternational Economics Department - is unemployment had risen. This perverse part of a larger effort in PRE to study behavior may be attributable to certain Japanese banks are highly capitalized in alternative sources of external finance. East Asian labor market institutions - terms of market value. Here is a method Copies are available free from the World notably steep wage-seniority scales and for testing hypotheses about determinants Bank, 1818 H StreetNW, Washington DC the attachment of workers to firms after a of two types of hidden capital in Japanese 20433. Please contact Sheilah King- period of service. financial markets. Watson, room S8-025, extension 33730 Rising labor costs were only part of (35 pages). the problem of rising costs before the Japanese banks are promising sources of recession. The whole package of fiscal, capital for developing countries wishing monetary, and exchange rate policies - to finance a balance of payments gap. 573. Malaysian Labor Markets together with labor market behavior - Kane, Unal, and Demirguc-Kunt show Under Structural Adjustment led to the recession. that Japanese banks are highly capitalized And the recession was short-lived - in terms of market value; much of their Dipak Mazumdar no more than two years long. Factor mar- capital is "hidden capital," the divergence kets were highly flexible: wages, interest between accounting and stock market Inagenerally healthy economy, Malaysia's rates, andexchangerates all drifted down- estimates. labormarketsuffers some structuralprob- ward. This "collapse" of factor markets Kane and associates developed a lems: steep wage-seniority scales, unem- fueledtherecovery whenfavorable trends method for testing hypotheses about two ploymentamongsecondary-school leavers, reasserted themselves in Malaysia's ex- types of hidden capital: the misvaluation and an almost bizarre constancy in the ternal markets. ofon-balance-sheetitems(post-acquisition relative differences in earnings (and ever Mazumdar further concludes that: gains and losses that, although they re- wider differences in per capita income) * Plantation wages (especially rub, main unbooked, are bookable upon the between states - which suggests a serious ber) lagged somewhat behind wages in sale of the item under General Accepted problem in the sharing of fruits ofeconomic manufacturing but the overall growth rate Accounting Principles (GAAP)) and in- growth through internal migration of the of real wages in the formal sector was tangible values that GAAP currently des- factors of production. positive, before the slowdown of the 1980s. ignates tobe unbookable off-balance-sheet * Paddy farmers and smallholder items. Malaysia's sustained growth in the 1970s cash-crop growers had significantly lower They construct a model that explains was boosted by windfall gains during two earnings in 1973 than nonagricultural changes in both types of capital functions oil price hikes plus a commodity boom. Oil employees (rural and urban) and estate ofholding-periodreturnsearnedinJapan and commodity prices fell in the 1980s employees - and their relative position on stocks, bonds, yen, and real estate. and Malaysia, an oil exporter, bungled has declined even further. They apply the model to annual data for into a rather severe depression in 1985- * The tertiary sector increased its 1975-89 and afour-class size/charter par- 86. But it recovered quickly, to the sur- share in total employment from 36 (1970) tition of the Japanese banking system. prise of some - and growth resumed in to 49 (1980) to 55 percent (1987), and For each type of hidden capital and each 1987. government employment accounted for classofbank, themodel develops estimates The events that led to the recession only part of this growth. of the stock market, interest rate, foreign and quick turnaround are a Southeast * The self-employed are only a small Policy Research Working Paper Series 85 part (15 percent) of the work force in implemented for 1980-87 country panel consecutive years of data exist, to test manufacturing but more than a third of data. These show that indirect effects of several hypotheses about savingbehavior. the total in agriculture and distribution, public policies on private saving - The surprisingly strongresults ofthis * Growth in white-collarjobshas not through changes in domestic inflation and study -considering the few countries in. kept pace with growth in education, so real interest rates - are negligible. But the sample - verify the value of using therehasbeen aproblem ofunemployment cuts in current public spending and cur- household data, but results should be among the educated. Not all secondary- rent tax hikes significantly affect private checked with a larger sample when more school leavers would accept blue-collar savings. data become available. jobs. This type of white-collar unemploy- Increasing public saving by cutting The authors test how household say- ment is structural - not responsive to current-period public expenditures by $1 ing in developing countries responds to: changes in demand, unless as in the latter reduces private saving by only 16 to 50 the level of disposable per capita income; half of the 1970s the boom is sustained cents. Permanent cuts in public spending the growth rate of disposable income and and intense (perhaps favoring the white- reduce private saving by 47 to 50 cents. its deviationfrom trend;real liquidwealth collar sector). Not surprisingly, a higher perma- at the start of the period; the real interest * Relative earnings for women im- nent tax hike has less of an effect on rate; the inflation rate; foreign saving; proved in striking ways in 1970-87. private saving than a transitory tax hike. government transfers to households; and This paper -aproduct of the Studies For each $1 increase in permanent taxes, some demographic variables. The results and Training Design Division, Economic private saving declines only 23 to26 cents. suggest the following: Development Institute-is part ofalarger Increasing only current-period taxes re- * Income and wealth explain most of effort in PRE to understand the role of duces private saving between 48 and 65 the variation in household savings rates. labor markets in the process of structural cents. Households save more of their income adjustment of the economy. The paper is Increasing taxes and improving tax when that income is higher and when it is one of the country studies prepared for compliance are the most efficient ways to growing faster. the project on"Labor Markets in anEraof reduce public deficits when traditional * They save less when they start the StructuralAdjustment."Copiesareavail- tax revenue is low and inefficient tax period with greater liquid wealth, al- able free from the World Bank, 1818 H levies (such as the inflation tax) are high though wealth reduces saving less than Street NW, Washington DC 20433.Please and widespread. Finally, public policy can one-for-one. (A one-percentage-point in- contact Marshall Schreier, room M4-013, help raise private savings and make their crease in the money supply as a share of extension 36432 (72 pages, including fig- use more efficient by providing a macro- income reduces the saving rate an aver- ures and tables). economic framework in which inflation is age of one-fifth of a percentage point.) low and incentives are predictable. * Real interest rates do not encour- This paper -a product of the Macro- age savingin the countries in this sample. 574. Public Policies and Saving economic Adjustment and Growth Divi- This is particularly true when one con- In Developing Countries sion, Country Economics Department - trols for liquid wealth. Households with is part ofa larger effort in PRE to improve substantial wealth are likely to reduce Vittorio Corbo and Klaus Schmidt-Hebbel the understanding of the transition from their saving rate in response to higher a4justment to growth. Copies are avail- interest rates because in their case the Developing countries can increase their able free from the World Bank, 1818 H substitutioneffectofhigherinterestrates national saving rate best by increasing Street NW, Washington DC 20433. Please is dominated by the wealth effect. government saving. The most effective way contact Susheela Jonnakuty, room N11- This paper -a product of the Macro- to increase national saving is through a 039, extension 39074 (29 pages). economic Adjustment and Growth Divi- permanent tax hike, a cut in current pub- sion, Country Economics Department - licspending, and a macroeconomic frame- is part of a larger effort in PRE to study work in which inflation is low and incen- 575. Household Saving the macroeconomic determinants of tives are predictable. In Developing Countries: growth in developing countries. Copies First Cross-Country Evidence are available free from the World Bank, -Corbo and Schmidt-Hebbel analyze the 1818HStreetNWWashingtonDC 20433. effectiveness of public policy in raising Klaus Schmidt-Hebbel, Steven B. Webb, Please contact Emily Khine, room N11- saving in developing countries, drawing and Giancarlo Corsetti 069, extension 39361 (26 pages). on estimates of consumption functions for 13 developing countries. First, they pro- Disposable household income is the major vide evidence from time-series and panel factor affecting the savings rate. House- 576. Lessons from Tax Reform: An data on how liquidity constraints affect holds save more of their income when that Overview consumptionfunctions. This suggests that income is higher and when it is growing a rise in public saving does not produce an faster. They save less when they start the Wayne Thirsk equal reduction in private saving. period with greater liquid wealth. Second, they present direct evidence More administrative simplicity (making of the link between private consumption Schmidt-Hebbel, Webb, and Corsetti use avoidance and evasion difficult) and hori- and government saving - based on a time-series household datafrom 10 devel- zontal equity (uniformly imposed across more general consumption specification oping countries for which at least eight units at the same income level) are strong 86 Policy Research Working Paper Series selling points for tax reform. Harder to sell * Emphasis on the importance of tal account would curtail fiscalprofligacy are more economic efficiency (not well horizontal equity, neutrality, and sim- andprovideprice stability withoutjeopar- understood by the public) and vertical plicity. dizing growth. equity (a matter ofpersonal judgment). * Recognition that accepting crude justice in taxation is better than fine- Chhibber empirically assesses inflation Thirsk identifies general lessons about tuning in the search for the unattainable in Africa using various price indicators tax reform, drawing on ten developing goal of perfect justice. and examines the major instruments of countries' experience: Columbia, Indone- Successful tax reforms share common anti-inflationary policy in Africa. He sets sia, Jamaica, Korea, Mexico, and Turkey structural elements. For indirect taxes, up a generalized model of inflation and (which have carried out comprehensive countries often use value-added tax to examines four special cases of that model, tax reforms) and Bolivia, Malawi, Mo- replaceahodge-podgeofcommoditytaxes, representing four prototypical African rocco, and Zimbabwe (which are currently thus producing more revenues and fewer policy regimes: reforming their tax systems). disincentives for exports and investment. (1) Countries with pegged exchange Research for each country study fo- Typically, foodstuffs are exempted to rates, an open capital account, and no cused on which policies and procedures protect the poor, excise taxes are rede- price controls (the 13 countries ofthe CFA worked reasonably well (or didn't), using signedtofallmoreheavilyonluxuryitems, franc zone). four standard public finance criteria: rev- and trade and domestic taxes are better (2) Fixed-but-adjusting exchange enue adequacy, allocative neutrality, eq- coordinated. rates, with a closed capital account and uity, and the efficiency of tax administra- Personal and corporate income taxes selective price controls (as in Zimbabwe, tion. are typically modified so lower tax rates Malawi, and Kenya). The goals of tax reform are more are applied on a broader base. Personal (3) Fixed-but-adjusting exchange modest but realistic than they once were. income taxes are expanded so that fringe rates with widespreadparallelmarkets,a Simpler tax rules ignore the fine distinc- benefits are more heavily taxed, deduc- closed capital account, and selective price tions that equity demands but serve the tions and exemptions are consolidated, controls (as in Ghana, Nigeria, Tanzania, broader interest of tax equity by encour- and more use is made of presumptive and Zambia). aging fuller compliance with tax laws and levies for certain hard-to-tax groups. No (4) Dual exchange rates and a closed making their evasion more difficult. Less trend is discernible toward replacing in- capital account, but with extensive, ef- emphasis is placed on redistributing cometaxeswithcash-floworexpenditure- fective price controls (as in Algeria and welfare through the tax system and more related taxes. Ethiopia). on achieving the goals of revenue ad- To curb corporate tax evasion and Drawing on results from empirical equacy, economic neutrality, and simpli- achieve more uniform tax burdens, some studies, Chhibber focuses especially on fying the tax system to make it conform to countries employ minimum taxes on a the interaction of exchange rate policy administrative capabilities. company's net worth. and inflation. He concludes, among other Common elements in successful tax Many elements of capital income es- things, that: reform include: cape taxation altogether or are only partly * At first glance, there seems to be a * A clear perception of the flaws in captured in the tax base. Few countries strongcorrelation between exchange-rate tax systems before reform and a well- successfully tax capital gains, for example. regimes and inflation. Countries with thought-out program of action to correct And interest income is often exempted or floating exchange rates (or auction sys- them. taxed at a low rate out of concern for tems) seem to have experienced higher * The support ofmajor policymakers capital flight. inflation and countries with fixed ex- and technocrats. This paper - a product of the Public change rates lowerinflation. But the story * Careful, systematic implementa- Economics Division, Country Economics is more complex than that. tion and monitoring. Department - is part of a larger effort in * In such countries as Ghana, Sierre * Minimal use of tax incentives and PRE to document and understand how Leone, Uganda, and Zambia, high infla- more reliance on broader, simpler tax developing countries may improve the tion prevailed before exchange reforms, bases on which lower marginal rates are performance of their tax systems. Copies even when the exchange rate was fixed. imposed. are available free from the World Bank, High inflation rendered the official ex' * Efforts not only to avoid raising 1818HStreetNW, Washington DC 20433. change rate irrelevant, and parallel taxes on the poor but to reduce their tax Please contact Ann Bhalla, room N10- markets emerged. Adjusting the official burden. 059, extension 37699 (52 pages). exchange rate may actually have lowered * Avoidance of procedural demands inflation in Ghana by reducingfiscal defi- that overwhelm tax administration ca- cits. High fiscal deficits, financed prima- pabilities, and investment of more re- 577. Africa's Rising Inflation: rily by creating money, were the underly- sources in training and in upgrading ad- Causes, Consequences, and Cures ing cause of inflation. ministrative performance. * The reason for lower, stable infla- * Attentiontorevenueadequacyand Ajay Chhibber tion in countries with pegged exchange to how different components of the tax rates is the underlying monetary and fi- system interact. Is there a link between devaluation and nancial arrangements, not the fixed ex- * Direct targeting of tax measures high inflation? It depends on accompany- change rate. The open capital account mainly, if not exclusively, to their in- ing monetary and fiscal policies and the between countries of the franc zone en- tended objectives. presence ofparallel markets. An open capi- sures thatthe money supply is nota policy Policy Research Working Paper Series 87 variable. Domestic expansion of credit use, despitetherecommendationsinmany be developed. affects the balance of payments but does past studies and reviews. She identifies * Projects should be designed in a not lead to inflation and money expan- theminimumrequirementsforsuccessful participatory manner responding to sion. ID-related TA, and gauges whether the genuine needs and capacity of the bor- * The key to price stability lies in Bank is equipped to take on the challenge rower. providing checks on large fiscal deficits of improving it, or should consider other * Institutional analysis of the re- and noninflationary mechanisms for fi- ways to promote ID. cipient agency is needed, including coun- nancing them. In principle, this can be She contends that the Bank labors try commitment. done through responsible spending and under serious built-in handicaps as a * Projects should be designed for revenue policies. In practice, it requires supplier of ID-related TA. These include: flexible implementation, with clear objec- institutional arrangements that restrain * The neglect of in-depth country tives. A series of verifiable performance profligate spending. An open capital ac- knowledge and a poor institutional indicators should be defined. count is one such mechanism (witness memory, both attributable tothefrequent * More thought should be given to Indonesia). Another is effectively to sepa- rotation of staff. the packaging and delivery of ID-related rate monetary and fiscal policy, either by * A high degree of centralization in TA - for example, by integrating short- joining a monetary union (like the CFA the control of operations from Washing- term consultants and long-term technical franc zone) or by establishing and manag- ton. assistants. ing a central bank with the (fiercely pro- * The priority the Bank attaches to * Operational staff should system- tected) independence of the U.S. Federal capital lending and to the preparation of atically compile and exchange informa- Reserve System and with a status equal projects rather than their supervision. tion on consultants used for ID-related to the judicial system. * The high cost of Bank TA to some TA, including frank evaluations of their * The benefit of joining a monetary borrowers, compared with TA extended performance. system is price stability - but the costs by many bilateral donors on a grant basis. * Practical guidelines and project are high. The best option is to control * The Bank's blueprint approach to implementation manuals should be pre- fiscal and monetary policy without the project design and implementation. pared for Bank staff working on these rigidity of a fixed, pegged exchange rate. * The absence of systematic, explicit areas. The path that countries such as Indonesia attention to the issue of government com- * More use should be made of the have followed -through the open capital mitment in Bank work, a prerequisite for Bank's field offices. For example, to list account - provides price stability with- successful ID-related TA. local consultants, monitor the perfor- out jeopardizing growth. She also argues that compared with mance and progress of ongoing projects, This paper - a product of the Office traditional Bank projects and economic and coordinate TA financed by the Bank of the Vice President, Development Eco- and sector work, ID is a relatively new with that provided by bilateral donors. nomics - is part of a larger effort in PRE and particularly complex area of Bank * Cross-fertilization and dissemina- to study inflation and price decontrol in work. As a result, the body of knowledge tion of best practice are needed for staff Africa. Copies are available free from the is still quite limited, and there are few working on these areas. World Bank, 1818 H Street NW, Wash- best-practitioners. * The conceptual and methodologi- ington, DC 20433. Please contact Bilkiss She suggests that the Bank be more cal base for ID-related TA needs to be Dhomun, room S9-041, extension 39413 discriminatingin its use of ID-relatedTA, expanded. (26 pages). limitingittocaseswherethegovernment's This paper -a product of the Public commitment is clearly demonstrated and Sector Management and Private Sector where there is an institutional base on Development Division, Country Econom- 578. The Bank's Use of Technical which to build. ics Department - was prepared as back- Assistance for Institutional But the Bank should also consider ground for the division's December 1989 Development alternative routes to ID. When shortcom- conference on institutional development. ings in institutional capability are identi- Copies are available free from the World Beatrice Buyck fled, TA is automatically assumed to be Bank, 1818 H Street NW, Washington DC the appropriate response. But excessive 20433. Please contact ErnestinaMadrona, Whenever the Bank identifies shortcom- reliance on TA to solve ID problems raises room N9-061, extension 37496 (89 pages). ings in institutional capability, technical false expectations. TA has and will con- assistance is automatically assumed to be tinue to have its limitations. the appropriate response. But technical In countries where there is still a 579. Chile's Experience assistance has, and will continue to have genuine demand for Bank-financed ID- with Stabilization, Revisited limitations - and there are alternatives. related TA, several things can be done to . improve the Bank's performance. Buyck Vittorio Corbo and Andrds Solimano Technical assistance (TA), including argues that it is unrealistic to expect a project-related training, is the principal change in the Bank's lending policies and The cost of stabilization in chronic-infla- instrument the Bank uses to promote practices, and a substantial increased re- tion countries is high, whether it is paid up institutional development (ID). source allocation for TA. In the absence of front (with fiscal shock) or delayed (in Buyck reviews trends in ID-related such changes, these are some of the ac- exchange-rate-based stabilization). And TAforFY1982-88 and examines why there tions she suggests: eliminating the fiscal deficit is a necessary is little evidence of improvement in its * Country-wide ID strategies should but not a sufficient condition for control- 88 Policy Research Working Paper Series ling inflation. The breaking ofinertia calls significantly to restoring non-inflation- commodity trade occurred between 1965 for a coordination device in the transition ary growth in Chile. and 1987. Almost all regional groups of toward price stability This paper - a product of the Macro- developing countries shiftedfrom primary economic Adjustment and Growth Divi- commodity exports to more processed Corbo and Solimano evaluate Chile's sta- sion, Country Economics Department - commodities - except for foodstuffs - bilization policies since the early 1970s, is part of a larger effort in PRE to un- and this change was reflected to varying examining four episodes: derstand stabilization policies in develop- degrees in all major developed-country * The high inflation at the beginning ing countries. Copies are available free import markets. ofthe military regime, when inflation was from the World Bank, 1818 H Street NW, But the developing countries actu- close to 800 percent a year. Washington DC 20433. Please contact ally responsible for the further processing * Theorthodoxstabilization program Emily Khine, room N11-061, extension (such as the Asian NICs) were often not of 1975. 39361 (52 pages). major producers of the primary (unproc-, * The exchange-rate-based stabili- essed) commodity. This suggests that in- zation of February 1978-June 1982. ternal constraints on commodity process- * The post-1984 adjustment period 580. Do Natural Resource-Based ing may often be more important than with a large real devaluation and mod- Industrialization Strategies Convey such external barriers as escalating tar- erately low inflation. Important (Unrecognized) Price iffs. The last 15 years of Chile's economic Benefits for Commodity-Exporting The shift has generally reduced in- history provide some important lessons Developing Countries? stabilityinexportearningsforagricultural on stabilization. Corbo and Solimano materials, ores, and metals - and to a learned that: Alexander J. Yeats lesser extent for foodstuffs - and has * Eliminating the fiscal deficit is a resultedin more favorablelong-term price necessary but not a sufficient condition Because of a relative shift from primary trends. for controllinginflation. Ineconomies with commodity exports to moreprocessed com- This paper - a product of the Inter- along history ofinflation, credibility prob- modities between the 1960s and the 1980s, national Trade Division, International lerns, and indexation schemes (de facto or most developing countries have experi- Economics Department - is part of a dejure), inertia is likely to make inflation enced less instability in export earnings larger effortinPRE to analyze andpredict stabilization costly without income poli- for agricultural materials, ores, and metals important structural changes in world cies to solve the coordination problem - and more favorable long-term price trade as well astoidentifyfactors affecting implicit in guiding individual wage and trends. developing countries' export earnings. price setters toward a low-inflation equi- Copies are available free from the World librium. Developing countries have long had two Bank, 1818 H StreetNW, WashingtonDC * If the exchange rate is used as an main objectives in terms of commodity 20433. Please contactJeanJacobson, room anchor in a stabilization program, other exports: toreduce instability in exporters' 88-037, extension 33710 (30 pages). nominal prices should be free or fixed earnings and importers' prices through with reference to the exchange rate. Oth- international (buffer stock) agreements erwise, key relative prices such as the real and to encourage more processing of do- 581. How Successful Is World exchange rate and the real interest rate mestically produced commodities by de- Bank Lending for Structural could move into disequilibrium positions, veloping countries. Adjustment? making the macroeconomic situation Little attention seems to have been unsustainable. The dynamics of paidtopossibleconnectionsbetween these Patrick Conway disinflation matter a great deal in the objectives. If processed commodities are design of the stabilization plan. The con- tradedin markets that are generallymore For a sample of 75 countries during the vergence toward a low-inflation equilib- stable, for example, and if these items period 1976-86, there is a significant as-' rium could be a slow process. experience more favorable longer term sociationbetweenparticipationina World * The cost of stabilization is high, price trends, might a natural resource- Bank adjustment lending program and whether it is paid for up front (as it was in based industrialization strategy not con- more rapid economicgrowth, a moreposi- the 1975 program, when real wages, out- vey important (unrecognized) price ben- tive current account as a percentage of put, and employment were cut) or when it efits for commodity-exporting developing gross nationalproduct (GNP), anda higher is delayed (as it was after Chile's boom in countries? rate of domestic inflation. the crisis of 1982-83, when the current And if a significant number of devel- account deficit had to be corrected). Dif- oping countries are shifting their compo- To measure the effectiveness of the World ferent programs (fiscal shock versus ex- sition of exports toward processed com- Bank's structural adjustment programs, change-rate-based stabilization) distrib- modities - and if the markets for these Conway examines the data on actual eco- ute the costs of stabilization differently items are less unstable - could this not nomic performance for 75 countries for over time. alter the priority attached to negotiating the period 1976-86. * The post-1984 experience illus- commodity price stabilization agree- He finds a clear association between trates that well functioninggoods markets, ments? participation in a World Bank adjustment a competitive real exchange rate, resto- Using the World Bank's commodity- lending program and cross-country dif- ration of basic macroeconomic balance, processing classification scheme, Yeats ferences in economic performance and and favorable terms of trade contributed shows that a major structural shift in policy. Countries that participated in ad- Policy Research Working Paper Series 89 justmentlending programs tended tohave deficits should other structural reforms policy environment. Awareness ofthe eco- the following characteristics, compared begin - of the public sector, trade and nomic problems that motivate the deci- with countries that did not participate in competition, the financial sector, and the sion for reform is strongest at the begin- such programs: labor market. ning-sopromptimplementationusually * More rapid economic growth increases the chance of political support. * More rapid inflation Corbo and Fischer review the rationale * Adjustment usually calls for re- * A less negative current account forprogramsandthenevaluatethedesign, ducingpublicspendingbutitisimportant balance as a percentage of GNP implementation, and effectiveness of to strengthen public institutions through * Deeper financial sectors Bank-supported adjustment programs. improvedpolicies,organization,andman- * A lower ratio of current govern- Amonglessons they drawfrom this review agement. ment spending to GNP of the programs are the following: * The ultimate success ofadjustment . * Depreciation of the real exchange * In countries experiencing acute depends not only on getting the right rate. macroeconomic imbalances (high fiscal policies in place but on increasing in- The first three indicators reflect dif- deficits, balance of payments crises, and vestment - including efficient public in- fering performance; the second three, high open or repressed inflation), adjust- vestment, saving, and growth. Public different policy mixes. In other words, the ment should start with policy and institu- policy can contribute to these objectives countries have not benefited merely by tional reforms to deal with the ultimate by mobilizing savings and providing a increased financing at the margin but causes of the macroeconomic crisis. Once macroeconomic framework that supports have also undertaken significantly differ- progress has been made in reducing infla- investment and efficient growth. ent economic policies. tion and the fiscal and balance of pay- This paper - a product ofthe Macro- Conway speaks of the association and ments deficits, other structural reforms economic Adjustment and Growth Divi- correlation, not causes. No components of aimed at improving resource allocation sion, Country Economics Department - adjustment lending programs are singled and achieving sustainable, equitable was prepared for presentation at the out for praise or blame. The atheoretic growth should be tried (particularly re- Conference on Policies for the Recovery of methodology he uses does not identify form of the public sector, trade and do- Growth: Adjustment Lending Revisited, causal links between bank adjustment mestic competition, the financial sector, held at the World Bank on September 13- programs and these measures, and pro- and the labor market). 14,1990. Itis part ofa larger effort in PRE vides no means of separating the effects of * The Bank can help adjustment by to improve the understanding of the role Bank lending from other factors. The ad- giving both policy advice and finance and ofpolicies in economic performance. When justment lending programs were often by mobilizing other sources of finance. the first draft was written, Fischer was concurrent, for example, with IMF sta- * Adjustment lending has a positive Vice President, Development Economics bilization policies, so to that extent the effect on growth, constant-price export and Chief Economist of the World Bank. correlations are measures of the joint rates, and saving rates, and a negative Copies are available free from the World impact of the two. effect on the investment ratio. In the short Bank, 1818 HStreetNW, Washington DC This paper - a product of the Trade run it does not appear to affect systemati- 20433. Please contact Lu Oropesa, room Policy Division, Country Economics De- cally changes in living conditions. N11-035, extension 39075 (36 pages). partment - is part of a larger effort in * The implementation rate of pro- PRE to measure the effectiveness of grains increased in the 1980s, both for structural adjustment efforts, especially countries that received adjustment loans 583. World Bank Lending trade reform, in developing countries. It since the early 1980s and for those that for Education Research, 1982-89 includes both this empirical analysis and started more recently. Implementation other research identifying possible causal rates are lower for countries with higher Marlaine E. Lockheed and Alastair G. Rodd links between policy and performance. rates of inflation or that suffered heavier Copies are available free from the World negative external shocks. Successful sta- Since 1982 about $98 million - 2.2 per- Bank, 1818 H StreetNW, Washington DC bilization and appropriate adjustment to cent ofBank lending for education, in 116 20433. Please contact Sheila Fallon, room external shocks (including contingency projects -has been allocated to research. N10-035, extension 37947 (31 pages). financing) increase the implementation But many Bank-financed educational re- rate. search components are not completed, or if * To be successful, an adjustment completed are not widely available - or 582. Adjustment Programs program must be owned by the govern- even listed. Andfew (5.6percent) measure and Bank Support: Rationale ment. External financing alone won't educational outcomes. and Main Results work. It is important to diagnose the country's development problems and to Research on education is useful for policy Vittorio Corbo and Stanley Fischer build a consensus around the adjustment change, helps build national research ca- program. pabilities, and yields information on in- Adjustment should begin with policy and * Political support for stabilization terventions of use to others - borrowers institutional reforms to deal with the ul- is more likely when the government ac- and donors. timate causes ofany macroeconomic crisis tively explains the source of the problems Butmany Bank-financededucational a country is experiencing. Only when the program addresses, how it plans to research components are not completed, progress has been made in reducing infla- tackle them, why this is the best option, or if completed are not widely available, tion and fiscal and balance of payments and how people will benefit from the new and few measure educational outcomes. 90 Policy Research Working Paper Series In taking stock of research compo- Information Centers, which should pro- tive aspects for Hungary. nentsineducation projects, J.P. Tan (1982) vide a list of information received to the The continuing economic problems of foundthatl22Bankprojectsineducation Education and Employment Division, Eastern Europe, including the Soviet (1972-82) contained 272studies. Tan noted Population and Human Resources De- Union, suggest that Hungary has little that these studies were seldom available partment. Project completion reports alternative but to seek even closer ties to audiences beyond their original spon- should list studies in bibliographies, with the EC. But Hungary faces impor- sors and were often not available even to This paper-a product of the Educa- tant supply constraints and will need an them, and that many planned studies tion and Employment Division, Popula- infusion of new technology and physical were never initiated or completed. Many tion and Human Resources Department - capital to take advantage ofits position on of those studies were longitudinal in de- - is part of a larger effort in PRE to build the doorstep of the EC. Hungary has been sign so some thought the attempt to iden- education research and assessment ca- examining the options of applying for EC tify completed research may have been pacity in developing countries. Copies are membership. It has also considered ap-. premature. available free from the World Bank, 1818 plying for European Free Trade Associa- Lockheed and Rodd reviewed educa- H Street NW, Washington DC 20433. tion (EFTA) membership - possibly as tion studies (1982-89) and traced the Please contact Cynthia Cristobal, room an interim step toward EC membership - completion status of studies that were S6-214, extension 33640 (91 pages). -but this seems unlikely to be acceptedby incomplete before 1982. They found that: the EC, and obtaining EFTAmembership * Of 146 Bank education projects would not be easy. EFTA membership initiatedsince 1982,116includedresearch 584. Whither Hungary would have distinct advantages because componentswith 436identifiable, planned and the European Communities? the EC/EFTA Protocol allows for virtu- studies. These 116 projects were supported ally free trade in manufactures between with loans and credits of about $4.5 bil- Alfred Tovias and Sam Laird the two blocs. Barring EC or EFTAmem- lion, of which about $98 million (or 2.2 bership, some form of association might percent) was allocated to research. Hungary stands togainconsiderablyfrom yet be broached - along the lines of the * Research as a percentage of total an improvement in its standing in the EC EC's special relationship with Turkey, loan commitment declined sharply from pyramid ofprivileges. Membership in the Yugoslavia, and other Mediterranean 1982 to 1989. EC could lead to an expansion ofHungar- countries. * Of the 436 planned studies, only ian exports to the Community of some 48 Tovias and Laird examined the po- 184 (42 percent) were completed, 84 were percent, with the main gains in meats, tential trade effects of such different rela- available through Regional Information iron and steel, fruit and vegetables, tex- tionships between the EC and Hungary, Centers, and only 5.6 percent had any- tiles, and clothing. including in the context of possible out- thing to do with assessing educational comes ofthe Uruguay Round. Their simu- outcomes. Recent political changes in Eastern Eu- lations confirm the importance of an * Anecdotal evidence suggests that rope are leading to closer economic rela- exporter's place in the EC's pyramid of research components have often been in- tions between its countries and the EC. privileges. Membership in the EC could cluded as a form of"slush fund" to provide Hungary has been granted GSP status by lead to an expansion of Hungary's exports a financial buffer for other areas, drawing the EC and, with some important excep- to the EC of some 48 percent, with meats, down resources available for study activi- tions, quantitative restrictions on its ex- iron and steel, fruit and vegetables, tex- ties. Similarly, studies are included for ports to the EC will be progressively elimi- tiles, and clothing being the main sectors political reasons, to develop in-country nated. to gain, in declining order. This results discussions on divisive issues or to resolve Further improvement of Hungary's from setting tariffs at zero and eliminat- policy negotiation deadlock. Few studies access to the EC market faces three main ing non-tariff barriers. Membership in enhance domestic research capacity. challenges: the full integration of Spain the EFTA would lead to only a 15 percent Lockheed and Rodd conclude that: and Portugal in the EC, unification of expansion of exports to the EC, and ob- * More attention should be paid to Germany, and completion of the EC's in- taining the same preferential tariff treat- the design andimplementation ofresearch ternal market in 1992. The inclusion of ment as the Mediterranean countries components in education projects, with Spain and Portugal in the EC is likely to would lead to a 10 percent increase. GSP specific emphasis on institutional weak- stiffen the competition for Hungary's ex- treatment is projected to expand exports nesses. ports to the EC. After German unifica- by 6 percent. The authors superimposed * Freestandingeducational research tion, the former GDR - an important their Uruguay Round scenarios on these projects should be considered wherever market for Hungary - will apply EC preferential positions and found that the possible (usually in large countries). measures, and its goods will compete with export gains from EC membership are * The Bank should develop a train- Hungary's exports on more favorable reduced to 43 percent - as EC barriers ingprogramfor operational stafftodesign terms in the rest of the EC. Under EC-92 are reduced for all countries. EFTAmem- studies with appropriate methodologies the reduction of internal barriers will bership and the same treatment as other and which develop domestic research ca- likely cause diversion of trade to other EC Mediterranean and GSP countries are pacity. suppliers away from non-EC suppliers, somewhat better for Hungary than non- * Information on studies should be by 5-7 percent on average according to the Uruguay Round scenarios, because under more accessible. All data and documents EC's calculations. New regulations and these scenarios the authors allowfor some about studies should be sent to Regional norms will have both positive and nega- reduction in non-tariff barriers in agri- Policy Research Working Paper Series 91 culture and in the textile and clothing 586. The Challenging Arithmetic a shift in relative inequalities. Such a sectors, which more than offsets the of Poverty in Bangladesh growth rate has not been achieved in relative decline in preferential tarifftreat- recent times, but is expected over the next ment. Only minor losses to Spain and Martin Ravallion 10 years or so by some observers. Portugal would result from improved ac- * Recent growth in Bangladesh has cess to the EC for Hungary. The recent evidence ofa decline inabsolute been relatively low in a country where it This paper - a product of the Inter- numbers of poor in Bangladesh in the needs to be relatively high to avoid an national Trade Division, International 1980s is unconvincing. Recent growth in increase in the number of poor. Economics Department - is part of a Bangladesh has been relatively low in a * Certain changes in relative in- larger effort in PRE to analyze the im- country where it needs to be relatively high equalities could, in principle, wipe out plications of possible changes in the in- to avoid an increase in the number ofpoor. poverty alleviation through growth. It ternational economic environment. Cop- appears that a fairly substantial change ies are available free from the WorldBank, Did poverty increase in Bangladesh would be needed to do so for the simple 1818HStreetNW, Washington DC 20433. in the 1980s? How responsive is poverty headcountindexofpovertyin Bangladesh. - Please contact Grace Ilogon, room S8- in Bangladesh to economic growth and However, other measures of poverty - 038, extension 33732 (48 pages). changes in relative inequalities? What which reflect changes in living standards are the prospects for poverty alleviation of the poorest - will be more sensitive to through currently anticipated economic how equitable the growth process isin the 585. Financial Innovation growth in Bangladesh? near future. and Money Demand: Theory Ravallion addresses these questions * Any poverty alleviation strategy and Empirical Implementation using a narrow definition of poverty, for Bangladesh should strongly encour- whereby a person is judged to be poor ifhe age domestic policy reforms and interna- Patricio Arrau and Jos6 De Gregorio or she resides in ahousehold the income of tional assistance that not only enhance which does not allow a consumption level the rate of growth but also ensure that its A model that treats financial innovation that permits adequate nutrition. He benefits are shared widely. as shocks that have a permanent effect on concludes:* The recent evidence of a de- This paper - a product of the Agri- demand for money. cline in absolute numbers of poor in cultural PoliciesDivision,Agriculture and Bangladesh in the 1980s is unconvincing. Rural Development Department - was Traditional estimates of money demand The rate of growth in real per capita prepared as a background paper for the are often characterized by periods of consumption of 10 percent a year implied 1990 World Development Report on pov- "missing money," unstable parameters, by the underlying household spending erty. The paper draws on results from a and autocorrelated errors. surveys is too high to be believed. One PRE research project, Policy Analysis and Typically, these problems are resolved cannot assume that the national accounts Poverty: Applicable Methods and Case by changing specifications for the regres- are accurate, but their implied growth Studies. Copies are available free from sions once the shifts are identified. The rate of about 0.5 percent a year is more the World Bank, 1818 H Street NW, shifts are usually associated with finan- plausible. Assessments of growth in the Washington DC 20433. Please contactthe cial innovation. 1980s consistent with national accounts World Development Report office, room Arrau and De Gregorio provide an data (using household surveys only to P4-009, extension 38064 (32 pages). alternative approach for dealing with the measure relative inequalities) suggest that unobservable process of financial innova- the proportion of the population deemed tion. They derive from first principles a to be poor has remained fairly stable in 587. Quantifying the Magnitude money demand that is consistent with recentyears-while absolute numbers of and Severity of Absolute Poverty many traditional models but that explic- poor have increased. In the Developing World itlyincludesfinancialinnovation.Intheir * Per capita growth rates in In the Mid-1980s model, financial innovation is treated as Bangladesh have been below average for shocks that have a permanent effect on South and Southeast Asia in the 1980s, Martin Ravallion, Gaurav Datt, demand for money. and few observers expect this to change in Dominique van de Walle, and Elaine Chan They estimate the model using data the 1990s. for Chile (1975-89) and Mexico (1980-89). * The growth rates needed to pre- Aggregate poverty would fall fairly rap- This paper - a product of the Debt vent an increase in the absolute numbers idly if moderate growth in average con- and International Finance Division, In- of poor in Bangladesh, or to attain any sumption levels could be sustained and ternational Economics Department - is givenrateofpovertyreduction, are higher thepoorcould share at leastproportionally part of a larger effort in PRE to look for than similar calculations have suggested in that growth. But it would take only better structural models for developing wouldbeneededforsomeotherlow-income small adverse shifts in the world distri- countries. Copies are available free from countries in Asia. At a widely assumed bution of income to wipe out the potential the World Bank, 1818 H Street NW, poverty line for Bangladesh, the growth gains to the poor from economic growth. Washington DC 20433. Please contact rate of real consumption per capita must Sheilah King-Watson, room S8-025, ex- be at least equal to the rate of population The authors estimate that about one in tension 31047 (42 pages). growth before the absolute numbers of five persons in the developing world did poor can start to fall appreciably without not attain a consumption level of $23 per 92 Policy Research Working Paper Series month in 1985 adjusted to constant $US income from the better-off half to the tions well; firms for which financing is purchasing power. About one in three poorer half of the world's population. This limited are those to which lending would persons didnotattainaconsumptionlevel would roughly double the rate of decrease be imprudent. A key policy question is of $31 per month. They argue that a strong in the aggregate poverty gap (measured whether targeted credit should be used to case can be made for treating the $23 against their higher poverty line) associ- accelerate SMEs' access to formal finan- figure as a reasonable lower bound for an ated with a 1 percent annual growth rate cial institutions (such a World Bank pro- absolute poverty line, while $31 is of in- in mean consumption of the developing gram was important for Sri Lanka's suc- terest as a common poverty line in low- countries. Instead of the decrease of 2.2 cess) and whether banks should use their income countries. percent per year we could expect with SME lending apparatus to make loans to They find that the average consump- distributionally neutral growth, we would microenterprises (which even in Sri Lanka tion of the poor in the developing world see the poverty gap fall at an impressive are denied access to formal finance). was about 30 percent below either pov- annual rate of 4.5 percent. * Regulation inhibits the expansion erty line. This may be a very significant This paper - a product of the Agri- of SMEsin quite different ways in the two gap for a poor person. But, despite the cultural Policies Division, Agriculture and countries: large numbers of poor, the aggregate gap Rural Development Department - was In Sri Lanka, heavy formal tax and turns out to be a very small proportion of prepared as a background paper for the regulatory obligations are imposed only world consumption; for example, the ag- 1990 World Development Report on pov- on larger firms. Reform priorities there gregate poverty gap of the developing erty. Copies are available free from the should be to reduce these disincentives to countries at the $31 poverty line is about World Bank, 1818 H Street NW, Wash- firms achieving formal status and to 1.5 percent of the aggregate consumption ington DC 20433. Please contact the World broaden (but not to the point of universal- of the non-socialist countries, falling to a Development Report office, room P4-009, ity) the reach of the tax and regulatory mere 0.5 percent for the lower poverty extension 38064 (43 pages). apparatus. line. In Tanzania, heavy tax and regula- The authors find that aggregate pov- tory requirements are imposed on all firms, erty in the developing world will respond 588. Obstacles to Developing albeit with pervasive lubrication and re- fairly elastically to economic growth, Small and Medium-Sized negotiation of formal obligations. There provided that the poor share at least pro- Enterprises: An Empirical the reform priority should be to exempt portionately in that growth. For example, Assessment the smallest enterprises entirely from a 1 percent annual growth rate at all regulatory and tax obligations and to in- income levels will reduce the proportion Brian Levy troduce more transparent administrative of the population that is poor by about 2 procedures. percent per year. If annual population How financing, regulatory, technical, * Underdevelopedarm's-lengthmar- growth rates stay at about 2 percent or marketing, and other constraints inhibit kets for intermediate inputs constrain lower, the total number of poor will de- small and medium-sized enterprises from the participation of SMEs. A prime cause cine. participatingin the economies ofSri Lanka of such market weakness is vertically However, the authors' results also and Tanzania -and what this means for integrated production by state-owned suggest that even a seemingly modest policy. enterprises, even where there is no eco- worsening in distribution could upset this nomic rationale for such integration. A progress in poverty alleviation. For ex- Brian Levy analyzes different types of challenge for privatization is to distin- ample, if the same 1 percent growth rate constraints on the participation of small guish between those sectors where verti- in average consumption was associated and medium-sized enterprises (SMEs) in cal integration is efficient and should be with only a 0.25 percent annual increase the economies ofSri Lanka andTanzania. maintainedwhenstate-ownedenterprises in the world Gini index of inequality, the He concludes that: are privatized and those where the verti- reduction in the poverty gap attainable * Thetypeandseverityofconstraints cal structure should be broken up, allow- through growth would be virtually elimi- vary between the two countries: ing more opportunities for SMEs to par- nated. Such a rate ofincrease in the world Lack of access to finance is the bind- ticipate. Gini index has been observed over recent ing nonprice constraint on the expansion * Educated entrepreneurs in estab- decades, associated with the relatively of all SMEs in Tanzania, and on smaller, lished SMEs that serve high-quality low growth rates of a number of the poor- less-established firms in Sri Lanka. market niches (but not uneducated entre- est countries. In this case, the number of In Tanzania, tax and regulatory bur- preneurs serving simpler markets) per- persons who do not attain even the most dens are the next heaviest constraint on ceivelimitsinenterpriseandeconomywide meager consumption levels would almost all SMEs. In Sri Lanka, the smallest, technical and marketing capabilities as certainly increase. least-establishedenterprises maintain an significantly constraining expansion. It On the other hand, a pattern ofgrowth informal status outside the regulatory remains uncertain whether the weakness more favorable to the poor could rapidly web. Larger, establishedSri LankanSMEs of support systems signals an underlying accelerate global poverty reduction. The are inhibited by a host of nonprice con- marketimperfectionthatonlygovernment authors consider a rate of decrease in the straints, no one of which is dominant. intervention can overcome. world Gini index of 0.25 percent per year, * Tanzania's formal and informal fi- This paper - a product of the Public roughly equivalent to a transfer of one- nancial systems for SMEs are weak. Sri Sector Management and Private Sector third of 1 percent of the world's mean Lanka's financial system for SMEs func. Development Division, Country Econom- Policy Research Working Paper Series 93 ics Department-is partof alarger effort methods for valuing information and in- tor, but its reallocation was inhibited by in PRE to understand how to strengthen formation provision in the health sector. large fiscal deficits, inconsistentmonetary the private sector in developing coun- Copies are available free from the World policies, and increased intervention in tries. Copies are available free from the Bank, 1818 H StreetNW, Washington DC the financial market. Through their nega- World Bank, 1818 H Street NW, Wash- 20433.Please contact OtiliaNadora, room tive effect on the real exchange rate, these ington DC 20433. Please contactErnestina S6-065, extension 31091 (17 pages). interventions offset some of the gains in Madrona, room N9-061, extension 37496 competitiveness achieved through trade (62 pages). liberalization. 590. The Domestic Financial AthukoralaandRajapatiranafindno Market and the Trade Liberalization evidence of financial crowding out in Sri 589. To Prescribe or Not Outcome: The Evidence Lanka. to Prescribe: On the Regulation from Sri Lanka This paper - a product of the Trade, of Pharmaceuticals in Developing Finance, and Industry Division, Techni- Countries Premachandra Athukorala cal Department, Latin America and the and Sarath Rajapatirana Caribbean Regional Office - was under- Jeffrey S. Hammer taken as part of the World Bank's com- The main finding of the study is that the parative study, Macroeconomic Policies: A simple model is derived for determining domestic financial market plays a very Crisis and Growth in the Long Run. Cop- which drugs should be available over-the- significant role in the success or failure of ies are available freefrom theWorldBank, counter (and thus widely available even to trade liberalization. This was found to be 1818 H StreetNW, Washington DC20433.. those without access toformal health care) the case in Sri Lanka during 1977-87. Please contact Margaret Kienzle, room and which should be sold by prescription 14-058, extension 30733 (55 pages). only (to reduce the dangers of errors in Athukorala and Rajapatirana developed a self-prescription). framework for analyzing the relationship between domestic financial markets and 591. Global indicators From a theoretical perspective, Hammer the effects of trade liberalization and ap- of Nutritional Risk examines policy considerations in the plied it to Sri Lanka's experience between choice between allowing drugs to be sold 1977 and 1987. Theyfoundthat the domes- Rae Galloway over-the-counter and allowing them to be tic financial market significantly affects sold only under prescriptions issued by the outcome of trade liberalization. A quick reference on the prevalence of health professionals. Because Sri Lanka deregulated its protein-energy malnutrition among chil- The essential tradeoff can be stated interestrates when it undertook the trade dren in developing countries. starkly. On the one hand, people are likely liberalization, this allowed those earning to make potentially large errors in self- more from trade liberalization to hold The purpose of this paper is to provide a prescription, with serious consequences. financial assetsratherthan nontradables. quick reference on the prevalence of pro- On the other hand, limiting drug avail- The availability of savings and time de- tein-energy malnutrition by presenting abilitytothose withaccess toformal health posits at attractive interest rates pre- available weight-for- age data for chil- facilities will exclude many from the mar- vented the premature appreciation of the dren in developing countries. ket or run the risk of making drugs pro- exchange rate, thus helping to maintain These country data are arranged in hibitively expensive. the competitiveness stimulated by trade tables by area of the world and by World Hammer sets out a simple formal liberalization. Byreforminginterestrates, Bank-designated income groups. model and discusses the types of drugs removing credit ceilings, and increasing The data are also shown geographi- -that are optimally handled in one mode or competition among banks, Sri Lanka cally on a map of the world. the other. helped increase private sector savings - This paper - a product of the Popu- What factors determine this choice? which could be reallocated to the tradable lation, Health, and Nutrition Division, -The nature of the drug, the relative pre- sector. Population and Human Resources De- cision of professional diagnoses versus Unlike earlier studies on financial partment - is part of a larger effort in those of the public, and the demand reform in Sri Lanka, this one finds that PRE to provide information on malnutri- characteristics of health care. financial reforms have increased private tion to Bank staff working in operations. Hammer also examines the effects of savings in financial institutions, raised Copies are available free from the World different policy options such as pricing economywide financial intermediation Bank, 1818 H Street NW, Washington DC policy, the training of professional per- ratios, and expanded credit to the private 20433.Please contact OtiliaNadora,room sonnel, and essential drug lists, sector. S6-065, extension 31091 (17 pages). This paper - a product of the Popu- More important, Athukorala and lation, Health, and Nutrition Division, Rajapatirana find a statistically signifi- Population and Human Resources De- cant relationship between the financial partment - was presented to the Second intermediation ratio andthe real exchange Congress on Health Economics in Zurich, rate. Switzerland, in September1990. Itis part Credit to the private sector had in- of a larger effort in PRE to determine creased after reform of the financial sec- 94 Policy Research Working Paper Series 592. Official Credits to Developing vate debt service. Official creditor re- tional Trade Divisions, InternationalEco- Countries: Implicit Transfers sources that are specifically provided to nomics Department - is part of PRE's to the Banks finance development projects are less research on the use by developing coun- likely to be allocated to bank debt service. tries of financial instruments linked to Ash Demirgfg-Kunt and Harry Huizinga This paper - a product of the Debt commodity prices. The paper was pre- and International Finance Division, In- pared for the symposium on African Ex- The stock market expects virtually all ad- ternational Economics Department - is ternal Finance in the 1990s held at the ditional resources provided to debtor partofalargereffortinPREtounderstand World Bank in September 1990. Copies countries to be used for debt service to commercial bank lending behavior. Cop- are available free from the World Bank, commercial banks. The stock market capi- ies are available freefrom the WorldBank, 1818 H StreetNW, Washington DC 20433. talization of banks increased about $6 1818 H Street NW, Washington, DC Please contact Julie Carroll, room S7- billion at the timeofthe l983 U.S. proposal 20433. Please contact Sheilah King- 069, extension 33715 (53 pages). to increase its quota to the IMF by $8.5 Watson, room S8-025, extension 33730 billion, and by a low estimate of $22.4 (29 pages). billion at the time details of the Brady 594. Size Rationalization Plan were recorded. and Trade Exposure In Developing 593. Risk Management Countries Two types of event have affected returns In Sub-Saharan Africa of banks that are heavily exposed to third Mark J. Roberts and James R. Tybout world debt in the 1980s: actions by the Stijn Claessens and Ying Qian debtor countries (such as declarations of The popular belief that trade liberaliza- moratorium) and official actions (such as The optimal risk-minimizing financial tion will increase average plant size in changes in regulations and in the provi- portfolio for Sub-Saharan African coun- import-competing sectors is not supported sion of official monies to the debtor coun- tries would include only 30 percent gen- by recent Chilean and Colombian experi- tries). eral-obligation loans and 70 percent loans ence. The effect ofthe first type of event has for which repayment obligations are in- been extensively investigated. There are dexed to the price ofSub-Saharan Africa's Common wisdom dictates that increased fewer studies analyzing the effect of offi- most important exports: cocoa, coffee, exposure to global markets increases the cial actions on bank stock returns. cotton, copper, and oil. elasticity of demand perceived by domes- Demirgi-Kuntand Huizingainvestigate tic producers, which in turn shifts produc- to what extent official money available to Claessens and Qian investigate the vul- tion toward larger, more efficient plants. debtor countries has devolved to the banks, nerability of countries in Sub-Saharan Rationalization ofproductionis more pro- as reflected in stock market prices. Africa to uncertainty about commodity nounced when there are few barriers to They find that the stock market ex- prices, exchangerates, and interest rates. entry and exit of firms, because ineffi- pects virtually all additional resources They discuss some ofthe instruments ciently small plants are induced to shut provided to debtor countries to be used for these countries can use to manage finan- down. debt service to commercial banks. The cial risk and conclude that instruments Simulation models support the per- stock market capitalization of banks in- linked to commodity prices would signifi- ceived wisdom that liberalization of im- creased about $6 billion at the time of the cantly reduce their risk. perfectly competitive industries in devel- 1983 U.S. proposal to increase its quota to To account for possible interactions oping countries results in larger plants the IMF by $8.5 billion, and by a low between external risks, they estimate the and more efficiency. But there is little estimate of$22.4billion atthe time details optimal portfolio offinancial instruments microeconometric evidence to confirm the of the Brady Plan were recorded. for Sub-Saharan Africa. adjustment mechanisms these models The estimate of the magnitude of They show that the risk-minimizing assume. these effects is informative, but the em- portfolioforSub-SaharanAfricacomprises To see if these effects could be con- phasis should be on the direction of these only about30 percentofgeneral-obligation firmed, Roberts and Tybout examined effects, as they are robust to overestima- loans and about 70 percent of loans for annual plant data from Chile and Co-- tion problems. which repayment obligations are indexed lombia, using a simple model that sum- Clearly official resources provided to to the price of Sub-Saharan Africa's most marizes some effects of trade exposure on debtor countries do devolve to creditor important exports: cocoa, coffee, cotton, producer size and productive efficiency. banks. But the debtor countries should at copper, and oil. They found that: least gain insofar as the reduction of a This portfolio reduces by about 90 * Increasedexposuretoimportcom- debt overhang eliminates investment dis- percent the uncertainty of Sub-Saharan petition appears to clearly reduce the size tortions. Africa's resources available for imports. of all plants in both the short run and The results here stem from the fact The risk-reduction benefit of the op- (especially) the long run. The popular that some of the monies provided by the timal portfolio is fairly stable for specific belief that trade liberalization will in- multilaterals are specifically earmarked commodities included and for the specific crease average plant size in import-com- for debt service or are in the form of period for which it is estimated. peting sectors is not supported by recent general balance-of-payments support that This paper - a product of the Debt Chilean and Colombian experience. This the developing countries can use for pri- and International Finance and Interna- may mean that liberalization does not Policy Research Working Paper Series 95 necessarilyimprove productivity, but their conduct of monetary policy under rapidly and consumers from world price variabil- findings are not strong enough to warrant changing economic circumstances. Toful- ity, ensuring self-sufficiency, guarantee- strong conclusions. fill this role, financial reforms should (1) ing employment and social welfare, pro- * The results depend greatly on provide the authorities with monetary viding cheap milling services, and pro- whether barriers to firms' entry and exit policy instruments that contribute to tecting domestic soft drink manufactur- are high or low. The effects of changing short-term stabilization and (2) provide ers. output levels, import and export shares, the incentives for inducing a more effi- Borrell's calculations show that al- and effective protection rates are system- cient intermediation of savings through though the interventions have helped atically moderated by the possibility of the financial markets. stabilize industry returns to some degree, easy entry or exit. It could be that output In this context, Blejer and Sagari the estimated effective rate of assistance adjustment by incumbent plants has less identify the main tasks and targets of points to a high degree of resource distor- Df arole when the number of plants adjusts financial reform and comment on the key tion. In years when world prices were low, to shifts in demand. Or it could mean that developments of the Hungarian process. such as in 1985-88, the effective rate of high turnover reflects competitive pres- Hungary has made substantial assistance is estimatedin the range of 70- sure and reduces the marginal impact of progress, they conclude, but 390 percent. foreign competition on market structure. macrofinancial indicators suggest that To analyze the impact of changes in * Long-run and short-run correla- administrative and technical obstacles Mexican sugar policies, Borrell con- tions of trade regimes and distribution of remain and that supporting measures structed an econometric model of the plant size are quite different. Short-run must be deepened. Four steps in particu- Mexican sugar industry. This was linked correlations associate exports with rela- lar are needed: to a global model ofthe world sugarindus- tively large plants; long-run correlations * The ability of the monetary au- try. Stochastic simulations projecting the associate exports with relatively small thority to conduct monetary policy must Mexican sugar industry under these poli- plants. Roberts and Tybout suggest cau- be enhanced. cies show consumption increasing faster tion in basing policy decisions on either * The operating and financial condi- than production and Mexico increasing finding. tion of financial intermediaries must be its sugar imports. It appears unlikely that These findings cast doubt on the improved. under such policies Mexico would return mechanisms linkingtrade, plant size, and * Healthy competition among finan- to being an exporter of sugar. productivity in recent analytical and cial intermediaries must be encouraged. In simulations of a sugar industry simulation studies. * A prudential regulatoryframework operating under essentially free trade This paper - a product of the Trade that does not discriminate against the conditions, Mexico becomes a significant Policy Division, Country Economics De- development of a securities market must sugar exporter. Production, trade, and partment - is part of a larger effort in be established, stocks are morevariable, andconsumption PRE to study industrial competition, This paper - a product of the Fi- growth is curtailed. But welfare in the productive efficiency, and their relation nancial Policy and Systems Division, economy as a whole would be increased totraderegimes. Copiesareavailablefree CountryEconomicsDepartment-is part substantially. The main beneficiaries from the World Bank, 1818 H Street NW, of a larger effort in PRE to analyze sector would be sugar producers, and the losers Washington DC 20433. Please contact reformin socialisteconomiesintransition. consumers - but the loss to consumers Sheila Fallon, room N10-035, extension Copies are available free from the World would average less than US$3.20 per 37947 (39 Pages). Bank, 1818 HStreetNW, Washington DC person per year. 20433. Please contact Zena Seguis, room This paper - a product of the Inter- N9-005, extension 37665 (26 pages, in- national Trade Division, International 595. Hungary: Financial Sector cluding figures). Economics Department - is part of a Reform In a Socialist Economy larger effort in PRE to understand the implications for world commoditymarkets Mario I. Blejer and Silvia B. Sagari 596. The Mexican Sugar Industry: of changes in developing countries' trade Problems and Prospects policies and to assist developing countries The first steps of the Hungarian financial in designing good trade and industry reform areintherightdirection, andgiven Brent Borrell policies. Copies are available free from the short time elapsed they have been suc- the WorldBank, 1818 H StreetNW, Wash- cessful. But administrative and technical Theeconomiccosts oftheextensivegovern- ington DC 20433. Please contact Pauline obstacles remain, and a deepening ofsup- ment regulation of the Mexican sugar in- Kokila, room 87-040, extension 33716 (60 porting measures is required. dustry are quantified and policy changes pages). are suggested. Financial reforms in formerly centrally planned economies take a different form The Mexican sugar industry has been than in market economies because they subject to extensive government controls imply not only liberalizing the system but over land ownership, cultivation, harvest- also reshaping the structure and func- ing, milling, marketing, distribution, and tioning of financial markets. And the re- pricing. The many objectives of these in- forms must be designed to facilitate the terventions include protecting producers 96 Policy Research Working Paper Series 597. Rent Sharing in the Multi-Fibre rents. The determinants of the price dif- fertility surveys in these countries show Arrangement: Theory ferential are also studied. an increase in the use of contraceptives and Evidence from U.S. Apparel Rentsharingsubstantiallyaffectsthe and the first evidence of fertility decline. Imports from Hong Kong estimated magnitude of welfare losses It is assumed in the projections that this that exporting developing countries suf- trend will spread to other countries. Most Refik Erzan, Kala Krishna, and Ling Hui Tan fer because of MFA quotas-and, for that African governments now report their matter, because of any voluntary export country's population growth rates as too The actual cost of the multi-fibre ar- restraint (VER) in other sectors. Not only high. rangement (MFA) quotas to exporting de- do these countries have reduced export This paper - a product of the Popu- veloping countries could be considerably volumes, but, contrary to the prevailing lation, Health, and Nutrition Division, higher than conventional estimates that wisdom, they do not receive all the scar- Population and Human Resources De- assume that exporters seize all the scarcity city rents the quotas generate. partment - is part of a larger effort in rents. For U.S. apparel imports from Hong This paper - a product of the Inter- PRE to update demographic estimates on Kong, the authors'findings point to a 50- national Trade Division, International an annual basis. Copies are available free 50 sharing ofthe rents between the export- Economics Department - is part of a from the World Bank, 1818 H Street NW, ers and the importers. larger effortin PRE to quantify the effects Washington DC 20433. Please contact - of protectionism, particularly in the de- Otilia Nadora, room S6-065, extension Available estimates of tariff equiva- veloping countries. Copies are available 31091(222pageswithgraphsandtables). lents of quotas and welfare calculations free from the World Bank, 1818 H Street on the costs of MFA quotas for developing NW, Washington DC 20433. Please con- countries are based on the premise of tact Grace llogon, room S7-033, extension 599. Asia Region Population perfect competition in both product and 33732 (70 pages). Projections, 1990-91 Edition license markets. It is also assumed that the exporting countries that administer Eduard Bos, Patience W. Stephens, My T. Vu, the MFA quotas receive all the scarcity 598. Africa Region Population and Rodolfo A. Bulatao rents. Erzan, Krishna, and Tan argue Projections, 1990-91 Edition that, in the presence of market power on New estimates of trends in demographic the buyers' side in the product markets Patience W. Stephens, Eduard Bos, My T. Vu, indicators from the 1970s and revised combinedwithconcentrationinthelicense and Rodolfo A. Bulatao projections for all countries and econo- markets, the importing countries might mies in the region. retain part of this rent - that is, share it New estimates of trends in demographic with the exporters. Although the impact indicators from the 1970s and revised Almost half the world's population lives of imperfect competition on rent appro- projections for all countries and econo- in Asia. This proportion is projected to priation - non-equivalence of tariffs and mies in the region. decline to 40 percent by the end of the next quotas, and the size of the rent - has century, mainlybecause ofslowinggrowth been analyzed in literature, rent sharing As recently as the mid-1970s, the Africa in China. Other countries will continue to has so far been ignored in both analytical region had a smaller population than the grow rapidly, and India, which adds more and empirical work. The paper makes a Asia, the Latin America and the Carib- people everyyear than any other country, theoretical case forrent sharing, and then bean, or the Europe, Middle East, and is projected to surpass China in total analyzes U.S. imports ofapparel products North Africa regions. Explosive popula- population. from Hong Kong. It does not specify a tion growth of more than 3 percent per Recent contraceptive prevalence particular model ofimperfect competition year, projected to decline only gradually, surveys in several countries in the region but investigates whether the data con- willmakeAfricathe secondlargestregion show increasing proportions of couples form to all the relevant predictions of the by 2005. Its share of the world's popula- usingbirth control. Fertilityinthesecoun- competitive model. The authors' method tion will increase from less than 10 per- tries, mostly in Southeast Asia, has con- essentially tests whether the license price cent now to 20 percent in the middle of the sequently declined rapidly. inclusive Hong Kong price, adjusted for next century and to 25 percent when Population growth rates started to tariffs and transport costs, is equal to the stationarity is finally reached. drop in many countries in the region in domestic (U.S.) price. Adeviationbetween Vitalratesvaryrelativelylittle among the past decade, but the momentum built the two prices indicates rent sharing. the subregions of Sub-Saharan Africa. into the age structures of the populations Erzan, Krishna, and Tan test the Fertility is uniformly high, with the total will ensure continued population growth hypothesis with homogenous goods, fertility rate higher than 6 children per for many decades. Other countries in the modify it to take into account composi- woman. region are lagging in fertility decline, and tional differences, and, finally, consider Linked with high fertility are high their populations will continue to grow at differentiated goods. They find that his- infant mortality rates, which are above high rates. Infant and child mortality are torical data do not conform with the pre- 100 per thousandbirthsforall subregions. lowest in countries where fertility has dictions of the competitive model. There A few countries - Botswana, Zim- declined to low levels. is strong evidence that importers retain a babwe, and Kenya - are leading the way This paper - a product of the Popu- substantial portion of the MFA quota in the African fertility transition. Recent lation, Health, and Nutrition Division, Policy Research Working Paper Series 97 Population and Human Resources De- partment - is part of a larger effort in PRE to update demographic estimates on an annual basis. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Otilia Nadora, room S6-065, extension 31091 (202 pages with graphs and tables). 600. Latin America and the Caribbean Region Population Projections, 1990-91 Edition My T. Vu, Eduard Bos, Patience W. Stephens, and Rodolfo A. Bulatao New estimates of trends in demographic indicators from the 1970s and revised projections for all countries and economies in the region. The Latin America and the Caribbean region is demographically at an interme- diate stage. Fertility has declined to be- tween 3 and 4 children per woman in all subregions as contraceptive use has con- tinued to broaden. Life expectancy has risen to between 65 and 69, or about 10 years below countries with the most fa- vorable mortality conditions. Some coun- tries in the region have advanced to re- placement level fertility; a few others are just starting the fertility transition. The projections show all countries in the re- gion completing the transition by 2030 - - the earliest of all regions. As a result of high fertility in the past, the region has a young population, with 36 percent of the population under age 15. With fertility and mortality pro- jected to continue to decline, working age population will be a rapidly expanding - share of the total. This paper - a product of the Popu- lation, Health, and Nutrition Division, Population and Human Resources De- partment - is part of a larger effort in PRE to update demographic estimates on an annual basis. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Otilia Nadora, room S6-065, extension 31091 (208 pages with graphs and tables). de 4 = 4 Volume VII Numbers 601 - 700 Policy Research Working Paper Series 101 601. Europe, Middle East, 602. Firm Output Adjustment larger firms. and North Africa Region to Trade Liberalization: * Among survivors, small firms also Population Projections: Theory with Application tended to contract output proportionately 1990-91 Edition to the Moroccan Experience more than larger firms. Small firms are more likely to bear the brunt of an Eduard Bos, Patience W. Stephens, My T. Vu, Mark A. Dutz industry's contraction in output in re- and Rodolfo A. Bulatao sponse to an increase in imports. (Dutz Output among firms is likely to be reallo- examines the impact offirm market share New estimates of trends in demographic cated as a result oftrade liberalization. In on firm output adjustment in percentage indicators from the 1970s and revised imperfectly competitive industries, such a terms rather than in levels; no evidence of projections for all countries and econo- "rationalization"effectcanbean important a shift of production from small to large mies in the region. component of the welfare impact of trade firmsis therefore presentedin this paper.) reform. * The available pertinent data pro- Recent trends in demographic indicators vide tentative (though weak) evidence in the countries of the Europe, Middle In an imperfectly competitive market en- that firms with higher marginal costs (as Past, and North Africa region show the vironment, whether an economy gains indicated by higher labor/output ratios) distinctions among its three subregions: from trade liberalization is necessarilyan did have the smaller market shares, sug- * In Europe, low levels of fertility, empirical question. How trade liberaliza- gesting that the trade reforms in Morocco mortality, and population growth persist. tion affects resource allocation depends did result in the rationalization effects * InNorthAfrica,fertilityhas started not only on trade policiesbutonthe nature that theory would predict. to decline in the last decade, but high of oligopolistic interactions and the ease This paper - a product of the Trade population growth continues because of of entry into and exit from particular Policy Division, Country Economics De- young age structures and declining mor- industries. partment - is part of a larger effort in tality. In addition to generally lowering do- PRE to examine industrial competition, * In the Middle East, fertility de- mestic industry prices, an increase in productive efficiency, and their relation clinehasnotyetstartedinmostcountries, imports in recently liberalizedindustries to trade regimes. Copies are available and population growth rates are among causes domestic firms to adjust. Depend- free from the World Bank, 1818 H Street the highest in the world. ing on assumptions in theoretical models, NW, Washington, DC 20433. Please con- The population of the region as a domestic output (and the equilibrium tact Sheila Fallon, room N10-017, exten- whole is growing at 2.4 percent, and is price) can either rise or fall after trade sion 38009 (46 pages). projected to double in 30 years. During liberalization. the 1990s, the region's population will Dutz shows in an imperfectly com- increase by 14 million people every year. petitive (Cournot oligopoly) model that 603. The Role of Officially The total fertility rate is generally high - loosening a quota on elastically supplied Supported Export Credits more than 6 children per woman in a imports will typically cause smaller firms In Sub-Saharan Africa's dozen countries in the region. The infant with high marginal costs to contract more External Financing mortality rate of 85 for the region, exclud- (arid to exit with a higher probability) ing Europe, exceeds the average for devel- than larger firms with low costs. This Ash Demirgdr-Kunt and Refik Erzan oping countries. The projections show "rationalization" effect, a redistribution mortality and fertility declining in all of resources from smaller to larger users, Officially supported export credits, an im- countries, following a model based on an leadStolowerindustry-wideaveragecosts portant source of external finance for de- analysis of observed trends worldwide. and is an important component of the veloping countries until the early 1980s, This paper - a product of the Popu- welfare impact of trade reform. areshowingsignsofregainingmomentum. lation, Health, and Nutrition Division, Dutz examines the extent to which Sub-Saharan Africa stands to gain most Population and Human Resources De- incumbent firms in certain imperfectly from the increasing cooperation between partment - is part of a larger effort in competitive industries adjusted their the export credit agencies and such mul- -PRE to update demographic estimates on output choice in Morocco between 1984 tilateraldevelopmentagencies as the World an annual basis. Copies are available free and 1987. During this period, Morocco Bank. from the World Bank, 1818 H Street NW, scaled down an extensive system ofquan- Washington DC 20433. Please contact titativerestrictions. Theeconometric work Like all low-income areas, Sub-Saharan Otilia Nadora, room 86-065, extension focuses on industries subject to binding Africa received only a modest share of the 31091 (234 pages with graphs and tables). import quotas before and after the reforms. early officially supported export credit Duts explores the distribution of output boom. But the share of officially sup- adjustment to the changes in imports ported export credits in Sub-Saharan Af- amongincumbentfirmsinsuchindustries. rican countries' external financing dif- He finds that: fered little from that of other developing * The more imports increased, the countries. Officially guaranteed credits more firms tended to contract output. covered a more important chunk of capi- * Asimports increased, smallerfirms tal flows to Sub-Saharan Africa from pri- were more likely to exit the industry than vate financial sources compared to that 102 Policy Research Working Paper Series for higher income developing countries. 604. Foreign Trade and its national provident funds, life insurance Although private capital flows to Sub- Relation to Competition and companies, private pension funds, and Saharan Africa are relatively small, this Productivity in Turkish Industry funded social pension insurance systems. close link suggests the importance of ofil- They have long-term liabilities and stable cial support in realizing these flows. But Faezeh Foroutan cash flows and are therefore ideal provid- officially supported export credits, de- ers of term finance, not only to govern- signed as policy tools primarily to boost Trade liberalization has improved pro- ment and industry but also to municipal exports, were distortive and inefficient ductivity in the industrial private sector authorities and the housing sector. financial instruments, for both the ex- - especially tradables - but not in the Except for Singapore, Malaysia, and porting and the recipient countries. public enterprises. Improvedproductivity a few other countries, most developing Under the pressure of earlier losses of the latter has come from other sources. countries have small and insignificant and increasing scrutiny by their guardian contractual savings industries that have authorities and national legislatures, ex- Trade liberalization and more exposure been undermined by high inflation and' port credit agencies have been increasing to international competition generally inhibited by oppressive regulations and the flexibilityoftheiroperations and their benefited Turkish industry in the 1980s. pay-as-you-go social pension insurance reliance on market forces for pricing de- But the effect ofinternational competition systems. cisions. appears to have been felt mainly in the Contractual savings institutions play Demirgiig-Kunt and Erzan contend private sector - especially in tradable amuchbiggerrolein thefinancial systems that, given the current economic and po- industries. ofdevelopedcountries. Insomecountries, litical environment, development aid and In the first half of the 1980s, inter- such as Switzerland, the Netherlands, bank lending will remain suppressed. national competition decreased the price- and the United Kingdom, the resources Consequently, officially supported export cost margin and increased the growth mobilized by life insurance companies and credits can reemerge as an important rate of productivity in the private sector. pension funds correspond to well over 100 source of relatively cheap and readily In the public sector, deeper trade pen- percent of annual GDP. available financing. etration seems to have lowered the price- Vittas and Skully provide an over- Increasing cooperation between ex- cost margin in the public enterprises that view of the structure and the state of port credit agencies and such multilateral were above-average in capital intensity, development of contractual savings in- development agencies as the World Bank but had no impact on productivity. stitutions in both high- and low-income is avery positive developmentin reducing Improved productivity in the public countries. They also identify a number of the waste and increasing the efficiency of enterprises appears to be more related to operating characteristics that define the officially supportedexport credits forboth changes in other areas - probably the social, economic, financial, and regula- the donor and the recipient countries. reform of management. tory implications of different types of con- Sub-SaharanAfricancountries,whichare This paper - a product of the Trade tractual savings institutions. impairedbythe shortage oftechnical skills Policy Division, Country Economics De- Reforming their contractual savings and administrative capacity and which partment - is part of a larger effort in and pension systems is becoming a high may have suffered heavily from ill prac- PRE to study the effect of trade liberal- priority in many countries. Vittas and tices in export credits, stand to gain most ization on the performance and conduct of Skully emphasize that the fundamental from this cooperation. the industrial sector. Copies are available objectives of reform should include: Finally, amajor source ofinefficiency free from the World Bank, 1818 H Street * Providing adequate but affordable in the use of external funds, whether NW, Washington, DC 20433. Please and therefore sustainable benefits (this officially supported exportcredits or other contact Sheila Fallon, room N10-041, ex- might involve some intentional redistri- funds, is distortions in the domestic tension 37942 (58 pages). bution for social equity). economies of the borrowing countries. To * Creating a strong link between con- induce lending to the private sector by tributions and benefits, which would. exportcreditagencies, therecipientcoun- 605. Overview of Contractual minimize any incentive distortions on la- tries must improve the efficiency of their Savings Institutions bor markets and avoid capricious redis- marketplace and institutions. tributive effects caused by volatile infla- This paper - a product of the Debt Dimitri Vittas and Michael Skully tion and inconsistent service require- and International Finance and Interna- ments. tional Trade Divisions, International Contractual savings institutions, because * Generating long-term savings that Economics Department - is part of a of their stable cash flows and long-term would help stimulate the development of larger effort in PRE to study alternative liabilities, could be ideal sources of term capital markets. sources of external finance to developing finance for both the public and private On the basis of their analytical countries in general, and to the African sectors. Unlike developed countries, most evaluationof differenttypesofinstitutions region in particular. Copies are available developing countries have insignificant and in line with practice in high income free from the World Bank, 1818 H Street contractualsavings industries-but many countries, the authors advocate a multi. NW, Washington, DC 20433. Please are beginning to make reform in this in- pillar approach to contractual savings and contact Grace flogon, room S7-033, ex- dustry a high priority. pensions. For developing countries this tension 33732 (40 pages with tables). could include: Contractual savings institutions include * A first pillar, in the form ofa social Policy Research Working Paper Series 103 pension insurance system, that would pro- structural reform and liberalization in ington, DC 20433. Please contact Emily vide a basic pension to old people, would Latin America in the 1970s (Chile) or the Khine, room N11-061, extension 39361 aim for widespread coverage, and would 1980s (Mexico and Bolivia); (2) countries (63 pages). be funded either from general taxrevenue that experienced severe macroeconomic or from a combination of employee, em- instability and did not pursue macroeco- ployer, and government contributions. nomic reform (Argentina and Brazil); and 607. Abolishing Green Rates: * Asecondpillar, based onacompul- (3)EastAsian countries with high-growth, The Effects on Cereals, Sugar, sory system of personal pension plans of- outward-oriented, state-active economies and Oilseeds In West Germany fering contribution-based benefits but that adjusted to the shocks of the 1980s with strong safeguards regarding infla- and maintained high growth, low infla- DonaldF. Larson, Simon Glance, BrentBorrell, tion protection and solvency (this pillar tion, and remarkable macroeconomic Merlinda Ingco, and Jonathan Coleman could comprise both a state-run national stability (Korea, Singapore, and Thai- providentfundandpersonal pensionplans land). Eliminating the price differentials that offered by private-sector insurance com- Drawing on the literature and their result from country- and commodity-spe- panies and commercial banks). econometric analysis of the determinants cific exchange rates ("green rates") would * A third pillar, consisting of op- of private investment in developing coun- reduce farm income and devalue fixed tional funded occupational pension tries using cross-country data for 1972- agricultural assets. This complicates the schemes that might be offered by multina- 87, Serven and Solimano conclude (among difficult task of reform that is essential if tional corporations as well as large local other things) that: there is to be a unified European market. conglomerates. * Macroeconomic stability and policy * A fourth pillar, consisting of vol- credibility are essential for achieving a In 1987 the European Community began untary personal savings such as bank strong investment response. Investment the ambitious task of forging a single deposits, life insurance policies and annu- is likely to be limited under great macro- market for goods and services across the ities, marketable securities, and houses. economicuncertaintyorifpolicymeasures national borders of its member states by This paper - a product of the Finan- are:perceived as inconsistent or suspected 1992. Substantive reform of the cial Policyand SystemsDivision, Country to be only temporary - in which case Community's CommonAgricultural Policy Economics Department - is part of a investors prefer to wait and see before - necessary for the full integration of larger effort in PRE to study the financial committing resources toirreversible fixed existing markets - has not yet been ac- and economic impact of contractual say- investments. complished and has proven difficult to ingsinstitutionsandassesstheirprospects * The sequence of adjustment mea- achieve. in developing countries. Copies are sures is thus important. Trade liberaliza- Creating a truly "common" agricul- available free from the World Bank, 1818 tion measures undertaken while macro- tural policy in the European Community H Street NW, Washington, DC 20433. economic instability persists are likely to requires, ataminimum, eliminating price Please contact Wilai Pitayatonakarn, be viewed as purely transitory, and thus differences resulting from country- and room N9-003, extension 37666 (59 pages might actually distort the investment commodity-specificexchangerates,known with tables). pattern. as "green rates." * Even well-designed, consistent Larsonandhisassociatesdiscussthe adjustment programs might have to variouspolicyinstrumentsthatcomplicate 606. Adjustment Policies overcome a lack of credibility, especially the effects ofthese policy-determinedprice and Investment Performance in their early stages. If enough external differences on crop production and the in Developing Countries: resources are available, the private sector demand for inputs. They present a model Theory, Country Experiences, may be more confident about the viability that estimates the cross-commodity biases and Policy Implications of adjustment efforts, which could facili- created by multiple policy instruments tate investment recovery. and that quantifies the effects of remov- Luis Serven and Andr6s Solimano * Evenifpolicychangesareperceived ing green-rate differentials in what was as permanent, inadequate infrastructure West Germany. Adjustment without growth has been, for may pose a significant obstacle to the The effects of price changes on do- many developing countries, the outcomeof recovery of private investment. The mestic production are statistically sig- the debt crises of the 1980s. Macroeco- implementation of well-targeted nificant in the model, although quantita- nomic stability, policy credibility, and public investments in infrastructure tively small. This result suggests that adequate external financing are among projects can stimulate the private sector's eliminating green rates would lead pri- the key ingredients for achieving a strong response to adjustment measures. marily to a decline in farm income and a investment response to adjustment mea- This paper - a product of the Macro- devaluation offixed agricultural assets - sures. economic Adjustment and Growth which complicates the difficult task of Division, Country Economics Department attaining reform. ServenandSolimanoanalyzetheresponse - is part of a larger effort in PRE to This paper - a product of the Inter- of private and public investment to exter- investigate the response ofprivate invest- national Trade Division, International nal shocks, macroeconomic adjustment, ment to macroeconomic adjustment mea- Economics Department - is part of a and structural reform in three sets of sures. Copies are available free from the larger effort in PRE to understand the countries: (1) countries that pursued World Bank, 1818 H Street NW, Wash- implications for developing countries of 104 Policy Research Working Paper Series changes in the industrial countries'trade A vast literature uses cross-country re- imports (andsometimes exports) meetqua- policies. Copies are available free from gressions to find empirical links between lityandquantitystandardsandthatprices the World Bank, 1818 H Street NW, Wash- policy indicators and long-run average are within established norms. But preship- ington DC 20433. Please contact Dawn growth rates. ment inspection failed to reduce the exces- Gustafson, room S7-044, extension 33714 Levine and Renelt study whether the sive import prices Madagascar was pay- (22 pages). conclusions from existing studies are ro- ing (particularly for chemicals and basic bust or fragile if there are small changes manufactures), possibly as the result of in the list of independent variables. false invoicing by Madagascar importers 608. Cross-Country Studies Their conclusion: they are fragile. and industrial country exporters. of Growth and Policy: They find that although "policy" - Methodological, Conceptual, broadly defined - appears to be impor- Many developing countries use and Statistical Problems tantlyrelatedtogrowth,thereisnostrong preshipment inspection (PSI) firms to independentrelationshipbetweengrowth counter the adverse effects on their for- Ross Levine and David Renelt and almost everyexisting policyindicator. eign trade of certain pricing and business Levine and Renelt: practices. These firms may also perform The design, implementation, and inter- * Pind that very few macroeconomic some national customs functions, but their pretation of cross-country investigations variables are robustly correlated with key responsibility is normally to verify should be improved. This review of con- cross-country growth rates. thatimports(andsometimesexports)meet ceptual, methodological, and statistical * Clarify the conditions under which quality and quantity standards and that weaknesses in cross-country studies sug- onefindsconvergenceofpercapitaoutput prices are within established norms. gests that existing findings warrant only levels. Developing countries make substan- limited confidence. * Confirm the positive correlation tial payments for PSI - charges appear between the share of investment in GDP to average about 1 percent of the value of Levine and Renelt review the conceptual, and long-run growth. the goods inspected - but have under- methodological, and statistical problems * Conclude that all findings using taken no comprehensive cost-benefit associated with drawing inferences from the share of exports in GDP could be studies of PSI. cross-countryregressions. They elaborate obtained almost identically using the to- Using data from Madagascar's expe- on the particular problems associated with tal trade or import share. (Cross-country rience, Yeats analyzes the impact of PSI empirical attempts to link particular poli- growth studies that use export indicators on Madagascar's relative import prices. cies with long-run growth. should not be interpreted as studying the The results suggest thatMadagascar paid Theyhope to stimulate improvements relationship between exports and growth considerably higher prices than other de- in the design, implementation, and inter- per se but rather as between growth and veloping and industrial countries both pretabilityofcross-countryinvestigations trade defined more broadly.) before and after PSI was adopted. and to caution readers about the confi- * Find that many commonly used In other words, preshipment inspec- dence they place in existing findings. fiscalindicators are notrobustlycorrelated tion failed to reduce Madagascar's import (See also WPS 609.) with growth. prices to the level of those paid (on aver- This paper - a product of the Macro- * Highlight the importance of con- age) by other importers. Extreme prices economic Adjustment and Growth Divi- sideringalternative specifications in cross- (150 percent or more above average) occur sion, Country Economics Department - country growth regressions. for all types of goods imported by Mada- is part of a larger effort in PRE to under- This paper - a product of the Macro- gascar but are clustered in chemicals stand empirically thelinksbetweenpolicy economic Adjustment and Growth Divi- (SITC 5) and basic manufactures (SITC and long-run growth. Copies are avail- sion, Country Economics Department is 6). able free from the World Bank, 1818 H partofalargereffortinPREtounderstand Evidence suggests that collaborative Street NW, Washington DC 20433. Please empirically the links between policy and false invoicing by Madagascar importers contact CECMG staff, room N11-024, long-run growth. Copies are available and industrial country exporters is one extension 39175 (54 pages). free from the World Bank, 1818 H Street reason for the excessive prices both before NW, Washington DC 20433. Please con- and after adoption of PSI. tact CECMG staff, room N11-024, exten- This paper - a product of the Inter- 609. A Sensitivity Analysis sion 39175 (43 pages, with tables). national Trade Division, International of Cross-Country Growth Economics Department - is part of a Regressions larger effort in PRE to improve develop- 610. Can Preshipment Inspection ing countries' ability to make more effec- Ross Levine and David Renelt Offset Noncompetitive Pricing tive use of their financial resources in the of Developing Countries' Imports? procurement of imports vital to industri- A vast literature uses cross-country re- The Evidence from Madagascar alization and growth. Copies are avail- gressions to find empirical links between able free from the World Bank, 1818 H policy indicators and long-run average Alexander J. Yeats Street NW, Washington DC 20433. Please growth rates. But conclusions from those contact Jean Jacobson, room S7-037, ex- studies are fragile if there are small Many developing countries pay preship- tension 33710 (31 pages). changes in the independent variables. ment inspection firms well to verify that Policy Research Working Paper Series 105 611. Tariff-based Commodity lization proposals, providing benefits particular, few published studies of ag- Price Stabilization Schemes when price movements are extreme but gregate production functions establish a in Venezuela preserving average international price statistically significant link between real signals. GDP and the labor force's educational Jonathan R. Coleman and Donald F. Larson As a practical matter, budget con- attainment. Lau, Jamison, and Louat straints may limit the government's abil- found that education has had little effect Of the stabilization schemes proposed to ity to defend the domestic price range on the aggregate real GDPs of a sample of ease the liberalization of quota-driven, dictated by this scheme. Sub-Saharan African countries. price-managed domestic markets for sev- Four properties are desirable in any Now Lau, Jamison, and Louat have eral"essential"commodities, the wideprice stabilization scheme, contend Coleman pooled data on 58 developing countries, band - based on a moving average of and Larson: from 1960 through 1986, to estimate an iominal border prices - is the least offen- * The scheme should allow changes aggregate production function using as sive. It provides benefits when price in the world price to be reflected in the independent variables the quantities of movements are extreme but preserves av- domestic market. capital, labor, land, average educational erage international price signals. * The mean stabilized price to pro- attainment of the labor force, and chrono- ducers should not be above or below the logical time. Venezuela's agricultural sector is heavily long-run average international price. They measured the percentage regulated and protected. As part of struc- * The scheme should not put too change in a region's real GDP in response tural adjustment, the government is much ofa financial burden on the govern- to an increase of one year in the average considering major reform of its agricul- ment. educational attainment of the working tural trade policies. The strategy is to * The scheme should be transparent age population in 1985. The estimated introduce competition into the economy and predictable. effects range from negative to more than by removing government price controls This paper - a product of the Inter- 5 percent a year. and liberalizing trade. national Trade Division, International The results suggest: The government is concerned about Economics Department -is part of PRE's * Apositiverelationshipbetween the the microeconomic effects of the resulting research on commodity price risk man- level of primary schooling achieved and commodity price instability on individual agernent by developing countries. Copies the size of its effect. producers and consumers. Farm prices are available free from the World Bank, * A threshold of four years of school- have been fixed in Venezuela for more 1818HStreetNW, WashingtonDC 20433. ing before primary school has an effect. than 40 years, so Venezuelan farmers Please contact Sarah Lipscomb, room S7- * The effect of secondary education have little experience managing risk; and 062, extension 33718 (46 pages, with seems to be independent of the level of the government fears high food prices will tables). secondary schooling attained, although lead to malnutrition among the poor and local factors may predominate here - a repeat of the food riots experienced in witness the negative effect estimated for Caracas in 1989. 612. Education and Productivity South Asia. In 1990, the government of Venezu- In Developing Countries: They conclude that education is an im- ela proposed a price stabilization scheme An Aggregate Production portantdeterminantofaggregatereal output to ease the liberalization of quota-driven, Function Approach and productivity but that its effect varies price-managed domestic markets for considerably across countries and regions. several "essential"commodities-includ- Lawrence J. Lau, Dean T. Jamison, and More research is needed to explain ing maize, sorghum, rice, wheat, sugar, Frederic F. Louat why education varies in its effectiveness, palm oil, and soybeans and soybean especially where the effect appears to be products. Coleman and Larson analyzed Education is an important determinant of negative. They speculate that certain historical data to demonstrate the effects aggregate real output and productivity, factors mayinfluence theeffectofprimary of several alternative stabilization but its effect varies considerably across and secondary education on aggregate schemes on domestic prices and govern- countries and regions - ranging from real output - among them, a country's ment revenues. They also calculated negative to more than 5 percent a year in institutions, its organizations for pro- average welfare benefits, including trans- this sample. duction and distribution, the composition fer and risk benefits - based on assump- and skill requirements of its industries, tions about risk aversion among produc- The estimatedratesofreturn toeducation the structure of education, and the inci ers. are typically (often considerably) above dence of war and pestilence. The effects of the various stabiliza- 10 percent a year in real terms - a re- This paper - a product of the Wel- tion schemes on government revenues spectable rate of return. The rates of re- fare and Human Resources Division, and producer welfare depend on both the turn are highest for primary education, Population and Human Resources De- crop and the method of stabilization cho- and higher in countries where educated partment - was prepared as a back- sen. manpower is scarcer. And the durability ground paper for the 1990 World Devel- Generally, Coleman and Larson of educational capital can be as high as 50 opment Report on poverty. Copies are conclude that a wide price band - based years. available free from the World Bank, 1818 on a moving average of nominal border But the effect of education on real H Street NW, Washington DC 20433. prices-is theleast offensive of the stabi- output has not been well documented. In Please contact the World Development 106 Policy Research Working Paper Series Report office, room S13-060, extension Economic Development Institute, and the indicators within and across countries 31393 (33 pages, with tables). Macroeconomic Adjustment and Growth may help create a groundswell demand Division, Country Economics Department for reform. - is part of a larger effort in PRE to * Mustering exit and voice mecha- 613. Price-Wage Dynamics analyze the sources and dynamics of in- nisms to correct the imbalance among and the Transmission of Inflation flationin transitional socialist economies. stakeholders of public services. In many in Socialist Economies: Empirical Copies are available free from the World developing countries, the mandates and Models for Hungary and Poland Bank, 1818 HStreetNW,WashingtonDC behavior of service providers are domi- 20433. Please contact Olga Del Cid, room nated by their own preferences or the Simon Commander and Fabrizio Coricelli M7-047, extension 39050 (33 pages). priorities of their supervisors and influ- ential elite groups. The weakest stake- Nominal anchors - particularly wage holders are the unorganized public or the restraints - are important in stabiliza- 614. Accountability In Public poorer sections of society. tionprogramsinreformingsocialistecono- Services: Exit, Voice, and Capture * Checking monitoring and incen- mies. Without conventional equilibrating tive systems used by service providers mechanisms and effective market re- Samuel Paul and their supervisors for compatibility straints on wages, monopolistic pricing with the expectations of the stakeholders can result in powerful inflationary pres- Public accountability is strengthenedwhen - and tradeoffs must be worked off be- sures and higher-than-warranted output government control (monitoring and in- tween them. In developing countries, costs. centivesystems) is reinforced by thepublic's where poverty reduction is a major goal, willingness and ability tofind alternative imbalances must be corrected so there is Commander and Coricelli set up a simple sources of supply ("exit") or to exert pres- a shift of services toward the poor, and an inflation model to analyze the transmis- sure to perform ("voice") - to balance the improvement in access to and quality of sion and short-run dynamics of inflation phenomenon of "capture" (the tendency of services. in partially reformed socialist economies. those who manage and control the allo- This paper - a product of the Public The model has features derivedfrom mar- cation of public services to seek rents, not Sector Management and Private Sector ket economies with few producers and serve the public interest). Development Division, Country Econom- sticky prices. It also tries to capture some ics Department-is part ofa larger effort attributes of socialist economies, includ- Paul argues that public accountability, a in PRE to examine the complex issues of ing chronic excess demand in goods mar- major determinantin public performance, governance and public accountability in kets. Most of the empirical analysis fo- is strengthened when the government's developingcountries. Copies are available cuses on the period after 1982 when hierarchical control (monitoring and in- free from the World Bank, 1818 H Street market-related reforms had been imple- centive systems) is reinforced by the NW, Washington DC 20433. Please con- mented. public's willingness and ability to find tact Ernestina Madrona, room N9-061, Commander and Coricelli simulta- alternative sources of supply ("exit") or to extension 37496 (54 pages). neously estimate dynamic price andwage exert pressure to perform ("voice") - models. The estimated equations allow which will depend on the relative costs of them to explore the role and weight of these options, what the results might be 615. Socialist Economic Growth foreign prices and domestic factors in worth, and the underlying degree of and Political Investment Cycles propagating inflation in Hungary and market failure. Poland. The phenomenon of "capture" is the Heng-fu Zou They find that foreign prices matter tendency ofthose who manage and control but cost developments are critical in re- the allocation of public services to engage Investment rates in China have often been latingexogenous,policy-determinedprice in rent- seeking. Capture, together with highest under leftist (hardline) political adjustments to increases in inflation. In government monopoly of many public regimes, not rightist (softline) political most periods, wages wereindexedtoprices services, the public's limited ability to regimes. -but in Polandmore complexbargaining demand and monitor good performance, games emerged and a corresponding in- and problems in measuring and quantify- Socialist economic growth in China and ability to make centralized wage norms ing the benefits of services, make the Eastern Europe has long been character- hold. Polish planners relied increasingly improvement of public accountability ized by investment hunger, drives toward on price adjustments toaddress emerging complex and difficult. expansion, and cyclical fluctuation of in- macroeconomicimbalances, butthese only Three things can be done in the me- vestment rates. further destabilized the system andfailed dium term to improve public account- For decades, relatively high growth to address the underlying sources of ability in developing countries: rates - often accompanied by a shortage macroeconomic imbalances. In contrast, * Mobilizing public opinion for of consumption goods - have typically the Hungarian experience points to some change by disseminating comparative in- been achieved at the consumers' expense. of the ways administered prices can be formation about the performance of pub- Treating social planners as self-in- used to stabilize the system. lic services. Public surveys ofclient satis- terested bureaucrats, Zou offers a posi- This paper - a joint product of the faction, public evaluations of service pro- tive model to help understand the norms National Economic ManagementDivision, viders, and comparisons of performance of socialist economic growth. This model Policy Research Working Paper Series 107 demonstrates: call for relatively low marginal tax rates in an influential 1979 paper. * How rapid capital accumulation at the bottom of the income distribution. They find that those projections of tends to serve the social planners' own Which tax-tranfer schedule does most to poverty are not robust to reasonable interests. reduce poverty? changes and improvements in the meth- * Why investment hunger is an in- The issue, say Kanbur, Keen, and odology; in some cases, even the projec- evitable consequence of social planners' Tuomala, is one of optimal nonlinear in- tions' time trend is reversed. rational choices. come taxation - using a nonwelfarist Thus, analysts and policymakers * When a drive toward expansion objective function that seems to accord should treat such global forecasts of pov- can cause a permanent shortage of con- well with the common concerns of the erty with caution. sumption goods. policy debate: an income-based poverty This paper - a product of the Re- Through numerical examples and index. search Administrator's Office, Office of 'empirical tests, Zou provides a framework They show that one of the key theo- the Vice President, Development Eco- within which to analyze political invest- retical results ofthe welfaristliterature is nomics - is part of a larger effort in PRE ment cycles in a socialist economy. In overturned: if it is desirable for every- to analyze the design of poverty allevia- .China, Zou finds that high investment body to work, the optimal marginal tax tion policies. Copies are available free rates have often been linked to leftist (or rate on the very poorest individuals is from the World Bank, 1818 H Street NW, hardline) political regimes and low or strictly negative (a marginal subsidy). Washington, DC 20433. Please contact moderateinvestmentrates with"rightist" They argue that the nonwelfarist Jane Sweeney, room 83-026, extension (or softline) political regimes. perspective points towardlowermarginal 31021 (37 pages). This paper - a product of the Public tax rates in the lower part of the income Economics Division, Country Economics distribution than does the welfarist per- Department-is part ofa larger effortin spective. But numerical simulations 618. Poverty and Development: PRE to study the centrally planned suggest that this effect is of limited quan- The Human Development Report economies in transition. Copies are avail- titative significance. and The World Development able free from the World Bank, 1818 H Using conventional functional forms Report, 1990 StreetNW, Washington, DC 20433. Please and parameter values, optimal marginal contact Ann Bhalla, room N10-059, ex- tax rates on the poor are in the 60-70 Ravi Kanbur tension 37699 (24 pages). percent range. This paper - a product of the Re- The consensus represented in these two search Administrator's Office, Office of comprehensive reports holds out the hope 616. Optimal Nonlinear Income the Vice President, Development Eco- that the polarization of policy analysts Taxation for the Alleviation nomics - is part of a larger effort in PRE into "camps" is a thing of the past - and of Poverty to understand the design of poverty alle- that policies for the 1990s can be built on viation policies. Copies are available free agreement about the basics. Among the Ravi Kanbur, Michael Keen, and from the World Bank, 1818 H Street NW, basics: that poverty alleviation requires Matti Tuomala Washington DC 20433. Please contact growth, but growth is not enough. Jane Sweeney, room S3-026, extension Poverty-minimizing marginal tax rates 31021 (19 pages). Afterthe"adjustmentdecade"ofthe 1980s, on the poor are in the range of 60-70 attention in the 1990s seems to be turning percent. once again to longer-term issues of devel- 617. International Poverty opment - particularly of poverty allevia- There has been much discussion recently Projections tion. .of "targeting" in the design of social Just as the 1980s were heralded by a security and income transfers - that is, Sudhir Anand and Ravi Kanbur series of reports on adjustment, so the the structuring of tax and transfer 1990s have seen two major reports on programs to ensure that resources go to The methods used in projections of inter- poverty: World Development Report 1990: -the poor, with minimal leaks to the national poverty -particularly in many Poverty, by the World Bank, and Human nonpoor. World Bank documents - are not robust Development Report 1990 by the UNDP Incentive effects force one to rule out to reasonable changes and improvements (the first in a planned annual series fo- 100 percent marginal tax rates on the in the methodology. In some cases, even cusing on human development). poor(implicitinbenefit withdrawal). With theprojections'time trend is reversed. Use Kanbur presents an overview of a marginal tax rate of 100 percent, the these projections with caution. conceptual issues and the best policies for poor have no incentive to earn income. alleviating poverty, based on a review of But how high or low the marginal rate of Anand and Kanbur investigate the meth- these two reports. He poses basic taxation should be, and how they should odology used in projections of interna- questions on the definition and measure- vary with income, is more complex - and tional poverty - particularly those used ment of poverty, looks at what has opinion varies widely. in many World Bank documents. They actually happened to poverty in develop- Social security schemes that with- examine critically, and subject to sensi- ing countries in the last three decades, drawbenefitsrepresentanextremelyhigh tivity analysis, the methodology devel- and reviews policies to help alleviate pov- effective marginal taxrate; otherschemes oped by Ahluwalia, Carter, and Chenery erty. 108 Policy Research Working Paper Series The consensus represented in these Clearly, structural adJustment pro- No. Creditors in the 1970s took into ac- tworeports, he concludes, offers hope that grams have had a negative effect on high- count the default histories of borrowers the polarization of policy analysts into cost, overprotected import-substituting andgave defaulters worse credit terms on "camps" is a thing of the past - and that industries in Sub-Saharan Africa; some new loans. policies for the 1990s can be built on were intended to do so. Structural adjust- fundamental agreement about the basics: ment programs are expected to attract a What incentives do countries have to re- * That poverty alleviation requires good deal of foreign direct investment but pay loans? Do banks credibly punish growth - but growth is not enough. there is little evidence yet that they are borrowers that behave badly - and if so, * That growth must be broad-based doing so. how? Two explanations are commonly and labor-intensive, and must go hand in Foreign investment in the 1990s (as offered for why countries repay debts: (1) hand with purposive, targeted basic social in the 1980s) is likely to flow to a few key to preserve their reputation as a good expenditures. sectors: energy (certainly minerals), se- borrower or (2) to avoid direct sanctions, * That the international community lected export manufacturing sectors, and such as trade sanctions or the seizure of must do its share, by supporting these possibly the tourist industry. The least overseas assets. efforts in the 1990s through greatly in- attractive area for the foreign investor is Ozler empirically investigated the - creased capital flows to developing coun- exclusively import-substituting industri- effect of repayment problems in earlier tries. alization. eras on the spreads paid by developing This paper - a product of the Re- Investors interested in Sub-Saharan countryborrowersinthe 1970s. Shefound search Administrator's Office, Office of Africa are more likely to commit technol- that creditor banks did take account of the Vice President, Development Econom- ogy and management than equity capital. borrowers' default histories. Defaulters ics - was prepared for a special issue of As a result, development finance institu- paid higher spreads than nondefaulters, Pensamiento Iberoamericano. It grew out tions are likely to play an increasingly and the defaulters that reneged on larger ofa session Kanbur organized andchaired important role in meeting the need for portions of their past debt paid (even) at the Fifth International Congress of the capital. higher spreads. European Economic Association, held at Thus, activity in Sub-Saharan Africa Ozler also found that countries that Lisboa in August 1990. Copies of this may be more effective at raising the total acquired sovereignty more recently were paper are available free from the World volume of investment than any change in charged higher spreads than other coun- Bank, 1818 H Street NW, Washington, the climate of fiscal and other incentives, tries. DC 20433. Please contact Jane Sweeney, There is no prospect whatsoever for These findings apply during an ex- room S3-026, extension 31021(25 pages). foreign investment to meet Sub-Saharan pansionist period. During an earlier cri- Africa's rising foreign exchange and say- sis stage, markets failed to discriminate ings gaps -indeed, the prospects may be between borrowers that "behaved badly" 619. Foreign Direct Investment worse in the 1990s than in the dismal and those that did not. In Sub-Saharan Africa 1980s. For one thing, prospects in other This paper - a product of the Debt parts of the rapidly changing world look and International Finance Division, In- Laurence Cockcroft and Roger C. Riddell brighter and less risky and are closer to ternational Economics Department - is home. For another (Catch 22), Sub- part of a larger effort in PRE to analyze Foreign investment is even less likely to Saharan Africa is unlikely to attract capi- commercial bank lending to developing meet Sub-Saharan Africa's rising foreign tal until the prospects for growth improve countries and to assess the prospects for exchange and savings gaps in the 1990s - which is more likely in countries that future lending. Copies are available free than in the dismal 1980s. Investors in- succeed in attracting more public and from the World Bank, 1818 H Street NW, terested in Sub-Saharan Africa are more private foreign capital. Washington DC 20433. Please contact likely to commit technology and manage- This paper - a product of the Debt Sheilah King-Watson, room S8-040, ex- ment than equity capital. Economicactiv- and International Finance Division, In- tension 33730 (32 pages). ity and overall economic policy may be ternational Economics Department - is more effective at raising the total volume part of a larger effort in PRE to assess the ofinvestment than special fiscal and other external financial situation of developing 621. Sensible Debt Buybacks incentives. countries, overall and by regional and for Highly Indebted Countries analytical group. Copies are available Cockcroft and Riddell examine trends in free from the World Bank, 1818 H Street Enrica Detragiache private foreign direct investment in Sub- NW, Washington DC 20433. Please con- Saharan Africa, assess how this has af- tact Sheilah King-Watson, room S8-040, Concerted agreements in which debt re- fected the hosteconomies, and discuss the extension 33730 (71 pages). purchases are linked to reduced interest prospects for increased investment in the rates or new-money requirements can make 1990s. They examine new or buybacks at a fair price viable, while pre- nontraditional formsofinvestmentaswell 620. Have Commercial Banks venting a free-rider problem among lend- as more traditional stock and flow trends. Ignored History? ers. They also focus on the relationship be- tween structural adjustment programs Sule Ozler Previous studies indicate that debt and foreign private investment. buybacks at market prices benefit lend- Policy Research Working Paper Series 109 ers the most - because the lack of a between discounts in the secondary mar- and investment had to become more effi- seniority structure in sovereign lending ket and U.S. banks' heavy exposure to cient. To restore growth, the challenge of distorts secondarymarket prices upward. developing country debt. They estimate the 1990s is to havegoodeconomicpolicies Detragiache examines whether we)- that every US$4 billion increase in alarge and to create the conditions needed to fare-improving buybacks would arise at bank's exposure to a country reduces the increase investment-to-GDP ratios. the "fair" price. If so, policy intervention discount 10 to 15 cents on the dollar. is needed to remove the distortion. In a They also find that discounts and Simple comparisons of growth rates in model of intertemporal consumption total bank capital are strongly positively countries thathavehadatleasttwo struc- smoothing, buybacks at the fair price are correlated over time: a US$8 billion in- tural adjustment loans (SALs) or at least desirable if the country experiences un- crease in the capital of the largest U.S. three adjustment loans (the first one in usuallyheavy export earnings and iflarge banks increases discounts by nearly 25 1985 or before), show that their growth reserve holdings tend to increase trans- cents on the dollar. has improved more than that of other fers to creditors in default states. They explain their results with a countries. Concerted agreements in which debt simulationmodel ofarepresentative bank But simple comparisons of the per- -repurchases are linked to cuts in interest with minimum capital requirements, flat- formance of groups of countries are poor rates or new money requirements can rate deposit insurance, and limitedliabil- estimators of the effectiveness of adjust- make buybacks at the fair price viable, ity. The bank's portfolio adjustment deci- ment programs because the performance while preventing the free-rider problem sion involves trading risky foreign loans of an adjusting country is the result of. among lenders. in the secondary market or making short- * The policies that would have been This paper - a product of the Debt term domestic loans. The model yields a in place even without adjustment loans and International Finance Division, In- negative relationship between the banks' from the Bank. ternational Economics Department - is exposure to developing countries and dis- * World economic conditions. part of a larger effort in PRE to under- counts in the secondary market. * The effects of the Bank-supported stand the benefits and costs of voluntary This is because flat-rate deposit in- program. market-based debt and debt service re- surance, combined with limited liability, * Internal shocks to the economy duction operations. Copies are available encourages banks to gamble with de- (such as drought, wars, and earthquakes). free from the World Bank, 1818 H Street positors' money and to choose a more After explicitly controlling for exter- NW, Washington DC 20433. Please con- heavily concentrated developing country nal shocks andnonprogram determinants tact Sheilah King-Watson, room S8-040, loan portfolio. Similarly, poorly capital- of performance, Corbo and Rojas find that extension 33730 (32 pages). ized banks with deposit insurance benefit adjustment lending programs have usu- more than well-capitalized banks do from ally increased the growth rate of GDP and a risky developing country loan portfolio. the ratio of exports to GDP, and have 622. How Factors In Creditor This paper - a product of the Debt increased the saving-to-GDP ratio over Countries Affect Secondary Market and International Finance Division, In- early 1980s levels. But the average ratio Prices for Developing Country ternational Economics Department - is of investment to GDP has fallen below Debt partofalargereffortin PREtounderstand 1970s levels. the secondary market for developing The drop in investment's share in Sule Ozler and Harry Huizinga country debt as part of its analysis of GDP in the initial years of adjustment voluntary market-based debt and debt must be interpreted carefully. In many Flat-rate deposit insurance, combined with service reduction. Copies are available countries, economic crisis was the result limited liability, encourages banks - es- free from the World Bank, 1818 H Street of unsustainable levels of public invest- pecially poorly capitalized banks - to NW, Washington DC 20433. Please con- ment reached in the 1970s; part of the .gamble with depositors' money. A bank's tact Sheilah King-Watson, room S8-040, needed adjustment was reducing high heavy exposure in developing country debt extension 33730 (40 pages). levels of inefficient public investment. increases the secondary market price; Also, the initial uncertainty that occurs strong bank capitalization decreases it. when an adjustment program begins will 623. World Bank-Supported probably slow down private investment. Bank loans to many developing countries Adjustment Programs: Country Despite their disappointing invest- trade at a discount on the secondary mar- Performance and Effectiveness ment performance, these countries expe- ket. These discountsare typicallyassumed rienced more of an increase in their rates to reflect only the repayment prospects of Vittorio Corbo and Patricio Rojas of GDP growth in 1985-88 than in 1970- the borrower country. 80. This must reflect more efficient in- But Ozler and Huizinga demonstrate Most of the Bank's adjustment lending vestment combined with increased ca- that factors in the creditor countries have programs have increased the growth rate pacity utilization. a major impact on secondary market of GDP, the ratio of exports to GDP, and But for countries that have reduced prices. Their empirical investigation sug- the ratios ofsaving to GDP. But the aver- most of their policy inefficiencies, achiev- gests a systematic relationship between age ratio of investment to GDP is lower ing an acceptable, sustainable growth rate secondary market prices and the size dis- than 1970s levels. Sometimes in the 1990s will require higher invest- tribution of banks' portfolios. unsustainable levels of public investment ment rates than those achieved in the Thereisastrongnegativecorrelation in the 1970s had led to economic crisis, 1980s. The challenge of the 1990s is to 110 Policy Research Working Paper Series create the conditions needed to generate tions that take these and other problems 625. How Trade an increase in investment-to-GDP ratios. into account. An example is that policies and Macroeconomic Policies This paper - a product of the Macro- relying heavily on monitoring and en- Affect Economic Growth economic Adjustment and Growth Divi- forcement make less sense in developing and Capital Accumulation sion, Country Economics Department - countries than in industrialized market in Developing Countries is part of a larger effort in PRE to assess economies. Developing country agencies the effectiveness of adjustment lending. may not have the capacity to monitor and Ramon Lopez Copies are available free from the World to tax emissions or damages directly. Bank, 1818 H Street NW, Washington, Taxesandsubsidiesoninputsandoutputs A stable exchange rate is crucial to eco- DC 20433. Please contact Aludia Oropesa, can then, under certain circumstances, be nomic growth. Export promotion gener- roomN11-035, extension 39075(37pages). effective in inducing abatement, even if ates fastergrowth than import liberaliza- they imperfectly mimic taxes on moni- tion. Economic instability and foreign tored emissions and damages. When debt are key determinants of capital 624. Choosing Policy Instruments monitoring and enforcement capacity is growth. for Pollution Control: A Review constrained, the better policy may be fuel taxes based on assumed emissions - or Lopez provides cross-country empirical Gunnar S. Eskeland and Emmanuel Jimenez taxes or subsidies for equipment with evidence on the relationship between trade different emissions characteristics. Indi- and macroeconomic policy and economic Such realistic problems as limited moni- rect policy instruments like these can growth. He finds that: toring and enforcement capacity can often work well if they affect the profitability of * Countries that follow sustainable render the standard recommendations on abatement options without affecting other strategies perform better than those fol- pollution control ineffective, particularly choices. lowing unsustainable strategies. Indeed, in developing countries. Taxes (and sub- Any reform in developing countries unsustainable policies hurt growth. Sus- sidies) on inputs and outputs can in some must take into account how it affects the tainable policies (as in Korea, Taiwan, cases be effective in reducing pollution - most vulnerable groups in society. For Singapore, Hong Kong, Thailand, and even if they imperfectly mimic pollution instance, poverty considerations may re- Malaysia) promote exports and lead to taxes. strict the use of high fuel taxes if the poor real exchange rates that are either fully spend much of their income on fuels. And aligned or even undervalued for prolonged Eskeland and Jimenez review the theo- privileged groups are often strong in de- periods of time but are relatively stable. retical and empirical literature on policy veloping countries and may block other- Unsustainable policies (more common in instruments for pollution control, empha- wise well-designed policies. These con- developingcountries)include policies that sizing constraints on policy choices that siderations are relevant when mecha- tax exports and overvalue exchange rates prevail in many developing countries. nisms for compensation are not well de- for extended periods, leading to periodic They examine how a given reduction in veloped. balance of payments crises and a highly emissions can be achieved at the lowest Eskeland andJimenez emphasize the unstable real exchange rate. possible cost. need to incorporate analysis of behavioral * Export promotion policies gener- Under some restrictive assumptions responses in the design of intervention ate faster growth than policies that re- common in welfare economics, a pollution instruments. Exploitingflexibility among move import restrictions. tax gives perfect incentives for reducing consumers and producers is a key to con- * Economic instability and foreign pollution. taining environmental costs. Schemes debt are key determinants of capital Under the same assumptions, a sys- that encourage self-compliance, such as growth. tem of tradable emission permits also deposit reform systems, should be consid- * Contrary to conventional belief, allows efficient emission reduction - in ered. capital accumulation appears to be contrast to the more common command- This paper - a product of the Public stimulated by direct export restrictions control regulatory regimes of source-spe- Economics Division, Country Economics and does not seem to be directly affected cific emission constraints. Source-spe- Department -is part of a larger effort in by economic instability. cific constraints usually achieve the same PRE to analyze environmental problems This paper - a product of the Trade degree of abatement at a higher cost. and policiesin developing countries. Cop- Policy Division, Country Economics De- But these standard assumptions are ies are available free from the WorldBank, partment - is part of a research effort in particularly inappropriate in developing 1818 H Street NW, Washington, DC PRE, Trade Reform and Sustainability countries. First, transfer mechanisms 20433. Please contact Ann Bhalla, room (RPO 675-32). Copies are available free are not well developed, with the conse- N10-055, extension 37699 (60 pages). from the World Bank, 1818 H Street NW, quence that both the public revenue and Washington DC 20433. Please contact income for the poor are valued at a pre- Karla Cabana, room N10-035, extension mium. Second, monitoring and enforce- 37946 (30 pages). ment capacitycan be severely constrained, with the result that sophisticated instru- ments such as pollution taxes and tradable permits cannot play a major role. The authors discuss recommenda- Policy Research Working Paper Series 111 626. The Macroeconomics flation. portance of these components. Drawing of the Public Sector Deficit: Easterly finds that many changes in on evidence from the Managing Agricul- The Case of Colombia the real exchange rate between 1975 and tural Development in Africa (MADIA) 1987 are attributable to fiscal policy. He study, Holt shows, for example, that be- William Easterly shows how external debt financing and cause of a lack of adequate institutional domestic debt financing have relatively links andinformation flowsbetween small There is a close relationship between the different effects on the real exchange rate farmers and researchers, less than 5 per- means of financing the fiscal deficit and and the real interest rate. cent of farmers in Malawi have adopted macroeconomic outcomes in Colombia. A This paper-a product of the Macro- hybrid maize despite more than 30 years debt-financed deficit increase of about I economic Adjustment and Growth Divi- of maize-breeding work and 20 years of percent of GDP translates into a real in- sion, Country Economics Department - agricultural development projects. terest rate increase of 3 to 5 percent; a is part of PRE research project, The Mac- But institutional investments often money-financed deficit increase ofabout 1 roeconomics of the Public Sector Deficit require unconventional, potentially costly percenttranslatesintol5percentagepoints (RPO 675-31). Copies are available free programs and projects. ID initiatives more inflation. from the World Bank, 1818 H Street NW, have been criticized in terms of the costs Washington DC 20433. Please contact and benefits of different approaches, the Colombia is justly celebrated in Latin Raquel Luz, room N11-057, extension scale on which they can operate, their America for its prudent macroeconomic 39,059 (97 pages). compatibility with conventional project management, the cornerstone of which is frameworks, the degree and types of de- careful management of fiscal deficits. centralization they require, and their From the 1960s through the early 627. The Role of Institutions political feasibility. 1970s, Colombia's macroeconomic policy in Poverty Reduction: Using case studiesfrom differentpro- was mostly conservative - supportive of A Focus on the Productive Sectors ductive sectors and subsectors such as the an export-oriented development strategy National Irrigation Authority in the Phil- associated with high growth of both GDP Sharon L. Holt ippines and the Grameen Bank in and trade. Authorities were partially Bangladesh, she illustrates how these successful at sterilizing a surge in coffee Institutional development is critical to objections may be unwarranted or export revenues in the second half of the growth and sustainable poverty reduc- overskeptical - that investments in 1970s. In the early 1980s, the end of the tion. Institutions that reach the poor and institutional development can be both coffee boom coincided with a large in- help them to participate in economic economically and politically viable. crease in public investment - especially growth are typically flexible, involve in- This paper was prepared as a back- in energy - which led to an incipient tended beneficiaries, andemploy a variety ground paper for the 1990 WorldDevelop- balance ofpayments and debt crisis. This ofgovernment, nongovernment, and local ment Report on poverty. Copies are avail- crisis was largely avoided through a organizations. able free from the World Bank, 1818 H strong, continuing adjustment effort that Street NW, Washington DC 20433. Please began in 1985. Holt contends that institutional develop- contact the World Development Report Episodes of loose fiscal policy in Co- mnent (ID) is critical to growth and sus- office, room S13-060, extension 31393 (71 lombia have been minor compared with tainable poverty reduction. pages). other Latin American countries. The cri- Although there is no single model for sis of the early 1980s was cut short by a poverty-oriented institutional develop- sharp fiscal adjustment. Thisadjustment ment, and ID initiatives vary considerably 628. The Indonesian Family was a combination of good luck and fun- across sectors and nations, important Planning Program: damental policy changes, especially the common lessons have been learned about An Economic Perspective latter. To restore long-term growth, some successful institutional development ini- fiscal reform will be needed to reverse tiatives. Holt presents these in terms of Dov Chernichovsky, Henry Pardoko, David De some measureimplementedbetween 1985 six components: Leeuw, Pudjo Rahardjo, and Charles Lerman and 1989. * Forming and strengthening local Easterly finds a close relationship organizations. The intrauterine device (IUD)and (less so) between the means of financing the fiscal * Supportinginstitutionalpluralism. the injectable are relatively cost-effective deficit and macroeconomic outcomes in * Building links between poverty- methods ofcontraception that could prob- Colombia. Using a simulation model, he oriented institutions. ably improve contraceptive prevalence. traces how money-financed and domestic * Adopting the appropriate organi- They both require capital investment and debt-financedfiscal deficitstranslateinto zational structure andencouragingstrong trained medical manpower - which are inflation and the real interest rate. leadership. beyond the means and jurisdiction of Roughly speaking, a debt-financed * Adopting the learning process ap- Indonesia's family planning agency but deficit increase of about 1 percent of GDP proach. would probably pay off, especially in im- translates into a real interest rate in- * Mobilizing local resources and the proved health care. crease of 3 to 5 percent; a money-financed participation of poor people. deficit increase of about 1 percent trans- Both successful and unsuccessful Acomparative analysis ofthree provinces lates into 15 percentage points more in- -programs are used to illustrate the im- in Indonesia indicates that the IUD and, 112 Policy Research Working Paper Series to less extent, the injectable, are methods performance. assumption of diminishing returns in that, if available, would probably be used production. Zou offers an alternative: he and would contribute to high contracep- Conwaypresentsandimplementsameth- introduces "the spirit of capitalism" tive prevalence. odology for assessing the success of struc- (as Max Weber used the term) into the Moreover, the IUD appears to be tural adjustment based on a "fixed effect" model. relatively cost-effective. methodology. In the long run, countries with dif- But the IUD (and to less extent the He examines data for 75 countries ferent degrees ofcapitalist spirit will have injectable) requires capital investment over 11 years. Performance indicators different consumption, capital stock, and and trained medical manpower (which include measures of inflation, economic endogenous growth rates. In Zou's model are beyond the means and control of growth, external balance, and physical (unlike traditional models), inflation is no Indonesia's National Family Planning Co- investment. He measures government longer superneutral in relation to long- ordinating Board, BKKBN). policiesin terms ofspending, trade regime, run growth. The relative delivery cost of different financial deepening, and real exchange Zou provides a formal model that is methods are inversely related to their rate policy. supported by many empirical and his- efficacy -so the most cost-effective meth- The empirical estimates he obtains torical studies on cultural attributes and ods are also the most efficient - probably suggest thatrankingcountries byadjusted economic development. His model helps - also in terms of demographic impact. Dif- economic performance yields significantly explain: ferences in the mean age of users for the different results than ranking them by * Why Japan and the four Asian IUD (32.5), pill (30), and injectable (29) historical performance. "miracles" have succeeded. are slight-so reproductive potential and Further, countries following a pre- * Why nations that had an estab- risk of pregnancy are about equal among scription of relatively low government lished Protestant religion in 1870 had a different user groups. spending, deep financial markets, and per capita income in 1979 that was more Clearly, altering the delivery system outward orientation in trade policy per- than a third higher than in Catholic na- - particularly in favor of methods that formedsignificantlybetter than those that tions. require medical facilities and staff - re- did not. * Why British industry has declined quires investment in facility, staff, and This prescription was correlated sig- since 1850. the cost of initiating a new method. This nificantly with more rapid economic This paper - a product of the Public merits a detailed cost-benefit analysis, as growth, current accounts with lower Economics Division, Country Economics the data strongly suggest that such in- deficits, expanded investment, and re- Department - is part of a larger effort in vestments might pay off, especially be- duced inflation. PRE to study long-run growth and eco- cause they would also improve medical This paper - a product of the Trade nomic policies. Copies are available free care. Policy Division, Country Economics De- from the World Bank, 1818 H Street NW, This paper is a product of the Popu- partment - is part of a larger effort in Washington DC 20433. Please contact lation, Health, and Nutrition Division, PRE to identify empirical regularities in Ann Bhalla, room N10-055, extension Population and Human Resources De- the nexus of economic performance and 37699 (28 pages). partment of the World Bank, in coopera- government policy for developing coun- tion with the Indonesian National Family tries. Copies are available free from the Planning Coordinating Board, and the World Bank, 1818 H Street NW, Wash- 631. The Macroeconomics Ministry of Foreign Affairs of the Royal ington, DC 20433. Please contact Dawn of the Public Sector Deficit: Governmentofthe Netherlands. Itis part Ballantyne, room N10-025, extension The Case of Morocco of a larger effort in PRE to examine the 37947 (63 pages, with tables). economics of family planning. Copies are Riccardo Faini available free from the World Bank, 1818 H Street NW, Washington DC 20433. 630. The Spirit of Capitalism Growth has remained relatively high in Please contact Otilia Nadora, room S6- and Long-run Growth Morocco, and inflation subdued. Morocco 065, extension 31091 (185 pages). has made great progress toward macro- Heng-fu Zou economic and fiscal stability, but the need remains for an unshaken commitment to 629. An Atheoretic Evaluation In the long run, cultural attributes and fiscal discipline, a determined effort to of Success in Structural the spirit of capitalism help explain why reform the tax and public spending sys- Adjustment Japan, the four Asian "miracles," and tems, and a measured attempt to make many countries with Protestant religion credit available for investment and to lib- Patrick Conway have succeeded economically. eralize financial markets. Countries that followed a prescription of Why do different countries have different Morocco's recent economic history re- relatively low government spending, deep long-term savings and growth rates? Why sembles those of many African countries. financial markets, and outward orienta- is the productivity rate not the same Morocco's economic difficulties originated tion in tradepolicyperformedsignificantly around the world? Recent new theories of in the commodity (phosphate) boom of the better than those that did not when coun- endogenous growth have tried to answer mid-1970s, which coincided with rising tries are ranked by adjusted economic these questions by replacing the usual government spending and an unprec- Policy Research Working Paper Series 113 edented expansion of public investment spending will probably crowd out invest- Despite heavy fiscal pressure, fiscal - ending Morocco's earlier fiscal conser- ment. The short-run benefits on output of spending has continued to grow, system- vatism. A sudden reversal of the terms of such spending may be outweighed by its atically exceeding revenues. From 1964 trade in the late 1970s - a result of a long-run negative impact on growth. to 1975, the deficit was financed by cre- plunge in phosphate prices and the sec- * A determined effort to reform the ating money; with the fall of Peron and ond oil shock - prompted Morocco to tax and public expenditure system, so the the beginning of a military regime, debt resort increasingly to external capital brunt of fiscal adjustment will not again financing became significant. Rodriguez' markets to maintain an unabated level of fall mostly on public investment. regression study shows that every 1 per- public spending. * Encouraging the availability of centof primary deficitis financed with 0.7 But the continued deterioration of credit, which significantly influences the percent of revenue from creating money the terms oftrade and the unexpectedrise demand for investment. - the effect of collecting which is an in international interest rates, together * Studying the impact of macroeco- additional 67.9 percent of inflation. with the severe drought of 1980-84, eroded nomic equilibria, especially on the gov- Public debt plays a peculiar role in debt service capacity and precipitated a ernment budget, to assess the best speed Argentina's finances. The central bank major foreign exchange crisis in 1983. for financial liberalization. has become the chiefborrower of about 80 In response to this crisis, Morocco This paper-a product of the Macro- percent of the private banks' lending launched a medium-term program of economic Adjustment and Growth Divi- power. In this context, a policy of tight economic reform and introduced compre- sion, Country Economics Department - money to reduce aggregate demand basi- hensive stabilization and structural ad- is part of a PRE research project, The cally increases the transfers from the justment measures. Since 1983, Morocco Macroeconomics of the Public Sector public to the private sector because of the has made great progress in alleviating Deficit (RPO 675-31). Copies are avail- higher deficit that the rise in interest both internal and external disequilibria able free from the World Bank, 1818 H rates generates. - reducing the budget deficit from 9 per- Street NW, Washington DC 20433. Please The pressure that government debt cent ofGDPin 1982 to 4.5 percentin 1988, contact Raquel Luz, room N11-057, ex- puts on the financial markets is best cap- and the current account deficit from 12 tension 34303 (39 pages). tured by evaluating that debt at the com- percent of GDP to 0.4 percent in the same mercial exchange rate. When the stock of period. debt gets out of line with available re- Interestingly, growth has remained 632. The Macroeonomlcs serves, pressures mount against the cur- fairly high in Morocco, at least in relation of the Public Sector Deficit: rency and devaluation follows. Then the to other highly indebted countries, and The Case of Argentina remaining stock of debt rises at rates far inflation subdued. Morocco's performance beyond levels consistent with a fixed ex- seems to contradict the perceived wisdom Carlos Alfredo Rodriguez change rate - and a new crisis begins to that large budget deficits will foster in- develop. flation. The inflation record is particu- Argentina has had a quarter century This paper -a product of the Macro- larly surprisingbecause Morocco achieved withoutgrowthatatimeofrapideconomic economic Adjustment and Growth Divi- a20percentreal depreciationinthe 1980s. growth in the rest of the world - and sion, Country Economics Department - Faini argues that wage moderation governmentspendingsystematicallygrows is part of a PRE research project, The and judicious monetary policies were in- faster than GDP and exceeds government Macroeconomics ofthe Public Sector Defi- strumentalin restraining inflation. With revenues. The central bank borrows about cit (RPO 675-31). Copies are available a brief exception in 1983, monetary au- 80 percent of the private banks' lending free from the World Bank, 1818 H Street thorities remained firmly committed to power. NW, Washington DC 20433. Please con- avoiding inflationary financing of the tact Raquel Luz, room N11-057, exten- budget deficit. But this strategy could Argentina has had a quarter century sion 34303 (90 pages). succeed only because of the wide-ranging without growth at a time of rapid eco- system of credit and monetary regula- nomic growth in the rest of the world and tions that channeled domestic funds to- government spending systematically 633. The Macroeconomics ward the treasury at relatively low cost. grows faster than GDP. Spending de- of the Public Sector Deficit: But the prospects for continuing such a cined when the final crisis of the Argen- The Case of Thailand strategy are not favorable. tine economy began in 1982, but more Growth performance can be attrib- because of resource constraints than Virabongse Ramangkura and uted to an outstanding export response to deliberate political action - and too late Bhanupongse Nidhiprabha the new trade regime and to favorable to avoid the financial crisis that brought supply shocks - including a string of hyperinflation (approaching 5,000 per- Thailand's pattern of public expenditure record agricultural harvests and the col- cent in 1989). The government ran a finance - relying more on tax revenues lapse of real oil prices. primary deficit (not including interest and commercial and private borrowing, Morocco has made great progress payments) every year from 1961 to 1989, and less on central bank loans and money toward macroeconomic and fiscal stabil- so it issued money and interest-bearing financing-has contributedto Thailand's ity but the author recommends: debt. As a result, the economy experi- macroeconomic stability. This year, the * An unshaken commitment to fis- enced high real interest rates and infla- government proposes a balanced budget, cal discipline. Increased government don. after three years offiscal surplus. 114 Policy Research Working Paper Series In the past, the Thai government usually their imports from developing countries This paper - a product of the Office ran a budget deficit. In recent years, the have accelerated. Exports have grown of the Vice President, Development Eco- deficit has become a surplus. Acontinued most rapidly among outward-oriented de- nomics - has been prepared as a back- high growth rate in the last three years veloping countries. ground paper for the 1991 World Develop- produced an unexpected rise in tax rev- ment Report. Copies are available free enues, and the growth of public spending Ragnar Nurkse and, subsequently, Raul from the World Bank, 1818 H Street NW, was effectively controlled. The govern- Prebisch and Gunnar Myrdal expressed Washington, DC 20433. Please contact ment has adopted an early retirement theview that developedcountries'imports the World Development Report office, plan for foreign debts and in fiscal 1991, fromdevelopingcountriestendtoincrease room S13-060, extension 31393(37 pages, for the first time in recent history, the go- less rapidly than the developed countries' with tables). vernment proposes to balance the budget. gross domestic product. It has been fur- The central government's actual ther suggested that this situation is ag- spendingis usuallybelow planned spend- gravatedbythe decline ofeconomic growth 635. Exchange Rates and Foreign ing - which is overestimated during rates in developed countries and by their Trade In Korea slumps andunderestimated duringbooms. protectionist actions towardimports from Tax capacityhasincreased gradually over developing countries. The conclusion has Bela Balassa time relative to GDP. This factor has been reached that developing countries contributed most to reducing the public do not have favorable prospects in devel- Korea's exchange rate has had a greater deficit. There have also been more auto- oped country markets. effect than other domestic economic vari- matic stabilizers and a decline in depen- The results that Balassa presents ables on its exports, which have been key to dence on foreign trade tax. conflict with the earlier claims. Hisresults its outstanding economic growth. Thus Thailand's pattern of deficit finance indicate that developedcountries'imports Korea's use ofthe exchange rate as a policy has contributed to macroeconomic stabil- from developing countries tend to grow variable makes good sense and should be ity. In times of high deficit, the govern- faster than the developed countries'gross continued as long as domestic and foreign ment relies less on borrowing from the domestic product. And despite the alleged inflation rates differ. central bank and more on borrowing from increase in import barriers in developed commercial banks and the private sector. countries after 1973, the growth of devel- Korea's exports have made an important Money-financed deficits are more likely opingcountries'exports to these countries contribution to its outstanding economic to exacerbate inflation and the current accelerated duringthe period. Al percent growth. Its exports, in turn, have been account deficit than any other method of rise in the gross domestic product of de- affected by domestic economic variables, deficit financing. The strong growth of veloped countries was associated with a including exchange rate policy, and by the Thai economy is attributable partly to 1.2 percent increase in their nonfuel im- external influences. appropriate fiscal responses to external ports from the developing countries in Among domestic economic variables, shocks. Stable priceshelped facilitate the 1967-73, and the corresponding estimate the exchange rate appears to have had a depreciation ofthe real effective exchange is 2.6 percent for 1973-88. greater influence on exports than changes rate, further strengthening export and Among groups of developing coun- in export prices or changes in the prices of output growth. tries, exports grew more rapidly in coun- competing domestic goods. Taking into This paper - a product of the Macro- tries that pursued outward-oriented poli- account that Korean exports are influ- economic Adjustment and Growth Divi- cies. In turn, continual inward orienta- enced by external factors, such as foreign sion, Country Economics Department - tion led to losses in export market shares. export prices and foreign incomes, does is part of a PRE research project, The These results are reinforced when indi- not affect this conclusion. Macroeconomics of the Public Sector vidual countries are considered. Korean imports are affected by do- Deficit (RPO 675-31). Copies are avail- At the same time, the product compo- mestic income, the exchange rate, import able free from the World Bank, 1818 H sition of developing countries' exports of prices, and the prices of competing do- Street NW, Washington DC20433. Please manufactured goods exhibits a consider- mestic goods. Again, the influence of the contact Raquel Luz, room N11-057, ex- able upgrading of exports between 1963 exchange rate is greater than that of im- tension 34303 (73 pages). and 1988. There was a shift from wood port prices and the price ofdomestic goods. products and furniture and the group of The results indicate that Korea can other industries to engineering products usefully employ the exchange rate as a 634. Trends In Developing Country as well as changes in the product compo- policy variable. This has been the case Exports, 1963-88 sition of several product categories. during much of the 1965-88 period that Despite the operation ofthe Multifibre Balassa considers, except for 1975-80, Bela Balassa Arrangement (MFA), developing coun- when it led to a substantial overvaluation tries' exports oftextiles and clothing grew of the currency. Korea should also use the Contrary to earlier theories, developed only slightly less than the total manufac- exchange rate in the future as long as countries' imports from developing coun- tured exports of these countries. And the domestic and foreign inflation rates dif- tries tend to grow faster than the devel- exports of wearing apparel that were sup- fer. oped countries' gross domestic product. posed to be particularly affected by MFA This paper - a product of the Office And despite the alleged increase in devel- limitations grew more rapidly than the of the Vice President, Development Eco- opedcountries'import barriers after 1973, overall average. nomics - is part of a larger effort in PRE Policy Research Working Paper Series 115 to examine exchange rates and trade poli- invdlve providing credit on the basis of the wage bill was reduced by uniform cuts in cies in developing countries. Copies are mutual trade of the countries concerned real wages - so the wage and the overall available free from the World Bank, 1818 rather than their total trade. And while distribution of income remained practi- H Street NW, Washington, DC 20433. clearing arrangements would bring some cally unchanged. The real income of pen- Please contact Clare Cuskelly-Young, benefit, the countries in question should sioners' households decreased almost as room S9-047, extension 39413 (16 pages). pursue the objective of convertibility. much as that of workers' households. This paper - a product of the Office Farm and mixed households weath- of the Vice President, Development Eco- ered the crisis better than workers and 636. Economic Integration nomics - is part of a larger effort in PRE pensioners. This wasnot so muchbecause in Eastern Europe to examine reforms in the Eastern Euro- terms of trade between agriculture and pean socialist countries. Copies are industry improved, but because farmers Bela Balassa available free from the World Bank, 1818 and mixed households had more flexibil- H Street NW, Washington, DC 20433. ity about economic decisions. Farmers Among the alternatives for the future of Please contact Clare Cuskelly-Young, could change thecompositionoftheir crops the Council for Mutual Economic Assis- room S9-047, extension 39413 (22 pages). and mixed households could also vary tance, its dissolution seems most appro- their labor inputs between work in so- priate in view of differences in the extent cialized industry and private agriculture. and speed of reform among its Eastern 637. Poverty in Poland: 1978-88 This paper - a joint product of the European members. Socialist Economies Reform Unit, Coun- Branko Milanovic try Economics Departmentand the Coun- The Council for Mutual Economic Assis- try Operations Division, Country De- tance (CMEA) was established by Bul- As a result of Poland's economic crisis, partment IV, Europe, Middle East, and garia, Czechoslovakia, Hungary, Poland, which began in 1978, the proportion of North Africa Regional Office - was writ- Romania, and the Soviet Union in 1948 as Polish people living below the poverty line ten as a background paper for the 1990 a response to the Marshall Plan. But increased from 10 percent to almost 20 World Development Report on poverty. unlike the Marshall Plan it provided no percent. Farm and mixed (farm/nonfarm) Copies are available free from the World financial assistance to its member coun- householdsweatheredthecrisisbetterthan Bank, 1818 H Street NW, Washington, tries and its activities were limited to workers and pensioners - probably be- DC 20433. Please contact the World De- trade in the framework of bilateral and cause farmers could vary their crops and velopment Report office, room S13-060, multilateral negotiations. Because of workers in mixed households could choose extension 31393 (25 pages). centralized decisionmaking, the lack of between work in socialized industry or price signals, and the bilateral balancing private agriculture. of trade flows, the CMEA countries failed 638. Researching the Trade- to exploit their trade potential. And al- The economic crisis that began in Poland Productivity Link: New Directions though the smaller CMEA countries in 1978 significantly reduced the benefited from receiving Soviet energy population's average incomes (about 20 James Tybout and raw materials at low prices in ex- percent by 1988) and increased the pro- change for often poor quality manufac- portion of the population living below the No stable, predictable correlations have tured goods, these gains were more than poverty line by 10 percentage points. (It is emerged in studies of how trade policy offset by the losses suffered because of significant that 3.1million ofthe 7million affects productivity growth but market insufficient technical change and the estimated poor in Poland are the "new concentration seems to be an important straightjacket of the socialist planning poor.") factor. Research also suggests that in- system. The composition of the poor has also creased foreign competition tends to in- For the future of the CMEA, four changed. Before the crisis, most of the duce cuts in plant size, may improve tech- alternatives present themselves: main- poor lived in rural areas; now 70 percent nical efficiency, and appears not to be taining the present arrangements, of them live in cities. This change oc- closely linked with firm entry patterns. *marketizing the CMEA, reforming the curred because of a sharp jump in poverty CMEA, and dissolving the CMEA. In among workers in the socialized sector, Tyboutreviewstheliteraturelinkingtrade view of differences in the extent and the whose real wages declined. policy and productivity. He finds that: speed of the reform efforts in Eastern The most important direct cause of * The literature on X-efficiency ar- European countries, the last alternative increased poverty in the second half of the gues that exposure to foreign competition appears most appropriate. At the same 1980s was increased poverty in workers' induces managers to make an extraeffort time, the more developed CMEAcountries households. The second most important to eliminate efficiency, but makes fragile should seek association with the EC, fol- cause was demographic: in shifting to assumptions about the labor supply and lowed by membership. retirement, some workers' households changes in work incentives. For the transitional period, propos- joined the ranks of the poor. The only * Theliteratureoneconomiesofscale alshavebeenputforwardforestablishing group for which the incidence of poverty argues that when domestic firms enjoy payments arrangements among the decreased was mixed households. market power, extra competition from former CMEAcountries. These proposals Until the end of the period studied foreign producers can force producers to havelittletocommendthemastheywould (1988), no unemployment appeared. The expand or exit - but the net effect of 116 Policy Research Working Paper Series liberalization depends on demand shifts, come from the creation and death ofplants; tic content requirements. ease of entry or exit, and the nature of in others, size adjustments by incumbent Takacs developed a model to investi- competition. plants are what matter. Further, there gate the distortions, costs, and transfers * Arguments involving technologi- are systematic productivity differences among groups caused by the combination cal catch-up are equally fragile. Uncer- between entering, dying, and continuing of domestic content and compensatory tainty can lead producers to place a pre- plants. So turnover patterns play an export requirements. She applied that mium on flexibility that may mean sacri- important role in shaping productivity model to the protection scheme for ficing some productivity. differences. Uruguay's automobile industry. It is a mistake to think of productiv- The Bank's Industrial Competition, She found that the protective regime ity growth as an orderly shift in technol- Productive Efficiency, and Trade project keeps vehicle prices and domestic pro- ogy, says Tybout. Rather, the processes of focuses on linking entry, exit, and adjust- duction costs high and transfers large learning, innovation, investment, entry, ments in scale and technical efficiency sums to special interest groups. and exit are what matters. Trade orien- with exposure toaparticulartraderegime. Higher finished vehicle prices enz tation affects these processes through So far it appears that exposure to more courage more output from domestic as- many channels, often by influencing foreign competition is not closely linked sembly operations, but domestic content entrepreneurial ability to monitor new withpatterns offirm entry, tendstoinduce and compensatory export requirements technological developments or by reductions in plant size, and may cause discourage domestic assembly. The net changing the expected returns from inno- someimprovementsin technical efficiency. effect could either encourage or discour- vation. This paper - a product of the Trade age domestic assembly operations, de- Figures on productivity should be ap- Policy Division, Country Economics De- pending on the net impact of the regula- proached with skepticism, he concludes. partment - is part of a PRE research tions. In Uruguay, the effect is to encour- Problems of measurement error, project, Industrial Competition, Produc- age domestic assembly. disequilibria, and aggregation bias can tive Efficiency, and Trade (RPO 674-46). Part of the consumer loss from higher easily create the illusion of trends and Copies are available free from the World prices represents a transfer to the as- correlations that have no basis in the Bank, 1818 HStreetNW, Washington DC sembly industry; part a transfer to the economic processes we hope to capture. 20433. Please contact Dawn Ballantyne, domestic components manufacturers; and But Tybout reports on two new directions room N10-023, extension 37947(58 pages). part is an efficiency loss because domestic in thinking about productivity growth. production and assembly is costlier than The first is concerned with salvaging domestic production and assembly on the sectoral- and industry-level calculations 639. The High Cost of Protecting world market. by correcting for scale economies, adjust- Uruguay's Automotive Industry Trade in this industry should be lib- ment costs, or noncompetitive pricing. eralized. It would be possible to do so These approaches still suffer significant Wendy E. Takacs gradually within the framework of the measurement problems and aggregation current protective regime. Care should be bias, but give some sense of the robust- Uruguay loses between $17 million and taken not to inadvertently increase effec- ness of growth series to violations of tra- $35 million a year by protecting its auto- tive protection of the assembly industry ditional assumptions. mobile industry. Uruguayan consumers by, for example, phasing out domestic The second new direction concerns lose between $70 billion and $80 billion a content and compensatory export re- how plant heterogeneity shapes sectoral year on automobiles, transferring $36 quirements on kits faster than those on productivity growth. Newtechniquesfrom million to $44 million to domestic assem- finished autos - thus temporarily en- this infant (except for work on efficiency) bly operations and components manufac- couraging domestic assembly. field give a crude sense of the importance turers. This paper - a product of the Trade of entry, exit, and heterogeneity in shap- Policy Division, Country Economics De- ingproductivitygrowthpatternsandsome Domestic content requirements are partment-was prepared as background specifics on the nature ofaggregationbias regulations that mandate minimum per- material for the joint UNDPIWorld Bank in industry studies. centages of domestic value-added, or do- Trade Expansion Program, which pro- Tybout concludes that no stable, pre- mestic components for products sold vides technical and policy advice to coun- dictable correlations have emerged, al- within the country, or provide strong in- tries that want to reform their trade re- though in some countries and subperiods centives to substitute domestic for im- gimes. Copies of the paper are available there is some association between trade ported inputs. free from the World Bank, 1818 H Street flow patterns and indices of productivity Australia, Canada, and many Latin NW, Washington DC 20433. Please con- growth at the industry level, even after American countries have usedregulations tact Dawn Ballantyne, room N10-023, ex- correctingfor several measurement prob- of this type to foster a domestic motor tension 37947 (26 pages). lems. The effects of trade regimes on vehicle industry. The result is often do- productivity growth seem to be related to mestic assembly operations that import market concentration, although the na- "kits" or sets of components from abroad ture of this association is unstable. and combine them with domestically pro- Patterns ofindustrial evolution show duced components to produce a finished a surprising diversity. In some econo- vehicle. Some countries superimposed mies, much ofoutput fluctuation seems to export promotion policies on these domes- Policy Research Working Paper Series 117 640. The Impact of Policy relatively cheap. When the variation of sumption for lack of access to credit mar- In African Agriculture: these factors has been taken into account, kets). An Empirical Investigation the remainingunexplained trendis only 1 If consumers cannot borrow against percent ayear, causedin partby declining human wealth and have no financial William Jaeger international prices for wheat and rice. wealth, their consumption is limited to .Jaeger establishes a link between current income. But the fraction of con- Policy in Sub-Saharan African countries policy reforms and the improvements ob- sumers for whom credit is rationed is linked with the region's agricultural served in agricultural performance in the changes over time, as monetary authori- performance. Exchange ratepolicies, high late-l980s. Countrieswithfavorablepolicy ties apply different quantitative instru- taxes on agriculture, andgovernment con- environments have performed better in ments and as financial markets evolve. trol of export marketing are associated the 1980s, on average, than those with Assuming rational expectations with the deterioration in agricultural ex- unfavorable policy environments. This throughout, Pedersen concludes that: port performance in 1970-87. And the has been true both in agriculture and in * Overall, the results support the policy reforms of the late 1980s - where overall economic growth. And in coun- life-cycle model of consumption. Not all sustained and effective - are linked with tries where policy reform programs re- intertemporal elasticities of substitution increased agricultural productivity. sulted in significant and sustained im- are estimated at significant levels. But provements in incentives (for example, first order conditions of the life-cycle Jaegerexamines the relationshipbetween Ghana and Togo), productivity has im- model, often referred to as Euler equa- government policy and agricultural per- proved substantially. But in countries tions, are estimated in well-behaved do- formance in Sub-Saharan Africa between where reforms have not led to improved mains for all countries when terms of 1970 and 1987. Using newly compiled incentives or where the improvements credit rationing are included. Thus, one data enabling a wider range of empirical were short-lived (for example, Tanzania part ofconsumers seems to plan spending analyses, the study assesses the impact of and Zaire), little response was observ- according to expectations of future real policy distortions on productivity over time able. interest rates and future income expecta- and across countries. It assesses export This paper is a product of the Trade tions, while another part is tied to the agriculture and food production sepa- and Finance Division, Technical Depart- current level of income because of lack of rately. ment, Africa Regional Office. Copies are credit opportunities. Also, tests seem to The analysis confirms that the dete- available free from the World Bank, 1818 approve the assumed expectation forma- rioration of Africa's agricultural exports H Street NW, Washington, DC 20433. tion. The axiom of the efficient market during the 1970s and early 1980s was Please contact Azeb Yideru, room J3-080, hypothesis is accepted at 5 percent for all associated with agriculture's high levels extension 34663 (69 pages, with figures countries but one, and the information of direct taxation and of indirect taxation and tables). set's orthogonality to consumption inno- through government controls and vations is not violated for any country. overvalued currencies. Government con- * There is more credit rationing in trols in the marketing and pricing of ex- 641. Intertemporal Substitution middle-income than in higher-income portcropshave contributedto the deterio- In Consumption: Evidence countries. And models for middle-income ration in export performance. But the for Some High- and Middle-Income countries are estimated with more uncer- large indirect distortions and disincen- Countries tainty (higher standard errors of regres- tives caused by exchange rate policies are sion), which may indicate that the as- what have distinguished African policy Karsten N. Pedersen sumption of a representative consumer is environments from those in non-African particularly vulnerable in the middle-in- developing countries. Econometric re- When credit constraints are taken into come countries. sults show that the responsiveness of ag- account, support is found for an optimiz- Despite the simplicity of the estima- 'ricultural exports to changes in incen- ing life-cycle model of consumption for a tion specification, the raison d'etre for the tives is moderate in the short run for group of high- and middle-income coun- life-cycle model of consumption is sup- countries exporting tree crops but more tries. These results suggest that consump- ported when a credit-rationing proxy is elasticin countriesexportingannual crops. tion by individuals is best described when included. It is especially encouraging The author also investigates Africa's it is assumed that one part of individuals that Euler equations can be estimated chronic food crises and questions the con- plans consumption in a classical optimiz- evenforhighlyinflationary regimes. More ventional wisdom thatrisingfoodimports ing fashion, and another part follows a precise estimates of the intertemporal and declining per capita production re- more Keynesian plan, where consumer elasticityofsubstitutioncouldbe achieved flect primarily a production problem. expenditures arerelatedto current income. by a more sophisticated mechanism for Econometric results indicate that most of credit rationing. But introducing more the rise in Africa's food imports is associ- Pedersen tries to find support for the life- parameters tends to complicate the esti- ated with shifting demand toward im- cycle model of consumption in a sample of mation problem, diminishing the likeli- ported foods, rather than a failure of middle- and high-income countries. He hood of arriving at a solution. supply. The main factors causing the puts forward an intertemporal model of This paper is a product of the global shift in demand are increasing urbaniza- consumption that allows credit rationing modelling project in the International tion,higherimportcapacity,andexchange for a fraction of consumers (with credit Economic Analysis and Prospects Divi- rate distortions that make imported food rationing defined as constraints on con- sion, International Economics Depart- 118 Policy Research Working Paper Series ment. The analysis here contributes to zil could influence world sugar prices sig- and similar production and export pat- the specification of a North/South model nificantly in the short run, it could not terns. Also, serious problems arose in with consistent intertemporal linkages influence them to its short- or long-term implementing the main objectives. Trade that will serve the division's long-term advantage by restricting production. In- liberalization wasblockedor substantially forecasting and scenario analysis for out- deed, to the extent that Brazil could make slowed down, highly protective barriers look papers. Copies are available free world prices more stable by allowing its to trade remained untouched or were from the World Bank, 1818 H Street NW, producers increased flexibility in produc- harmonized regionally, and controversy Washington, DC 20433. Please contact tion, removing existing production con- about the distribution of gains and losses Milena Hileman, room S8-214, extension trols could provide not only substantial could not be resolved. Dramatic changes 31284 (16 pages). economic gains (in terms of increased ex- in the world economy further affected the ports to Brazil)but alsomore stable world environment for regional integration and prices. For other producers, there could cooperation. 642. How a Change In Brazil's be a tradeoff in terms of lower but more But the formation of new, powerfui: Sugar Policies Would Affect stable income. economic and trading blocs- such as the the World Sugar Market This paper - a product of the Inter- single market of the European Commu- national Trade Division, International nity, the U.S.-Canada free trade area; Brent Borrell Economics Department - is part of a initiatives in the Pacific basin, and the larger effort in PRE to understand the transition to market economies in By changing its policy, Brazil could in- impact of changes in countries' trade Central and perhaps Eastern Europe - crease its sugar exportsgreatly. Theworld policies on world commodity markets. seems to have fostered a trend toward price would decline, but Brazil's sugar Copies are available free from the World new regionalism in the world economy. revenues would increase. Bank, 1818 H Street NW, Washington, The virtual failure of the GATT negotia- DC 20433. Please contact Audrey Kitson- tions may speed this up. To minimize Although Brazil is the world's largest Walters, room S7-053, extension 33712 economic losses and avoid margi- sugarcane producer, only one-third of the (30 pages). nalization, regional groups of developing cane it grows is used to produce sugar; the countriesmustincreasingly work out com- rest is used to produce ethanol as fuel for mon positions and join one of the influen- automobiles. Still, Brazil is the world's 643. Regional Integration among tial groups. Both factors require the fourthlargestsugarproducer. What would Developing Countries, Revisited gradual yet rapid dismantling of barriers it mean for Brazil and for the world sugar to thefree flowofproductionfactors within market ifBrazil were to shift largely away Andras Inotai regional groups. from ethanol to sugar production? New approaches to regional coopera- This question is of keen interest for The formation of new, powerful economic tion have emerged. Attempts to revitalize the world sugar market because such a and trading blocs and the transition to dormant regional groups, to form new shift - although politically difficult - is market economies in Central and perhaps blocs, and to set partly new priorities are possible. Brazil's system of controlling Eastern Europe has fostered a trend to- on the increase. Trade is the most impor- the sugarcane and sugar industries to ward new regionalism in the world tant element of the new initiatives, but ensure enough ethanol for domestic fuel economy-which the virtualfailureofthe assessments of the possibilities and lim- needs is costly. With the border price of GATT negotiations may speed up. To its of regional integration have changed petroleum at $24 a barrel, for example, minimize economic losses and avoid since the 1960s. the shadow price of ethanol as a fuel marginalization, regional groups of de- Stabilization and adjustment policies substitute is about 4 to 5 cents a pound in veloping countries must increasingly work have created more open, export-oriented, sugar equivalent. (The world price of out common positions and join one of the liberal, and competitive economies. sugar is now 9 cents a pound.) influential groups. Higher exports have generated more Borrell uses a nine-region trade model growth and regional demand. Industrial of the world sugar industry to study this Economic integration among developing restructuring has improved competitive- question under both dynamic and sto- countries became an important policy is- ness, attracted international capital and chastic simulations. Simulations were sue in the 1960s and early 1970s. But technology, and opened up areas of intra- run on sustained increases in Brazilian although intraregional trade increasedin industrial division of labor. Export-ori- sugar production of 0.5 million tons, 2 some trading groups, it remained a mod- ented economies have provedincreasingly million tons, and 6 million tons. To exam- est share of total trade, tended to decline competitive in extraregional markets. ine the sensitivity of Brazil's influence on in the 1970s, and stagnated during most In most cases it was not the regional price at differentphases of the world sugar of the 1980s. In addition, ambitious plans training but successful outward-looking pricecycle, these sustainedincreases were for joint industrialization could not be policies that improved competitiveness simulated from two different start dates, implemented. within the region and resulted in higher Moreover, the model was run 60 times Thisfailurecouldbeattributedpartly intraregional trade volumes. The over the period 1985-2004, with different to the smallness of most of the markets, strengthening of the private sector and shocks representing random elements different political andeconomic policyori- closer cooperation in infrastructure de- such as weather. entations, the low level of economic, in- velopment (mostly the more efficient use Borrell concludes that although Bra- dustrial,andinfrastructural development, of human resources) support the shaping Policy Research Working Paper Series 119 of an environment conducive to new op- system. Terms of trade for the USSR recommended - whether such arrange- portunities for better regional trade. should improve because its main export to ments include or exclude the Soviet Union. Obviously, intraregional trade can- theCMEA-energyproducts-hasbeen Such credit helps countries finance not become an alternative to trade flows undervalued. But if payments are settled intraregional balances, which have little that are basically oriented to the world in hard currency, other countries of East- economic justification and could result market. But in the 1990s, intraregional ern and Central Europe are going to re- primarily from the participants' ineffec- trade and economic relations are likely to quire more financing at a time when they tive macroeconomic policies. grow parallel to, or even at a higher rate are already short on foreign exchange. This paper - a joint product of the than, extraregional contacts. * All countries may not reach full Policy and Review Department and the This paper - a product of the Trade currency convertibility in the near term, Trade and Finance Division, Technical Policy Division, Country Economics De- and old CMEA arrangements cannot con- Department, Europe, Middle East, and partment - is part of a larger effort in tinue so what interim payment arrange- North Africa Region -is part of a larger PRE to study new developments in re- ments can be made among these coun- effort in PRE and the Region to investi- gional integration and their relation to tries and between them and the USSR? gate the challenges of economic reform in trade strategies. Copies are available Michalopoulos and Tarr focus on pos- Central and Eastern Europe. Copies are free from the World Bank, 1818 H Street sible interim institutional arrangements available free from the World Bank, 1818 NW, Washington, DC 20433. Please for trade and payments among previous H Street NW, Washington, DC 20433. contact Dawn Ballantyne , room N10- members of the CMEA and how such Please contact Maureen Colinet, room 001, extension 37947 (51 pages). arrangements can help address emerging 812-045, extension 34698 (31 pages) imbalances in payments. They recom- mend the following: 644. Trade and Payments * Fundamentaltradereforms should 645. Poverty, Policy, Arrangements In Post-CMEA allow Eastern and Central European en- and Industrialization: Eastern and Central Europe terprises autonomy to negotiate and con- Lessons from the Distant Past clude contracts directly with foreign firms Constantine Michalopoulos and David Tarr or agents in the former CMEA countries, Ben Polak and Jeffrey G. Williamson to be under no state obligation, and to Suggestions about how trade and pay- bear the risk of their contracts. Competi- In the first stages of an industrial revolu- ments can be arranged on an interim basis tion should be encouraged by minimizing tion, real wage rates for unskilled workers among the countries of the Council of or eliminating licensing and price equal- grow only slowly (the poor benefit, but not Mutual Economic Assistance and the ization and the monopoly trading privi- proportionately). After that, real wages USSR now that the CMEA has collapsed. leges of foreign trading organizations. for the unskilled increase proportionately. Trade should be at world prices and - Meanwhile, modern economicgrowth may The web of trade and payments arrange- until convertibilityisachieved-denomi- erode traditional entitlements that serve ments binding countries of Eastern and nated and settled in dollars (convertible as safety nets in preindustrial societies. Central Europe under the Council of currency). Mutual Economic Assistance (CMEA) * These countries' commitments to Pessimists sayindustrialization increased agreements is incompatible with these introducing competitive exchange rates poverty; optimists sayit didn't. Polak and countries' recent commitments to move and a degree of convertibility should be Williamson argue that how much indus- towardliberalizedtrade and currencycon- encouraged. Countries might not achieve trialization eradicates poverty depends vertibility. convertibility at the same rate; the USSR on the form industrialization takes. Not But the importance to these coun- in particular may lag behind. If so, mul- economic growth by itself, but the pro- tries' total trade of their trade with other tilateral clearing arrangements with cesses and policies associated with differ- CMEA members - and the apparent de- strictly limited time settlements (no more ent growth regimes make the poor poorer. sire of the USSR and others to denomi- than three months) may be a useful in- The better we understand that, the better nate all future mutual trade at interna- terim measure and can be established we can understand how contemporary tional prices - poses a number of prob- without outside contributions. Short economic growth may aid or impede lems of transition for the countries of settlement periods are certainly prefer- progress in eradicating poverty in the Eastern and Central Europe. able toasystem in whichbilateral balanc- Third World. MichalopoulosandTarridentifythree ing of trade is forced. In along essay (with many tables and broad problems in this connection: * Moreambitiouspayments schemes figures), Polak and Williamson address * The breakdown of the CMEA ar- -patternedafterthe EuropeanPayments two questions: First, what happened to rangements has led to a serious break- Union - are not desirable, as they may the proportionate share of the population down oftrade relations and reduced trade retard integration into the international living in poverty, and to the living stan- volume among former CMEA members. economy and introduce distortions in the dards of the poor, during nineteenth What interim arrangements can be intro- pattern of trade and the allocation of century industrial revolutions? Second, duced to facilitate trade? financing. why did poverty statistics behave the way * Denominating international trade * Providingoutside credit to support they did? at international prices implies changes in payments arrangements among Eastern They answer the first question by the terms of trade for each country in the and Central European countries is not drawing on official statistics on poor relief 120 Policy Research Working Paper Series in England and America, combined with of the Vice President, Development Eco- able to offer much assistance in African the famous poverty surveys done by Booth, nomics - was prepared as a background governments'design ofdevelopment strat- Rowntree, and others. The evidence sug- paper for the 1990 World Development egies. Case studies of C6te d'Ivoire and gests that in the early stages of industri- Report on poverty. Copies are available Ghana support the conclusion that there alization, the poor benefited less than free from the World Bank, 1818 H Street is much room for increasing the effective- proportionately from economic growth, NW, Washington, DC 20433. Please con- ness of aid to Sub-Saharan Africa. but that rapid increases in real wages for tact the World Development Report office, Determinants of the effectiveness of unskilled labor subsequently led to sig- roomS13-060, extension 31393(145 pages, aid can be broken down into factors lo- nificant improvement in the well-being of with figures and tables). cated primarilyin recipient countries (the the poor. policy environment and institutional or In answering the second question, absorptive capacity) and those relating theyidentifyand discuss four factors that 646. The Developmental primarily to conditions and policies in* might affect the poor during an industrial Effectiveness of Aid to Africa donor countries (the worldeconomic envi- evolution: ronment and the policies and practices of * Inequality andtheliving standards Tony Killick aid agencies). of the poor will respond to technological Recipient-country policies are the de- events. InEnglandandAmerica,unskilled Aid to Sub-Saharan Africa has been less cisive influence on the effectiveness of labor-saving technological progress effective in promoting economic develop- program, sectoral, and project aid. Policy initially tended to retard growth in de- ment than has aid to other regions. Poli- mistakes in particular have contributed mand for unskilled labor, inequality rose, cies in the recipient countries ofAfrica - to declines in export market shares and in and the poor failed to share proportion- though certainly not the only factor-play saving and investment. ately in economic progress. But this pro- the most important role in determining Absorptive capacity - the economic cess was quickly reversed: real unskilled aid's effectiveness. At the heart of the system's ability to put additional aid to wage rates grew rapidly, and poverty de- problem is politics, and the solution rests productive use - is weakened by skill clined. in the hands of the people of Africa. shortages, weak policies, institutional * The cost of living for the poor may weaknesses, and budget constraints and rise, eroding their living standards in Killick uses an informal analytical frame- recurrent costs. But ofmore fundamental ways conventional income statistics may work to assess the developmental effec- importance are basic structural weak- fail to capture. The cost of food and urban tiveness of aid to Sub-Saharan Africa. nesses of Sub-Saharan African economies housing rose disproportionately, for ex- The framework provides a production and the adverse characteristics of some ample -andindustrialization cheapened function-type equation for determining political systems and processes. A crisis the goods the poor produced relative to income growth and conveys that: of governance in some Sub-Saharan Afri- the goods they consumed. * There are many influences besides can countriesis afundamental obstacle to * The early stages of industrial revo- aid on country economic performance. increasing the developmental effective- lutions may undermine both the earning * Domestic policies have a pervasive ness of the aid they receive. potential of secondary unskilled workers influence on the whole system. The effects of the hostile global eco- and the secondary earning sources of pri- * Aid also has an important influ- nomic environment are often aggravated mary unskilled workers. Polak and ence, in raising import and investment by donor-countrypolicies, particularly the Williamson focus onhow technical change capacity and in other ways. trends and policies that worsen Africa's affected the demand for old labor, child Agency evaluations of the overall ef- terms of trade, debt-servicing burdens, labor, and female labor - particularly fectiveness of aid record fairly high levels and access to world savings. Some donor- the cottage or domestic industries that of project success, but it is unclear how country policies and practices, such as are important to some of the poor. much weight should be placed on these using aid to promote foreign policy or Modern economic growth may erode results, particularly with respect to commercial objectives, reduce the quality traditional entitlements that serve as projects' ability to reach the very poor. A of aid and thus its potential developmen- safety nets in preindustrial societies. It review of the literature on the effective- tal value. Donor agency weaknesses fur- maybe convenienttothink otherwise, but ness of adjustment lending programs ther diminish the value of aid. typically the poor in preindustrial Euro- shows that they help raise economic per- Killick suggests that the problem of pean and North American societies were formance to some degree but less than aid effectiveness is not technocratic nor not supported by the family and private dramatically. It is even less clear that due to a shortage of advice. Politics lie at institutions. Much of the responsibility they are socially cost-effective. The evi- the heart of the problem. It is for the for the poor lay with the state and other dence on aid effectiveness favors a moder- people of Africa to resolve their gover- formal, statelike institutions that inter- ately positive but still rather tentative nance problems - and there are poten- vened in food markets. Where laissez- verdict. tially important stirrings of political faire policies were adopted during the The author presents evidence on aid change. And although donors have to Industrial Revolution - as in America in Africa that suggests that the high past work with existing governments, they and England - many of the poor, espe- levels of aid have been unable to prevent shouldbe more selective in those they aid. cially the extremely poor, became more serious economic deterioration and that Political changes are needed to break vulnerable to adverse events. its effectiveness is considerably less than the logjam on these issues of effective- This paper - a product of the Office in other regions. Nor have donors been ness, and the present state ofworld affairs Policy Research Working Paper Series 121 may facilitate the necessary reordering of method depends on exchange rates with people directly. For most poor house- policy priorities by donors and recipients. changes in welfare. Second, the World holds, the labor marketis the most impor- Engineering a fresh start in assisting the Development Report gives greater weight tant source of income, as they rarely own developmentof Sub-Saharan Africa coun- to the growth rates of richer countries much capital. So Fox and Morley focus on tries should become the priority for the (not necessarily the most populated ones), the effect Brazil's policies had on its labor newly created Global Coalition for Africa. which is highly questionable for measur- market. This paper - a product of the Debt ing welfare. Their counterfactual simulationssug- and International Finance Division, In- Kakwani proposes an alternative gest that Brazil could have dealt better ternational Economics Department - is procedure for calculating aggregate with rising levels of poverty in the 1980s part of a larger effort in PRE to assess the growth rates, one more suitable for com- ifit had been able to reach political agree- availability and potential growth impact paring different countries' welfare. ment on areducedlevel of consumption in of alternative forms of external finance This paper - a product of the Wel- either 1982-83 or 1985 (by reducing gov- for Sub-Saharan Africa. Copies are avail- fare and Human Resources Division, ernment spending orincreasing taxes and able free from the World Bank, 1818 H Population and Human Resources De- thereby reducing private consumption). StreetNW, Washington, DC 20433. Please partment - is part of a larger effort in This was difficult, as the loosening of contact Sheilah King-Watson, room S8- PRE to develop measures suitable for authoritarian controls gave voice and 040, extension 33730 (63 pages, with fig- tracinga country's developmentovertime, power to new groups, bringing a rush of ures and tables). with special emphasis on the welfare of pent-up demand for consumption, espe- the population. Copies are available free cially government services. Ironically, from the World Bank, 1818 H Street NW, the failure to exercise restraint in the 647. Growth Rates Washington, DC 20433. Please contact early and middle years of the decade com- and Aggregate Welfare: Brenda Rosa, room S9-137, extension prised growth for the rest of the decade, An International Comparison 33751 (62 pages). hurting all groups. Brazil's wage policies in the 1980s Nanak Kakwani strongly benefited formal sector workers, 648. Who Paid the Bill? especially during the recession. In this An alternative procedure for calculating Adjustment and Poverty in Brazil, Brazil's experience differs sharply from aggregate growth rates is developed, one 1980-95 many other countries during stabiliza- more suitable for comparing different tion. Moreover, during the recession, pri- countries' welfare. M. Lnuise Fox and Samuel A. Morley vate sector firms did not reduce employ- ment as fast as output declined - choos- Kakwani explores the relationship be- By choosing an expansionary fiscal path, inginsteadto stockpilelabor and sacrifice tween growth rates and changes in wel- Brazil traded growth in the middle years profits. The indirect effects (the income fare, using alternative procedures for of the decade for inflation and a larger multiplier effects) appear to have been measuring growth. debt three years later. Fox and Morley strong enough to have prevented real in- The Bank and other organizations look at the impact of that trade-off on comes in the informal sector (including commonly compute growth rates by fit- poverty alleviation in Brazil, where in agriculture) from falling relative to the ting a least-squares linear trend line to 1987 roughly 45 million people lived in formal sector. When private formal sec- the logarithmic values of economic indi- households below the poverty line. tor output increased in 1983-86, so did cators for a period. But is the least- employment. If the government had not squares procedure appropriate for mea- Against a regional record of negative per tried to protect the wages of lower-skilled suring people's economic welfare over capita growth after the world recession private sector workers, firms would prob- time? and debt crisis of 1982, Brazil stands out ably not have increased employment, but Kakwani develops a conceptual as a model for a different path. By effec- increased profits. framework for deriving an aggregate tively failing to adjust internal demandto Brazil can stabilize and return to a growth rate from a welfare function de- the decline in external funds, Brazil set sustainable growth path in the 1990s, fined in terms of levels of per capita in- records in its region in per capita growth contend Fox and Morley, if all groups comes in different years. Using this func- and inflation between 1982 and 1988. (including the poor) suffer a short-run tion, he derives the welfare implications By choosing an expansionary fiscal loss. This loss would be short-run only if of alternative procedures for estimating path, Brazil traded growth in the middle the stabilization is effective within a short growth. The new procedure captures all years of the decade for inflation and a time and private investors become confi- the desirable properties of a welfare func- larger debt three years later. Fox and dent enough to invest again. The ulti- tion. Morley look at the impact of that trade-off mate result should be higher employment Kakwani also deals with the issue of on poverty alleviation in Brazil, where in and earnings and greater government aggregating growth rates over countries. 1987 roughly 45 million people lived in ability to increase social services to the If one is interested in judging the growth households below the poverty line. (In poor. Arepeat ofthe stabilization failures rates for all countries in Africa, for ex- Latin America, only Mexico has a total of 1986-89 offers grim prospects for the ample, there are two drawbacks to using population greater than the number of poor. the country classifications developed for poor people in Brazil.) In short, prospects for reducing pov- the WorldDevelopment Report. First,the Macroeconomic policy affects few erty depend on whatmechanism is chosen 122 Policy Research Working Paper Series to expand the private formal sector. In ment, Latin America and the Caribbean 651. Taxation of Financial Assets the 1970s and again in 1984-85, output Regional Office. Copies are available free In Developing Countries growth in this sector brought both formal from the World Bank, 1818 H Street NW, sectoremploymentgrowth(higherpaying Washington, DC 20433. Please contact Christophe Chamley jobs) and higher incomes in the informal Barbara Diallo, room 14-196, extension sector - more so in the southern part of 30997 (12 pages). The administrative cost of implicit taxes the country, whereformalization is greater on financial assets - seigniorage, reserve and where the private sector has a greater requirements, lending targets, and inter- share of formal sector employment. Suc- 650. Administrative Valuation est ceilings - is low. But the excess bur- cessful stabilization, adjustment, and of Soviet Agricultural Land Results den that stems from the misallocation of growth should benefit the northeast but Using Lithuanian Production Data resources is probably a much higher will probably do so less than in the south. fraction of revenues than that of other And stabilization will be especially diffi- Karen Brooks taxes. cult for major cities in the northeast. Re- ducing poverty in this area will require New land tenure arrangements in the In developing countries, most financial policies that make growth more efficient Soviet Union require those who farm the assets in formal markets are deposits at at proverty reduction (improving the rate land to pay for its use. But Soviet land financial institutions. This potentially of trickle-down). markets areconstrainedor ineffective, and important tax base could be taxed at a low This paper - a product of the Coun- land use fees must be set administratively. administrative cost. try Operations Division, Country Depart- When revenues of financial taxes are ment I, Latin America and the Caribbean New land tenure arrangements in the significant, implicit taxes dwarf explicit Regional Office-was preparedasaback- USSR require that agricultural produc- taxes. Chamley focuses on the implicit ground paper for the 1990 WorldDevelop- ers pay for land use. The current dis- taxation of financial assets through ment Report on poverty. Copies are avail- torted pricing system and the absence of seigniorage, reserve requirements, lend- able free from the World Bank, 1818 H functioning land markets complicate land ingtargets, andinterestceilings combined Street NW, Washington, DC 20433. Please valuation, and slow the adoption of new with inflation. The last instrument has contact the World Development Report property relations. often been overlooked, but it has gener- office, room S13-060, extension 31393 (45 In a market economy that functions ated more than a third of implicit rev- pages). well, agricultural land would earn its enues in some cases (Nigeria), by lower- approximate marginal value product in ing the cost of government borrowing. agricultural production. This value can Tax revenues are difficult to measure 649. An Observation on the Bias be measured empirically from production because of regulations that prevent the In Clinic-based Estimates data and can serve as an appropriate use of market prices for computation and of Malnutrition Rates initial value for users' fees. distort the meaning of some definitions. Brooks estimates marginal value For some countries, the standard method Margaret E. Grosh, Kristin Fox, products for land for 1,032 collective and of seigniorage grossly underestimates the and Maria Jackson state farms in Lithuania using farm-level revenue from financial taxation. data for 1986 and 1987 and compares the In Sub-Saharan countries, the im- The bias in clinic-based estimates of mal- marginal value products derived from pact of taxation is small and hard to nutrition rates is large and variable in actual received producer prices with those detect when the financial burden is low. this sample. derived from border prices with alterna- In countries with repeated experiences of tive assumed exchange rates for the ruble. high taxation, the impact has been sub- Clinic-based data on malnutrition are the This paper - a product of the Agri- stantial (more than 50 percent of rev- most readily available for following mal- cultural Policies Division, Agricultural enues on the margin). In countries with nutrition levels and trends in most coun- and Rural Development Department -is more developed financial markets, such tries, but there is a bias inherent in clinic- part of a larger effort in PRE to analyze as Thailand or Indonesia, the excess bur- based estimates of malnutrition rates. the agricultural transition in former cen- den of taxation is very large even for small Grosh, Fox, and Jackson compare trally-planned economies. Copies are values of the (implicit) tax rates. annual clinic-basedmalnutrition dataand available free from the World Bank, 1818 The author discusses various sources those from four household surveys in Ja- H Street NW, Washington, DC 20433. of distortion but ignores potential im- maica. The clinic data give lower esti- Please contact Cicely Spooner, room N8- pacts on the level of savingandthe growth mates of malnutrition than the survey 039, extension 30464 (26 pages, with rate. data in all four cases - significantly so in tables). Although taxes on financial assets three. have a low administrative cost, the excess The size of the bias was variable over burden that stems from the misallocation time, so the clinic data were not a good of resources is probably a much higher indicator of either levels or trends in nu- fraction of revenues than that of other trition status. taxes. This paper is a product of the Human This paper - a product of the Public Resources Division, Technical Depart- Economics Division, Country Economics Policy Research Working Paper Series 123 Department - is part of a larger effort in development. These results are quite robust under a PRE to reform taxes in developing coun- Economic downturns not associated number ofunderlying assumptions. Posi- tries. Copies are available free from the with famine appear to have little short- tivenetbenefitsstemmingfromfundhedg- World Bank, 1818 H Street NW, Wash- term impact on mortality. Famines, ing can occur even when the welfare gains ington, DC 20433. Please contact Ann whether associated with major economic to producers and consumers stemming Bhalla, room N10-055, extension 37699 downturns or not, appear to have major from the stabilization program are small (62 pages, with figures and tables). short-term effects on mortality. Recent or nonexistent. evidence for such a conclusion (including To the extent that international prices Chinainthelatel950sandpossiblyGhana follow a log-normal random walk, the 652. Demographic Response in the early 1980s) is bolstered by the stochastic component of price variability to Economic Shock historical record from Europe. can become overwhelming in relatively This paper - a product of the Office large samples of 500 observations in- Kenneth Hill of the Vice President, Development Eco- creasing the error associated with price nornics - was prepared as a background expectations and hampering the ability of ,Economic downturns not associated with paper for the1990 World Development fund management to determine long-run famine appear to have little short-term Report on poverty. Copies are available "reasonable" prices. While hedging tech- impact on mortality. Famines, whether free from the World Bank, 1818 H Street niques are perhaps more obviously useful associated with major economic down- NW, Washington, DC 20433. Please con- when the stochastic component of price is turns or not, appear to have major short- tact the World Development Report of- large, similar risk benefits occur under term effects on mortality. fice, room S13-060, extension 31393 (29 simulations in which prices are determin- pages). istic and only international supplies con- The clear division of the world in the tain a random component. 1950s and 1960s into rich countries with Hedging techniques will not render low fertility and mortality and poor coun- 653. The Effects of Option- the funds immortal; they will generate tries with higher fertility and mortality Hedging on the Costs of Domestic revenue-based risk benefits for govern- was used to support strongly held views Price Stabilization Schemes ments backing the funds, and can gener- that economic development was neces- ate benefits to producers and consumers sary for demographic change (particu- Donald F. Larson and Jonathan Coleman by extending the probable lives of the larly a decline in mortality) and that de- stabilization schemes. mographic change (particularly a decline Whether a stabilization fund is hedged or This paper - a product of the Inter- in fertility) was necessary for economic not, it will inevitably generate large national Trade Division, International development. amounts of debt. But hedging the fund Economics Department - is part of a Cross-sectional relationships between will make it more likely to survive in the larger effort in PRE to improve the devel- mortality or fertility and economic indi- short term. opingcountries'managementofcommod- cators have been used to argue both for ity price risks. Copies are available free and against national or international Casual observation leads to the conclu- from the World Bank, 1818 H Street NW, health or family planning interventions. sion that commodity-stabilization funds Washington, DC 20433. Please contact Policymakers want increasingly to know tend to be short-lived. While some funds Dawn Gustafson, room S7-044, extension to what extent short-run economic fluc- may have failed because of poor manage- 33714 (23 pages, plus 19 pages of an- tuations result in short-run demographic ment or unwarranted political interven- nexes). fluctuations. tions, the stochastic components of com- Hill addresses this question with modity prices can generate insurmount- special attention to the possible effects on able difficulties for even the most expert 654. Reflections on Credit Policy mortality of the Third World economic managers. Bytransferringpriceriskfrom in Developing Countries: crises of the 1980s. He examines the domesticproducersandconsumerstogov- Its Effect on Private Investment historical record, working backward from ernment-backed stabilization funds, these the recent past to periods before the de- programs generate welfare benefits that Mansoor Dailami and Marcelo Giugale mographic transition. end abruptly when the funds fail. The historical record, he concludes, In the context ofa price-taking coun- The joint effect ofboth the volume ofcredit does not support the existence of strong try stabilizing domestic prices through and its price- that is, the interest rate - short-run responses in mortality to eco- variable border tariffs, Larson and is relevant to firms'investment decisions. nomic change and sometimes not even Coleman annotate the circumstances un- So effective credit policy in developing longer-term relationships. Clearly the der which fund resources face large or countries musttake into account the influ- strong cross-sectional relationship now unlimited liability and provide a simple ence of both the credit supply and the evident between mortality and economic strategy of hedging with commodity op- interest rate, not just one or the other. status must have arisen through some tions to limit fund risk. Using stochastic such long-term relationship. But fertility computer simulations, the authors dem- Previous approaches to credit policy and and mortality levels are low in Cuba and onstrate that using financial options will its role in the stabilization and adjust- Sri Lanka, for example, despite less-than- generate positive net welfare gains for the ment of developing countries have em- impressive improvements in economic government agencies backing the funds. phasized either the role ofthe availability 124 Policy Research Working Paper Series of credit or the role of its price - that is, 655. Interest Rate Policy In Egypt: deficit, reforming public enterprises, and the interest rate. Dailami and Giugale Its Role In Stabilization streamlining public investment. But the argue that effective credit policy in devel- and Adjustment increases in interest rates should be high oping countries must take into account enough to mark a clear departure from both interest rate and credit channels. Mansoor Dailami and Hinh T. Dinh past policies and to send the proper signal The authors develop their argument to economic agents. in the context of the link between credit Raising interest rates is clearly essential This paper - a joint product of the policy and private investment, using a to the success of any stabilization and Financial Policy and Systems Division, model offirms'investment behavior in an adjustment programs that Egypt under- Country Economics Department and the economy with takes. But to reduce the risks of higher Country Operations Division, Country exogenous, time-varying borrowing interest rates to its distorted economy, and Department III, Europe, Middle East, and constraints. The model incorporates a to increase the benefits, increases in interest North Africa Regional Office - is part of creditceilinglinkedtothefirms'networth rates need to be accompanied by other a larger effort in PRE to understand the and the state of the credit market. adjustment measures. role of financial markets in the stabiliza- The state ofthe creditmarket depends An appropriate interest rate policy is con- tion and adjustment process of develop- on factors - such as credit and interest sidered essential to the success of stabili- ing countries. Copies are available free rate policy, regulatory and supervisory zation and adjustment programs that from the World Bank, 1818 H Street NW, practices, and market sentiments - that Egypt might undertake. The broad objec- Washington, DC 20433. Please contact banks consider in making lending deci- tives of such a policy would include MariaRaggambi,roomN9-041,extension sions. These factors affectbanks'decisions deregulating credit and investment, rais- 37657 (34 pages, with figures and tables). independent ofaborrower's creditworthi- ing the interest rate, and developing a ness. Thus, in times of tight money, firms "core" short-term debt market to serve as that would otherwise have received loans areference pointformarket determination 656. Relative Deprivation may be denied them and have to postpone of interest rates. And as the government and Migration: Theory, Evidence, or cut back investment plans. moves away from a regulated environ- and Policy Implications Dailami and Giugale use their model ment of controlled credit and regulated to specify an equation relating aggregate investment toward amore liberal system, Oded Stark and J. Edward Taylor private investment to aggregate output interest rates will be the prices that guide and to two credit market variables - the investment decisions and ensure allocative Evidence on migration in and from Mexico real interest rate and aggregate credit. efficiency. shows that people in relatively deprived They estimate the equation for five devel- Dailami and Dinh describe some of households in their home village are more oping countries (Brazil, Colombia, India, the structural problems Egypt's economy likely to migrate abroad than people in Korea, and Turkey) using annual data for has faced in the past decade and policy households that are better positioned in 1965-85, and test the joint significance of initiatives that the government has un- that village. both interest rate and credit supply condi- dertaken, and review the economy's fi- tions. Their findings show that interest nancial sector. They analyze the role that Stark and Taylor examine the importance rates and credit volume exert a joint in- interest rate policy could play in Egypt's of absolute income and relative depriva- fluence on the behavior of private invest- stabilization and adjustment program, tion incentives for internal and interna- ment in the countries examined. particularly how it would affect the out- tional migration in developing country This paper - a joint product of the comes of the important objectives of at- households. Financial Policy and Systems Division, tracting workers' remittances, encourag- Empirical results, based on Mexican Country Economics Department and the ing domestic residents to hold deposits in village data, support the hypothesis that Country Operations Division, Country local currency, andincreasing investment households' relative deprivation in the Department III, Europe, Middle East, and efficiency. village reference group is significant in North Africa Regional Office - is part of Interest rates clearly need to be in- explaining migration by household mem- a larger effort in PRE to analyze the role creased. But the complexity and depth of bers to destinations where a reference of financial policy in the growth and ad- the distortions in both the real and the group substitution is unlikely and the justment process of developing countries. financial sides of the economy tend to returns to migration are high. Copies are available free from the World reduce the benefits of a sharp rise in Independent of relative deprivation, Bank, 1818 H Street NW, Washington, interest rates and increase the pressure village households wisely pair their mem- DC 20433. Please contact Maria onaweakfinancial system. Ofparticular bers with the labor markets in which the Raggambi, room N9-041, extension 37657 concern are the potential effects of higher returns to their human capital are likely (28 pages, withcharts,figures, and tables). interest rates on the investment perfor- to be greatest. The results suggest that a mance of the business sector and the sol- specific type of migration constitutes a vency of the banking sector. response to a specific configuration of The authors recommend thatchanges variables, and the role ofrelative depriva- in the level and structure ofinterest rates tion appears to differ for internal and be planned in several steps and carried international migration. out in conjunction with other adjustment Taking relative deprivation into ac- measures, such as reducing the budget count when studying migration is shown Policy Research Working Paper Series 125 to have important implications for devel- than labor to move abroad and thus evade investment-GDPratio barely compensated opment policy. For example, economic taxes-andwiththeexpectationofhigher for inflation. The country's fiscal stance development that does not redress taxes, capital is more likely to flee, reduc- hurt the real exchange rate and interna- intravillage income inequalities may be- ing capital stocks. Meanwhile, to gener- tional competitiveness. come associated with more migration. ate foreign resources, traded goods must This paper - a joint product of the expand, which requires a real devalua- C6te d'Ivoire represents an ideal opportu- Welfare and Human Resources Division, tion; this generates a conflict with nity for a case study of the effects offiscal Population and Human Resources De- non traded goods. policy in a developing country with afixed partment and the Agricultural Policies Diwan and Verdier argue that: exchange rate. For the last 15 years, the Division, Agriculture and Rural Develop- * Governments backed by constitu- growth of the Ivorian economy has been ment Department - is part of a larger encies from nontraded goods sectors are dramatically affected by both exogenous .effort in PRE to identify factors underly- more likely to default. factors and the responses of fiscal policy. ing rural change and rural economic * Without capital mobility, capital- After a commodity boom in 1976-77, performance. Copies are available free ists in import substitution will tend to expansionary fiscal policies increased the -from the World Bank, 1818 H Street NW, oppose the repayment sought by capital- price ofnontradable goods relative to trad- Washington, DC 20433. Please contact ists in export promotion. Workers' inter- able goods. Government deficits induced Maria Paz Felix, room S9-109, extension ests will depend on imports' share in their large external deficits. 33724 (42 pages). consumption basket. Chamley and Ghanem analyze the * With capital mobility, labor will structure of government spending and oppose the extent of debt repayment revenues to investigate whether there is a 657. Distributional Aspects sought by capitalists in both import sub- relationship between the large govern- of Debt Adjustment stitution and export promotion sectors. ment deficits and the Ivorian economy's * Self-fulfilling external default with poor performance during the 1980s. They Ishac Diwan and Thierry Verdier heavy capital flight is more likely when also examine what factors determine the the default penalty is inelastic and when real exchange rate and the external bal- Because external debt repayments have a left-wing government is in power. ance. distributional implications in the debtor * Assuming perfect bargaining, gov- This paper - a product of the Macro- country, domestic politics affect the for- ernments with constituencies thatoppose economic Adjustment and Growth Divi- mulation ofthe debt strategy. And domes- heavy debtrepayment can get better deals sion, Country Economics Department - tic opposition to heavy debt repayment can with creditors than governments sup- is part of a PRE research project, "The be a blessing for debt negotiators - who ported by groups that favor more debt Macroeconomics ofthe Public Sector Defi- are likely to get better deals with creditors adjustment. Opposition at home can be a cit" (RPO 675-31). Copies are available as a result. blessing for debt negotiators, as could be free from the World Bank, 1818 H Street seen by the last Venezuelan rescheduling NW, Washington, DC 20433. Please Diwan and Verdier explore how the for- agreement (which followed street riots contact Raquel Luz, room N11-057, ex- mulation of debt repayment policies can over price increases) and the recent Mexi- tension 34303 (65 pages). be affected by the nature of the can debtreliefagreement(whichfollowed decisionmakers and the strength of vari- a very close election). ousinterest groupsMost models of debtor This paper - a product of the Debt 659. Inflation and Growth in the countries assume that all individuals in and International Finance Division, In- Transition from Socialism: the economy are alike or that gainers ternational Economics Department - is The Case of Bulgaria compensate losers; most analysis ignores partofalargereffortin PRE to understand political considerations. But recent elec- the determinants of debt repayments by Andrds Solimano toral campaignsin Latin America suggest highly indebted developing countries. that debt policy may have important dis- Copies are available free from the World A fragile political-macroeconomic equi- tributive implications. Bank, 1818 H Street NW, Washington, librium is boundtoresultin high inflation - Diwan and Verdier argue that small DC 20433. Please contact Sheilah King- in the transition from socialism. The penalties can be enough to deter default if Watson, room S8-025, extension 33730 collapse ofgrowth inBulgaria is the result they hurt the interests of groups that are (31 pages). of cuts in oil deliveries from the Soviet closely associated with policymakers - Union and Iraq, domestic dislocation in especially when the costs of debt service the supply ofinputs following the disman- can be shifted to groups with less influ- 658. Fiscal Policy with Fixed tling of central planning, and the con- ence on decisionmaking. Nominal Exchange Rates: traction of the Soviet market. They focus on how debt policy affects Cte d'lvoire domestic conflict between labor and capi- Bulgaria's shaky macroeconomic situa- tal, between import substitution and ex- Christophe Chamley and Hafez Ghanem tion is a serious obstacle for a smooth port promotion sectors, and between transition from central planning to mar- traded and nontraded goods sectors. Debt Cte d7voire's increase in debt in the 1980s kets. It has to correct large current ac- service requires austerity, which is dis- (fr-om 30 percent of GDP to 100 percent) count deficits with the convertible cur- tributed unequally; capital is better able did little for new investment, because the rency area. It also has to eliminate in- 126 Policy Research Working Paper Series flationary pressures and large price dis- is part of a larger effort in PRE to conduct In the United States, consumers have tortions. And it has to get into a path of research onreforming socialisteconomies. benefited from the greater variety, lower sustainable growth. Copies are available free from the World prices, and wider availability of flowers. The links between inflation, money Bank, 1818 H Street NW, Washington, The U.S. economy also has benefited from velocity, the money overhang, and the DC 20433. Please contact Emily Khine, the employment opportunities created by fiscaldeficitarecrucialforassessingprob- roomN11-067,extension37471(51pages, the necessity to handle and care for the able inflationary trends in Bulgaria. with tables). increased volume offlowers at the whole- Solimano shows thatwith controlled prices sale and retail level. and financial repression, low velocity 660. The Development of the This paper - a product of the Trade keeps inflation at an artificially low level Colombian Cut Flower Industry Policy Division, Country Economics De- despite large fiscal deficits. But as prices partment - is part of a larger effort in are deregulated and the financial sector is Jos6 A. Mendez PRE to understand the economics of the reformed, velocity can be expected to in- emergence of "fairness" as a standard for crease - due to expectations of higher The Colombian cut flower industry is one regulating international trade, its impli- inflation and financial innovation. ofthe major development success stories of cations for the continued openness of the Solimano uses cost-determined price the last 20 years, growing from small international trading system, and its con- equations to explore the effects on domes- beginnings in 1966 to the world's second tinued functioning as an important ve- tic prices of a devaluation of the leva and largest exporter ofcutflowers in 1980. The hicle for development. Copies are avail- an increase in the price of foreign inputs industry also has become a major em- able free from the World Bank, 1818 H imported from the Soviet Union and other ployer of low-skill female labor. Street NW, Washington, DC 20433. Please CMEA countries. The input price shock contact Nellie T. Artis, room N10-013, has a bigger effect on internal prices than The Colombian cut flower industry is one extension 37947 (35 pages, with tables). does an equivalent devaluation. of the major development success stories The supply response to changes in ofthe last 20 years. The industry scarcely relative prices and market incentives is existed in 1966 but developed rapidly. 661. The Bretton Woods Agencies likely to face at least two major problems By 1980, Colombia was the world's and Sub-Saharan Africa at a micro level. First, the rules of op- second largest exporter of cut flowers af- In the 1990s: Facing the Tough eration for firms in the productive sphere ter the Netherlands, accounting for 8 Questions are still dominated by enterprises operat- percent of the world export supply of cut ing under soft budget constraints - with flowers, and it continues to hold that Richard E. Feinberg little price responsiveness. Second, in a position. settingofmonopolistic competition, where This rapid development has made The InternationalMonetary Fund and the individual firms have considerable mar- thecutflowerindustryamajorcontributor World Bank face a complex development ket power, full price deregulation may to the Colombian economy. Cut flowers challenge in Sub-Saharan Africa in the reduce output. are now the nation's leading coming decade. The World Bank should Bulgaria's moves toward a market nontraditional export and fourth largest take the lead in organizing external assis- economy are likely to affect growth earner of foreign exchange after coffee, tance efforts and structural reform pro- through several channels. The correction petroleum, and bananas. grams in this region. of macroeconomic imbalances - cutting The industry also has become a major imports and cooling aggregate demand to employer oflow-skill, largelyfemale labor Both the International Monetary Fund dampen inflationary pressures - will drawn from the low-income areas sur- and the World Bank recognize that Sub- contract aggregate economic activity. Re- rounding Bogota. In 1989, the industry Saharan Africa represents a difficult and forms ofthe incentive structure will make employed more than 70,000 workers and complex development challenge. part of the capital stock economically ob- generated another 50,000 jobs in such Feinberg proposes that the Bank and solete, hampering productive capacity in ancillary industries as packaging and the Fund take four institutional steps to the short run. The response of private transportation. deal effectively with the region's problems investment to the new incentives will be EvolutionoftheColombiancutflower in the near term: highly sensitive to macroeconomic sta- industry illustrates how the market sys- * The agencies should reconsider bility and the perceived probability that tem enables a society to coordinate its their planned net capital contribution to the reform process will last and consoli- economic activities in the most effective help overcome the region's severe foreign date. Otherwise, private investors will way. Historically, cut flower production exchange constraints. Anegativeresource wait before acting, delaying the resump- moved from the eastern United States to transfer could weaken the influence of the tion ofgrowth. Given these impediments, the western and southern states and then multilateral agencies and tighten the fi- external support in the form of new fi- to Colombia. nancial straitjackets already crippling nancing and direct investment will play a In both cases, development of air many countries in the region. major role in consolidating the reform transportation made markets accessible * The Brady proposals represented and in the resumption of growth. within hours from anywhere in the world. a major conceptual step forward toward This paper - a product of the Macro- This freed growers to shift production to alleviating the private debt overhang that economic Adjustment and Growth Divi- areas with favorable land and labor costs seriously burdens at least a dozen coun- sion, Country Economics Department - as well as a good growing climate. tries in the region. Additional efforts to Policy ResearchWorking Paper Series 127 reduce the private debts of the low-in- 662. Trends in Social indicators fare and Human ResourcesDivision, Popu- come countries will be needed to achieve and Social Sector Financing lation and Human Resources Department the objectives of the proposals. - is part of a larger effort in PRE to * The Bank's analysis of the prob- Jacques van der Gaag, Elene Makonnen, improve knowledge on trends in poverty lems facing the region argues for a faster and Pierre Englebert and its correlates: malnutrition, illit- and more comprehensive reform program. eracy, illness, and premature death. Cop- In the 1990s the Bretton Woods agencies Socialindicatorssince1960showthequal- iesareavailable freefrom theWorldBank, will faceincreasingpressures togive more ity of life improving in developing coun- 1818 H Street NW, Washington, DC weight to issues of social equity and politi- tries as a group. The aggregate picture 20433. Please contact Brenda Rosa, room cal variables. masks substantial differences. S9-137, extension 33751 (129 pages, with * The Bank and the Fund will have tables). to improve their ability to work together Over the past three decades, per capita to maximize their effectiveness in the GDP has increased worldwide. Van der 1990s. One way to achieve more effective Gaag, Makonnen, and Englebert exam- 663. Bank Holding Companies: cooperation between the agencies would ine whether this has resulted in better A Better Structure for Conducting be for them to synchronize their policies quality of life in developing countries. Universal Banking? on such issues as resource transfers, Their paper documents the evolution of commercial debts of middle- and low-in- social indicators (health, education, nu- Samuel H. Talley come countries, and economic and politi- trition), private consumption, and gov- cal conditionality. ernment expenditure on the social sec- Would bank holding companies bea better The World Bank and the IMF should tors. structure to conduct universal banking? collaborate in long-term planningfor Sub- The authors conclude that develop- The device contains some important ad- SaharanAfrica. PolicyFrameworkPapers ing countries made uneven progress in vantages, but the evidence now is limited should go beyond the three-year horizon the quality of life in the period under and unacceptably high risks for banks that current procedures now dictate and study. Among the key findings: could be one result. plan some issues for five to 10 years. * Health indicators (mortality, im- The Bank and the Fund should unite munization coverage, life expectancy) Banking systems in many countries have in an effort to produce strategic plans for showed stable improvements in all re- become increasingly unstable in recent the entire region to guide their own work gions, but Africa's rates were the slowest. years. At the same time, market forces and to give clear signals and realistic * Of all social indicators, education have pushed banks to expand into a vari- expectations to the region. The nations of made the greatest gains. In Africa, how- ety of universal banking activities, Sub-SaharanAfricaalsoshouldplaymajor ever, net enrollment ratios actually de- including some that appear to involve roles in designing these programs. creased in the 1980s. higher risks than traditional banking op- Collaboration will proceed more * Whiledevelopingnationsasagroup erations. smoothlyifone institution clearly has the enjoyed improved indices of undernutri- Talley notes that these trends have lead - and, in this region, the World tion in 1965-85, the degree of undernutri- prompted questions about whether re- Bank rather than the IMF should take tion worsened in more than one-third of structuring banking organizations might the leadin organizing external assistance Sub-Saharan African countries. permit them to pursue universal banking efforts and policy reform programs. Such * The two regions characterized by activities without impairing the stability an approach would be consistent with the economic difficulties in the 1980s - Af- of the banking system. 1989 decision to give the World Bank rica and Latin America and the Carib- The basic bank holding company pro- primacy over structural matters. bean - also saw declines in average per posal contains three major elements: This paper - a product of the Debt capita private consumption during that * Any bank that wants to operate as and International Finance Division, In- decade. a universal bank must first form a hold- ternational Economics Department - is * The share of total government ex- ing company and then conduct all riskier part ofa larger effortin PRE to assess the penditure on health remained stable in activitiesinholdingcompanyunitsrather availability of external resources to sup- all regions, but that of education declines than directly in the bank. The bank port African adjustment and growth in in Africa, South Asia, and Latin America would continue to engage in traditional the 1990s. Copies are available free from and the Caribbean. banking activities that involve the usual the World Bank, 1818 H Street NW, The authors also note that any effort levels of risk. Washington, DC 20433. Please contact to assess trends is severely hampered by * The government would develop Sheilah King-Watson, room S8-040, ex- lackofinformation. The quality ofexisting laws and regulations designed as safe- tension 33730 (32 pages, with tables). data is not systematically trustworthy, guards to insulate the bank from any and there are many gaps. The World financial problems that might occur in Bank and most bilateral and multilateral holding company affiliates of the bank. agencies are placing increasing emphasis * Bank regulatory authorities would on monitoring the impact of programs. impose little or no supervision on holding The need for simple, up-to-date data may company units. Instead, the marketplace trigger more vigorous data collection. would discipline the financial affairs of This paper - a product of the Wel- these affiliates. 128 Policy Research Working Paper Series The use of the bank holding company percent of all employees in the U.K. are In the past decade the developing coun- device to conduct universal banking ac- eligible to participate in share ownership tries have tried much harder to achieve tivities can promise important public ben- plans. macroeconomic stability than they have efitsincluding: (1) a sounder commercial An estimated 500,000 employee to eliminate inefficiencies from banking system, (2) less banking regula- profit-sharing plans existin the U.S., and microeconomic distortions. tion, and (3) greater competitive equality participatory plans are a major element L6pez has pursued a relatively new between banking and nonbanking units. in the industrial policy of such countries line of inquiry in examining measure- One major objective of using holding as Japan and Sweden. In developing ment of the social income losses induced companies to conduct banking activities countries, plans for employe participa- by the reduction of the investment effi- is to preserve banking stability. The evi- tion have emerged only recently. ciency caused by trade distortions. dence is inconclusive on whether holding The effect of employee participation Empirical findings of the study sug- companies could achieve this goal. schemes on firm performance is mixed. gest a strong negative effect of trade dis- The major risk is that policymakers Without privatization, evidence is strong tortions on the social efficiency of invest- may tend to assume that safeguards pro- that combining employee ownership or ment. Even a moderate, uniform tariff of tecting banks are invulnerable and allow profit sharing with some direct participa- 50 percent could cause a reduction in the holding companies to engage in risky ac- tion produces a positive impact on firm efficiency ofinvestment ofup to 23 percent- tivities they would never consider permit- performance. Under privatization, by compared with a 0 percent tariff. ting banks to conduct. If holding compa- contrast, there is no evidence that em- The (social) income losses caused by nies encountered serious problems be- ployee ownership alone will contribute to the reduced investment efficiency are cause of unduly high risks, banks affili- improved performance. considerable. Countries that have a ated with them could experience serious Employee ownership and other forms moderate investment ratio (about 20 per- damage as a result. of participation do appear to ease cent ofGDP)can experience social income This paper-a product of the Finan- privatization. Employee ownership pro- losses in excess of 18 percent in 30 years cial Policy and Systems Division, Country vides a sense ofsecurity to employees that if tariffs are about 50 percent. Economics Department - is part of a the risk of redundancy in the firm after The existence of labor market distor- larger effort in PRE to explore ways to privatization will be less. As a result, the tionscausingunemploymentmayincrease increase the soundness of banking sys- opposition of labor may decrease. the social value of capital. Capital accu- tems. Copies are available free from the Where layoffs do occur after mulation moves the economy closer to the World Bank, 1818 H Street NW, Washing- privatization, share ownership may production possibility frontier by in- ton,DC20433. Please contactZenaSeguis, complement a severance package. Share creasing employment. room N9-005, extension 37665 (24 pages). ownership also may mute worker opposi- This study confirms earlier findings tion to privatization in those countries about the relatively modest efficiency where employees believe that they have losses caused by the independent effects 664. Should Employee some right to ownership in the firm, pri- of specific distortions. L6pez also found, Participation Be Part of marily in socialist and post-communist however, a significant synergistic effect Privatization? countries. when trade and wage distortions coexist This paper - a product of the Public and lead to larger efficiency losses. Barbara W. Lee Sector Management and Private Sector The key issue is the combination of Development Division, Country Econom- price distortions favoring capital-intensive Employee participation has grown rap- ics Department-is part of alarger effort activity with wage distortions that cause idly in many developed countries, but it is in PRE to assess the lessons of experience unemployment and underemployment. only beginning to emerge as an element in in privatization. Copies are available free This pattern of distortion is pervasive in the economies ofdeveloping nations. Evi- from the World Bank, 1818 H Street NW, developing countries. dence shows that employee ownership and Washington, DC 20433. Please contact This paper - a product of the Trade other forms ofemployee participation can Gloria Orraca-Tetteh, room N9-069, ex- Policy Division, Country Economics De- ease privatization. tension 37646 (26 pages). partment - was prepared as a back- ground paper for the 1991 World Develop- Employee participation in the financial ment Report. Copies are available free and managerial aspects of firms has in- 665. Microeconomic Distortions: from the World Bank, 1818 H Street NW, creased as governments and owners have Static Losses and their Effect Washington, DC 20433. Please contact tried to enhance productivity, broaden on the Efficiency of Investment the World Development Report office, ownership, or facilitate privatization room S13-060, extension 31393 (36 pa- transactions. Ram6n IApez ges). Many developed countries are expe- riencing rapid growth in schemes tointro- Trade distortions can reduce the social duce or enhance various forms of em- efficiency ofinvestment. Even a moderate, ployee participation. For example, about uniform tariff of 50 percent could reduce 11,000 firms employing 11 million work- the efficiency of investment by almost a ersinthe United States have some form of quarter. stock ownership for employees. About 10 Policy Research Working Paper Series 129 666. Agriculture and the Transition efforts of Central and Eastern Europeans into the model the important elements of to the Market to succeed. the auto industry and the VER, thereby This paper - a product of the Agri- isolating the impact of each on the esti- Karen M. Brooks, Jos6 Luis Guasch, cultural Policies Division, Agriculture and mates of the welfare effects of the VER. In Avishay Braverman and Csaba Csaki Rural Development Department -is part the most reasonable representation with of a larger effort in PRE to address issues increasing returns to scale, pure profits, The costs of food in Central and Eastern relatedtothe economic transition in East- internationally mobile capital, and endo- Europe during today's political and eco- ern and Central Europe. Copies are avail- genous conjectures, the estimate of the nomic transition are quite high. Reducing able free from the World Bank, 1818 H welfare costs of the VER are $9 billion; these costs will be a difficult task involv- StreetNW,Washington,DC20433. Please this is $1 billion or 10 percent less than ing restructuring farms and fostering contact Cicely Spooner, room N8-037, ex- the estimate from the constant returns to competition in processing and distribu- tension 30464 (25 pages). scale model. tion. The impact of foreign direct invest- ment was to lower the costs of the VER Agricultural sectors in Eastern and Cen- 667. VERs Under Imperfect because the greater entry into domestic tral Europe are large so that changes in Competition and Foreign Direct auto manufacturing resulted in a lower producer prices, farm employment, and Investment: A Case Study of the quota rent premium for foreign autos. land ownership affect substantial num- U.S.-Japan Auto VER The costs per job protected in the auto bers of people. sector, at the expense ofemployment else- In the past, food in the region was Jaime de Melo and David Tarr where, were high, ranging from $164,000 highly politicized. For decades, govern- to $296,000 a job a year. ments of Eastern European countries and Protection of domestic industries through This paper - a product of the Trade the USSR offered their citizens stable, nontariff barriers generally produces un- Policy Division, Country Economics De- subsidized food prices and a steadily im- intended effects. The developments that partment - is part of a larger effort in proving diet in an effort to demonstrate followed the agreement between the United PRE to understand the effects of trade the superiority of communism over capi- States and Japan on autos demonstrate policy on industrial efficiency. Copies are talism. the complexity of the voluntary export re- availabe free from the World Bank, 1818 During the transition, the context straint mechanism. H Street NW, Washington, DC 20433. has changed, butfood remains politicized. Please contact Dawn Ballantyne, room Many consumers in the region are ill- In 1981, the United States induced the N10-033, extension 37947 (42 pages). prepared to pay the real costs of food, Japanese to agree to a voluntary export which are quite high. The task of reduc- restraint (VER) on their exports of autos ing those costs will be difficult, involving to the United States. Using a general 668. Inflation Tax and Deficit restructuring of farms and fostering equilibrium constant return to scale Financing in Egypt competitionin processing and distribution. model, de Melo and Tarr first assess the Management of the agricultural costsoftheU.S.-Japanagreementatabout Hinh T. Dinh and Marcelo Giugale transition in Eastern and Central Europe $10 billion. will affect the political sustainability of The twocountriesnegotiatedthe VER Egypt is able to exact an exceptionally the process and influence agriculture's against a background of falling U.S. pro- high inflation tax without causing high contribution to the growth of emerging duction and employment in the auto in- inflation because of the private sector's market economies. dustry and several legislative attempts to large financial holdings. Causes for these Technological considerations argue curb Japanese imports. The Japanese large holdings are complex and include in favor of rapid restructuring and sale of agreed to limit their U.S. exports to 1.68 money illusion, foreign exchange restric- farms. The new owners might choose to millionvehiclesayearforathree-yearperiod. tions, and financial repression. Because manage their lands jointly, and the re- The study found that U.S. auto deal- of the reliance on the inflation tax - structured farm might look from the road ers captured some of the rents from the which makes Egypt's overall tax regime muchlikeitspredecessor,butmanagerial VER and that increasing returns to scale fairly regressive - any liberalization of andfinancial responsibility wouldbequite in the U.S. auto industry imply that pro- financial markets would put pressure on different. tection has an effect on scale efficiency. domestic prices, if the underlying budget Although the agricultural sector of From 1984 to 1987, seven Japanese deficit cannot adjust fast enough. all Eastern and Central Europe is large, auto manufacturing firms establishedas- Soviet agriculture dwarfs it in its impact sembly plants in the United States. De Although Egypt's budget deficit is far on the region and the world. A positive Melo and Tarr argue that the VER gener- above the level found in other low-middle- program to stop the decline in Soviet ag- ated pure profits in the domestic auto income countries, the inflation rate in riculture could contribute to economic industry whichinducedthe Japanese pro- Egypt has never been very high. This is growth and political stabilityintheregion ducers to enter the U.S. domestic market because the country has managed to fi- and in the world. Failure to remedy the through foreign direct investment. Their nance these budget deficits by resorting fundamental flaws in Soviet agriculture entry then largely eliminated the abnor- to an inflation tax that, at 11 percent of will speed the country's slide into poverty mally high profits. GDP in 1987, constitutes a large share of and ethnic turmoil - and undermine the The study sequentially introduces total tax revenues. By contrast, conven- 130 Policy Research Working Paper Series tional tax revenues come to only 17 per- 039, extension 80553 (29 pages, with are outward-oriented maybe able to profit cent of GDP. tables). from increased exports as a result ofrapid Dinh and Giugale report a large, un- growth in the industrial countries. derlying inflation-tax base - from which What does this analysis imply for the the Egyptian government has collected 669. Are High Real Interest consequences ofhigh real interest ratesin substantial revenues - that exists be- Rates Bad for World Economic the future? One implication is that high cause of money balances held willingly or Growth? real interest rates may not matter for unwillingly by the private sector. Egyp- growth performance if more productive tianshaveopted toholdunderperforming Nemat Shafik and Jalaleddin Jalali investment results. If there is a negative domestic currency deposits for a variety of impact of higher interest rates on growth, reasons: restrictions on domestic resi- The conventional wisdom says yes. But itwillprobablyaffectdevelopingcountries dents' freedom to legally convert Egyp- close examination suggests the answer is more. This is not simply because the low- tian pounds into U.S. dollars; a limited not nearly so clear-cut. and middle-income countries are net blackmarket; high insurance costsfor the debtors;it seems alsotoreflectthe differing average investor ofmaintaining assets in There is a conventional perception that structural characteristics ofindustrial and other forms, such as gold; and a mild high real interest rates are bad for eco- developing economies. Further research money illusion in the early 1980s. nomiegrowth. However, ShafikandJalali might consider the role of human capital The authors find that the private show that close examination of the expe- and institutional constraints in deter- business sector, with a net borrowing po- rience over the last 40 years undermines mining the ambiguous relationship be- sition of 14 percent of GDP, has benefited the existence of such a relationship. For tween world interest rates and growth in from the inflation tax. Households, on the much of the 1950-79 period, ex-post real the developing countries. other hand, pay more of the inflation tax interest rates were less than the growth This paper - a product of the Inter- than other sectors, turning over 8 percent rate of income in the major economies, national Economic Analysis and Prospects of GDP to the government this way. This whereas the 1980s were a period of rapid Division, International Economics De- compares with 0.5 percent of GDP that growth in the world economy that coin- partment - is part of a larger effort in households pay in income tax. Although cided with unprecedentedly high real in- PRE to understand the linkages between income tax in Egypt is fairly progressive, terest rates. the world economy and the development the greater reliance on the inflation tax Shafik and Jalali review the com- process. This paper was written as makes Egypt's overall tax structure fairly peting explanations for the high real in- background to a larger report by the In- regressive. terest rates of the 1980s. These explana- ternational Economics Department en- Dinh and Giugale argue that - tions include the U.S. budget deficit, re- titled Global Economic Prospects and the * Money illusion cannot last forever strictive monetary policies in the OECD, Developing Countries.. Copies are avail- -ifinflationbegins toincrease, Egyptian a decline in global savings, a boom in able free from the World Bank, 1818 H households will ultimately move out of investment, and higher risk premia. The Street NW, Washington, DC 20433. Please underperforming domestic assets, creat- merits of each explanation are reviewed contact Mila Divino, room S8-218, exten- ing strains on the banking system. in light of the empirical evidence. sion 33739 (33 pages, with figures and * If foreign exchange and interest The authors stress that the critical tables). rate controls are lifted - as part of an question is whether real interest rates adjustment program, for instance - and have had an adverse effect on economic if the budget deficit fails to adjust fast growth, not why they have been high in 670. Inflation Adjustments enough, the large base for the inflation the recent past. To test this, the litera- of Financial Statements: tax will disappear, leading to a rise in ture on cointegration is used to explore Application of International inflation rates to near Latin American whether world interest rates and growth Accounting Standard 29 levels. rates equilibrate in the long run. The * Understanding the role and size of econometric evidence disputes the view Yaaqov Goldschmidt and Jacob Yaron the inflation tax in Egypt will help in that high interest rates are associated determining the sequencing and equity withlow economic growthintheindustrial A framework for applying International aspects of any future reform program. countries. This would seem to support the Accounting Standard 29 to adjust the fi- * The financial side cannot continue view that the high interest rates that nancial statements ofrevenue-earning en- to bear the burden for the real side; Egypt prevailed during the 1980s were the result terprises operating in inflationary econo- must move swiftly to cut its budget defi- of increased profitability or improved in- mies. cit, the underlying cause of its depen- vestment efficiency. dence on the inflation tax. For the low- and middle-income The Bank's draft Operational Directive This paper is a product of the Coun- countries, the relationship between in- on Financial Sector Operations requires try Operations Division, Country De- terest rates and growth is ambiguous. the adjustment offinancial statements in partment III, Europe, Middle East, and High real interest rates will probably countries where the cumulative inflation North Africa Regional Office. Copies are adversely affect developingcountries that rate over three years approaches or ex- available free from the World Bank, 1818 are highly indebted at variable interest ceeds 100 percent. Financial statements H Street NW, Washington, DC 20433. rates and those that need to borrow fur- in those countries are to follow the ac- Please contact Luqui Santano, room D7- ther. However, developing countries that counting principles in International Ac- Policy ResearchlWorking Paper Series 131 counting Standard 29 (IAS 29) of the liviain 1985). The orthodox approach has flation" (RPO 674-24). Copies are avail- International AccountingStandards Com- been less successful in chronic high infla- able free from the World Bank, 1818 H mittee. tion countries - as demonstrated by StreetNW, Washington, DC20433. Please IAS 29 provides a list of principles Mexico's experience in 1982-83, where a contact Emily Khine, room N11-061, ex- and requirements but does not outline the drastic reduction in the budget deficit was tension 39361 (40 pages). procedure for measuring income. Nor accompanied by a large increase in infla- does it provide a numerical example. tion. This paper provides a framework for Kiguel and Liviatan argue that infla- 672. The Macroeconomics of applying IAS 29 to adjust financial state- tionary rigidities, in an economy with Public Sector Deficits: The Case ments accompanied by numerical ex- chronic high inflation, can be quickly of Ghana amples and thus may be considered as an overcome by using income policies. Their extension of the standard. main role is to deal with pessimistic ex- Roumeen Islam and Deborah L. Wetzel This paper - a product of the Agri- pectations about inflation in situations cultural Policies Division, Agriculture and where the government announces and In developing countries, fiscal policy - in Rural DevelopmentDepartment-is part makes a fiscal adjustment, but private particular, the reduction of public sector of a larger effort in PRE to provide guid- agents do notfullybelieve itand set prices deficits - has been a key element ofstabi- ance on the design of financial institu- accordingly. lization and adjustment programs. An tions and on their management practices. Heterodox programs were success- empirical analysis of fiscal deficits in Copies are available free from the World fully tried in two chronic high inflation Ghana, wherethey have beena prominent Bank, 1818 H Street NW, Washington, countries, Israel's program of 1985 and feature, reveals their significant effects on DC 20433. Please contact Cicely Spooner, Mexico's Pacto de Solidaridad of 1987-88. both the real and financial sides of the room N8-035, extension 30464(54 pages). In both cases these programs were fol- economy. lowed by a second, more orthodox stage and included the use of the exchange rate Ghana's economic program after inde- 671. Lessons from the Heterodox as the nominal anchor. While the pendence emphasized public investment Stabilization Programs programs succeeded, both experienced and spending as the road to growth, a costs in the form of an appreciation of the strategy that led to recurring fiscal defi- Miguel A. Kiguel and Nissan Liviatan real exchange rate and high real interest cits and declining growth. By 1983, per rates. capita income was 10 percent lower than Heterodoxstabilizationprograms are more The main lessons from the experi- in 1957. Since the 1984 Economic Recov- successful in chronic high inflation coun- ences analyzed by Kiguel and Liviatan ery Program, Ghana's fiscal deficits have tries because only there can the benefits are: declined and the public sector has been from achieving a rapid initial reduction * The initial, rapid reduction in in- rationalized. Average growth rates have in inflation outweigh the costs of tamper- flation (which usually comes about with become positive. ing with price and wage controls. While small costs) at the beginning ofheterodox Islam and Wetzel provide two differ- the heterodox phase is effective in blocking programs is the easy part; the difficult ent definitions of the fiscal deficit in inflation initially, success depends on a part is to maintain price stability over Ghana. The first, more conventional ap- long-termcommitmentto the orthodoxpart time. proach aggregates the components of the ofthe program and the readiness to accept * Income policies in heterodox stabi- public sector, including the central gov- the unavoidable costs ofdisinflation. lization programs are only justified in ernment, the social security and national high chronic inflation countries (coun- insurance trust, state-owned enterprises, This paper draws lessons on the advan- tries with annual rates of inflation above and the cocoamarketingboard. However, tages and disadvantages of the heterodox 100 percent) where inflationary persis- because of the lack of data, this method of stabilization approach in chronic high tence is more pervasive and problematic. treating the deficit may understate its inflation countries. Heterodox stabiliza- * There is a case for a larger fiscal true value. tion programs make temporary use of in- adjustment in heterodox programs than The second way looks at the total .come policies - price and wage controls in orthodox programs because of the risk financing flows to the public sector. Data -tosupport orthodox policies. The evalu- that a government that starts with price on the central government debt are ation is based on heterodox programs - controls could be confused with one that supplemented with data on the claims of successful and unsuccessful ones - from tries to achieve price stability without the central bank and banking system the 1960s and 1980s in Latin American adjusting. against state-owned enterprises and data countries and Israel. * A heterodox program that fails is on public external debt. Orthodox stabilization programs likelytoleadtolargerinflationinstability Islam and Wetzel examine the ways normally involve a tight fiscal policy, a than an orthodox program that fails. Ghana chose to finance its deficits and fixed exchange rate, and sometimes tight This paper -a product of the Macro- how these affected the financial side of monetary policy. The programs have economic Adjustment and Growth Divi- the economy. Theyfindthatbeforeimple. proved their worth under different condi- sion, Country Economics Department - mentation of the adjustment program of tions, including low and moderate infla- is part ofalarger effort in PRE to examine 1983, the government relied mainly on tion (Costa Rica and the Philippines in stabilization policies. It was funded by money creation for financing, though this the early 1980s) and hyperinflation (Bo- the research project "Stopping High In- was more by default than by choice since 132 Policy Research Working Paper Series external lending was unavailable until to high growth and to the availability of vorable effect on the trade balance, but at 1984. This policy led to high inflation, concessional external financing and do- a cost to economic growth and with few negative real interest rates, an overvalued mestic nonbank borrowing. price payoffs. currency, and the emergence of black * Increasing tax revenues could markets. These forces further eroded the For almost 20 years, Pakistan's fiscal defi- achieve a similar external adjustment tax base and ultimately increased the cit - at about 7 percent of GNP - aver- while reducing the output cost, but price deficit. aged nearlytwice the level for Asian coun- problems might arise. The authors also find thathigh levels triesasawhole. Although other countries * Altering the composition of deficit of inflation, combined with government with high fiscal deficits - in Latin financing would have predictable results restrictions on private currency holdings, America, for instance - have typically -shifting to more money financing would affect the demand for assets in Ghana, experienced serious growth, inflation, and mean higher prices, lower interestrates, leading to a Laffer curve effect in govern- current account problems, Pakistan has and higher growth. ment seigniorage: After a certain point, not. In recent years the inflation rate has The authors conclude that finding an increase in the inflation rate actually been 5 percent, economic growth has av- alternative modes of deficit financing will causes a reduction in seigniorage rev- eraged 7 percent a year, and the current become more urgent. Not only will con- enue. Yet given the government's depen- account has either been in surplus or tinued concessional financing depend on. dence on monetary finance, reduced registered manageable deficits. the vagaries of the world oil market, but seigniorage meant more money creation Haque and Montiel examine the the accumulation of domestic debt and and higher inflation. causes of Pakistan's fiscal deficits. As in the higher cost of borrowing at home will According to Islam and Wetzel: many other countries, public enterprise require lower primary deficits. But they * The fiscal deficit has had onlylittle investment spending (financed by exter- warn that if Pakistan turns to money effect on private consumption; lagged con- nal development funds) during the early financing, its macroeconomic performance sumption and disposable income were to mid-1970s became a fixture of the would likely begin to resemble that of more important. economy, while sufficient revenues could other high-deficit developing countries. * Public sector investment in Ghaa notbe generated through taxes or returns This paper - a product of the Macro- has mostly substituted for private in- onpublicinvestments. Public sectorwages economic Adjustment and Growth Divi- vestment. The current program of dives- and salaries, as well as higher defense sion, Country Economics Department - titure of state-owned enterprises should spending in the late 1970s, added to the is part of a PRE research project, The lead to an increase in private investment. burden. But the most important contri- Macroeconomics of the Public Sector * The fiscal deficit had a significant bution to the fiscal deficits came from Deficit (RPO 675-31). Copies are available negative effect on the external side. The public sector interest payments. To keep free from the World Bank, 1818 H Street official real exchange rate tended to ap- inflation in check and to tap remittance NW, Washington, DC 20433. Please preciate, the trade balance worsened, flows, Pakistan resorted to nonbank bor- contact Raquel Luz, room N11-057, ex- and the black market premium rose. rowing, but the rising stock of internal tension 34303 (63 pages, with charts and This paper-a product of the Macro- debt led to higher interest rates, exacer- figures). economic Adjustment and Growth Divi- bating the fiscal deficit. sion, Country Economics Department - The authors also examine why, de- is part of a PRE research project on "The spite these deficits, the country's macro- 674. Distributional Effects of Macroeconomics of the Public Sector economic performance has been surpris- Adjustment Policies: Simulations Deficit" (RPO 675-31). Copies are avail- ingly good. The equilibrium deficit is for Two Archetype Economies able free from the World Bank, 1818 H estimated to have been quite high for StreetNW, Washington, DC20433. Please Pakistaninrecentyears (about 5.5 percent Francois Bourguignon, Jaime de Melo, and contact Raquel Luz, room N11-057, ex- of GNP), despite a low inflation rate, be- Akiko Suwa tension 34303 (170 pages, with figures cause of a very high underlying rate of and tables). growth of real output (about 6 percent a Macroeconomic crises in the 1980s made year). This allowed a fairly rapid expan- it more difficult to design policies to alle- sion of debt without recourse to inflation- viate poverty because of the need to stabi- 673. The Macroeconomics ary finance. Pakistan was also able to lize the economy and promote restructur: of Public Sector Deficits: borrow both domestically and abroad at ing that would ensure long-term growth. The Case of Pakistan below-market rates, including recycled petrodollars from Middle East oil pro- The 1980s was a period of external shocks Nadeem U. Haque and Peter Montiel ducers after 1973. for developing countries, and domestic To gain additional insight into the macroeconomic imbalance and structural Pakistan's fiscal deficit remains high be- role of fiscal deficit in Pakistan, Haque inefficienciescompounded the effects. But cause of the government's inability to and Montiel analyze how alternative fis- the performance of developing countries mobilize new resources or to cut current cal policies would have affected the was not uniform. expenditures.- Yet, unlike otherdeveloping country's economic performance during Theauthors devisedamodel forsimu- countries withhighfiscaldeficits, Pakistan the 1980s. They find that: lating the effects of terms of trade and has experienced neitherhyperin/lation nor * Reducing the deficit by cutting interest rate shocks on two archetype debt rescheduling. This can be attributed public expenditure could have had a fa- economies, one representing an average Policy Research Working Paper Series 133 Latin American economy, and the other There is always some price that is low 676. Higher Education In the an average African economy. enough so that a debtor country gains by Republic of Yemen: The University The study examined the effects of the buying back some of its debts. Similarly, of Sana'a shocks and of different adjustment poli- there is always some price that is high cies. Identical shocks and adjustment enough so that creditors gain by selling Viswanathan Selvaratnam and Omporn L. packages yield different outcomes for their debt claims. What is needed is a Regel growth, poverty, and income distribution mechanism that allows trades to take in the two economies. place at some price within this range. Higher education in Yemen has reached a The simulations suggest three im- One mechanism, themarketbuyback, critical stage requiring urgent reexami- portant conclusions: has been called a boondoggle. Market nation of the course of its development. * With the standard adjustment buybacks are too expensive from the Futurepolicies should help to diversify the package, inequality increased signifi- debtor's point of view. Faced with a structure of higher education and to pro- cantly for the Latin American archetype buyback bid, each creditor has incentives vide opportunities for admission to a butdecreasedsignificantlyfortheAfrican to hold onto its claim unless the bid is broader group of students. archetype. larger than the value of debt after the This happened for two reasons. In deal. Enrollment in the University of Sana'a the Latin American archetype, the rich Concerted debt-reduction agreements grew gradually from fewer than 100 stu- are able to protect their financial assets can overcome this type of coordination dents in 1970, shortly after it opened, to through capital flight. In the African failure, but they may be difficult to reach about 4,500 in 1979. Government policy archetype, the poor are helped as the real in practice because ofthe heterogeneity of at first tried to balance the university incomes in rural areas increase because of creditors. enrollment with the capacity of the mar- the higher export earnings induced by the Diwan and Spiegel argue that the ketplace to absorb university graduates. real exchange rate depreciation. menu approach to debt reduction retains University enrollment began to in- * Adjustment can lead to a sharp the advantages but not the inconvenience crease at an outstanding rate after 1985, redistribution ofincome from groups with of buybacks and concerted agreements. following the heavy expansion of second- lowmarginal propensities tosave towards The authors introduce a model of ary education in the country in the late groups with a high marginal propensity bank asset pricing in the presence of tax 1970s. From 1987 to 1991, total enroll- to save. incentivesanddepositinsurance. Through ment expanded from about 17,000 to * Trade and taxreforms thatimprove itthey show that the exit price ofanybank 44,000 students. If the present rate of allocative efficiency by equalizing incen- depends on the composition of the bank's intake continues, total enrollment is tives across sectors can reduce inequality asset portfolio. projected to reach 79,000 students by the significantly, provided that governments They then derive the equilibrium level year 2000. are able to implement these revenue- of exit and new money for a distribution of This explosive growth has created neutral measures. creditors facing a given menu program. numerous problems, including over- This paper - a product of the Trade They show that theoptimal menuincludes crowded classrooms, insufficient staff re- Policy Division, Country Economics De- some positive level of debt repurchase in sources, deteriorating physical plant and partment - was prepared as a back- almost all cases - challenging the argu- equipment, inadequate educational ma- ground paper for the 1991 World Devel- ment that buybacks are undesirable. The terials and equipment, and a low level of opment Report. Copies are available free intuition for this result is that by getting absorption of graduates into the labor from the World Bank, 1818 H Street NW, the banks with the worse valuation out of force. Washington, DC 20433. Please contact the creditors'group, areschedulingagree- These developments threaten the the World Development Report office, ment at better terms can be reached with quality of degree programs in several room S13-060, extension 31393(36 pages, the remaining creditors. disciplines. The government should act -with figures and tables). Diwan and Spiegel conclude that the immediately to develop a strategy to menu program dominates the standard protectitsinvestmentin higher education. buyback and new-money approaches. The policy should consider the country's .675. Are Buybacks Back? Menu- That suggests a questioning of the con- medium- and long-term needs, the con- Driven Debt-Reduction Schemes ventional wisdom concerning the role of straints on its resources, and the growing with Heterogenous Creditors buybacksandtheoptimallevelofbuyback social aspirationsofits people. The goal of activity. this assessment should be to design a Ishac Diwan and Mark M. Spiegel This paper - a product of the Debt strategy that will make higher education and International Finance Division, In- a more effective investment to serve the Two debt-reduction mechanisms - mar- ternational Economics Department - is needs of the country and to protect its ket buybacks and concerted debt-reduc- part of a larger effort in PRE to analyze resources. tion agreements - run into coordination the role of debt and debt service reduction This paper - a product of the Educa- problems. The menu approach captures for highly indebted countries. Copies are tion and Employment Division, Popula- some of the advantages of both but not available free from the World Bank, 1818 tion and Human Resources Department their inconveniences. H Street NW, Washington, DC 20433. - is part of a larger effort in PRE to PleasecontactSheilahKing-Watson, room strengthen the ability of the Bank and S8-040, extension 33730 (38 pages). borrowers to address the challenges in 134 Policy Research Working Paper Series higher education. Copies are available ket economy are very weak. In fact, the growth model as a point of departure, free from the World Bank, 1818 H Street chief characteristics of these economies Renelt reviewed important recent devel- NW, Washington, DC 20433. Please are macroeconomic imbalances, obsolete opments in growth theory. He analyzed contact Cynthia Cristobal, room S6-035, and uncompetitive productive capacities, the methodology of several endogenous extension 33640 (48 pages, with graphs a lack of modern infrastructure, underde- growth models and examined models and tables). velopedfactormarkets, and weak institu- aimed at particular policy issues. tions. One reason for the success of the Nor is the external environment standard neoclassical growth model, 677. On Economic Transformation supportive. The disintegration ofComecon Renelt writes, is that it provided a conve- In East-Central Europe: will entail large terms of trade losses for nient tool for organizing data on the A Historical and International EasternEurope vis-a-visthe SovietUnion. sources of economic growth. The model Perspective A massive influx of western capital is left much of the growth unexplained, unlikely in the short to medium run. In- however. Andres Solimano ternational capital markets will be reluc- Cross-sectional analysis has provided tant to commit large amounts of credit to some useful insights into the growth The seemingly irreversible socialist ex- the region until reform is more consoli- process. More direct estimation of pro- periment in East-Central Europe came to dated. ductivitygrowth and production functions a sudden, largely unexpected, end in the On the political side, the initial eu- in developing countries along the lines late 1980s. That collapse generated im- phoria over the end of the old regime is suggested by existing growth accounting portant economic and political conse- waning and people are less enthusiastic studies could be very useful. quences. A broad historical and interna- about reform because of the hardships Economists working in this area tional perspective is needed to understand accompanying the transition. Fragile and should target their work directly to the the ongoing transformation in the region. changing political coalitions and the signs analysis of policy options in developing of some surrender to the temptations of countries. More work also is necessary at The paper considers two periods: before populism clearly reflect that tendency. the sectoral level. The new models of socialism and after it. The former in- This paper -a product of the Macro- growth have not adequately described the cludes the 1920s, 1930s, and 1940s, and economic Adjustment and Growth Divi- issues of structural transformation and the second includes the late 1980s and sion, Country Economics Department - disequilibrium in factors markets. The early 1990s. The focus is on issues of is part of a larger effort in PRE to analyze existence of spillovers and increasing re- economic reconstruction, hyperinflation, the transition from central planning to a turns probably is more important in the integration with the global monetary sys- market economy in Eastern-Central Eu- industrial sector of developing countries. tem and the functioning of the gold ex- rope. Copies are available free from the Policymaking generally will benefit from change standard, the impact of the great World Bank, 1818 H Street NW, Wash- empirical results generated from more depression of the 1930s and its aftermath, ington, DC 20433. Please contact Emily carefully constructed structural economic andpostwarmonetaryreforms. The study Khine, room N11-067, extension 39361 models. also compares per capita income and the (38 pages, with tables). This paper - a product of the Macro- structure of foreign trade of East-Central economic Adjustment and Growth Divi- Europe with those of Western Europe and sion, Country Economics Department - Latin America in the late 1930s and late 678. Economic Growth: A Review is part of a larger effort in PRE to analyze 1980s. of the Theoretical and Empirical the policy determinants of economic Differences in per-capita income be- Literature growth. This research was part of the tween Eastern and Western Europe wid- preparation of a research project "Do Na- enedafter socialism. In 1937, before World David Renelt tional Policies Affect Long-run Growth?" War II and socialism, per capitaincomein Copies are available free from the World GreatBritain-thenthehighestinWest- Some countries have achieved rapid Bank, 1818 H Street NW, Washington, ern Europe - was 2.6 times per capita growthratesandcaughtupwithwealthier DC 20433. Please contact Raquel Luz, income in Czechoslovakia - then the countries while others have achieved little room N1 1-059, extension 34303(42 pages). highest in East-Central Europe. In 1988, or no growth. Efforts to determine the the ratio of per capita income in West reasons for these differences are an impor- Germany - now with higher per capita tant theoretical and empirical task. 679. Poverty Alleviation in Mexico income than Great Britain - to that of Czechoslovakia was 5.6. The average In recent years, economists have devel- Santiago Levy income per capita of Eastern Europe has oped new models of endogenous economic moved closer to that of such Latin Ameri- growth that consider policy influences on The main determinants of poverty in can countries as Argentina, Brazil, and growth and divergent outcomes among Mexico are macroeconomic uncertainty, Mexico. countries. These models deal with such an urban bias in social and infrastructure Economic transformation in East- issues as growth, the operation of finan- spending, and institutionalarrangements Central Europe probably will be a long cial markets, trade policy, government and government policies in rural areas and complicated process because the ini- expenditures, and taxation. that discriminate against the poor. tial conditions for the transition to a mar- Using the standard neoclassical Benefits to the poor should be adminis- Policy Research Working Paper Series 135 tered under a single program that hand, can migrate, can benefit from edu- concentrated on information about aggre- simultaneously delivers food (through cational opportunities, and can partici- gate food availability. Some have deemed coupons rather than price subsidies), pre- pate more fully in the labor market. this to be the only information necessary ventive health services, and information There is a strong case for direct tar- tounderstandfamine. Abetter approach, on hygiene, birth control, and food han- geting of benefits onlt to the to the ex- the authors argue, is to focus on the deter- dling. tremely poor. Such benefits should be minants of individual entitlements - the administered underasingle program that command of people over food and other Among the findings is this ambitious simultaneously delivers food (through necessities. analysis of poverty in Mexico: coupons rather than price subsidies), pre- The study argues that government Mexico's moderately poor lack some ventive health services, and education can prevent famines by protecting the goods and services that everyone should about hygiene, birth control, and food entitlements of vulnerable groups. This enjoy, given Mexico's wealth. The ex- preparation and conservation. Food can also have beneficial long-term effects tremely poor have so few resources as to pricing policies should be divorced from on development. be at risk of undernutrition and illness. poverty considerations. A poverty pro- The authors examine several suc- At most, 19 percent of the population gram for the extremely poor should direct cessful government efforts to reduce or is extremely poor (probably an overesti- its efforts at reducing fertility, morbidity, eliminate chronic hunger. They show mate), and extreme poverty is mostly a undernutrition, and infant mortality. how countries such as Chile, China, Costa rural problem. The extremely poor have Intertemporal, incentive, and ad- Rica, Cuba, and Sri Lanka have used larger households, more children, and the ministrative considerations all argue that public provision to achieve the social indi- highest dependency ratios. the government can best help the moder- cators typical of richer countries. The three main determinants of pov- ately poor indirectly. This can be done Ravallion critically assesses the erty are urban bias, macroeconomic un- through policies that increase the perma- book's conceptual framework, data, and certainty, andinstitutional arrangements nent demand for unskilled labor, returns methods of analysis. He concludes that, and government policies in rural areas to land, and the poor's access to education despite some shortcomings in the book, that discriminate against the poor. Ur- and social infrastructure. the authors make a convincing case for a ban bias in social and infrastructure This paper is a product of the Coun- positive role for public action in famine spending reduces the rural poor's ability try Operations I Division, Country De- relief and longer term alleviation of pov- to increase their human capital. Macro- partment II, Latin America and the Car- erty and hunger. Even poor countries economic uncertainty and stop-go cycles ibbean Regional Office. Copies are avail- with limited domestic resources can par- depress the permanent demand for un- able free from the World Bank, 1818 H ticipate in this kind of positive approach. skilled labor and the steady stream of StreetNW, Washington DC 20433. Please Ravallion examines the implications for social spending. Institutional arrange- contact Margaret Stroude, room 18-155, the role of the international community. ments and resource allocation policies to extension 38831 (94 pages). Famines are avoidable and it is not increase agricultural output deliver sub- necessary for governments to wait for an stantial rents to high-income agricultural increase in domestic aggregate food producers while depressingreturnstoland 680. On Hunger and Public Action availability before theytake some stepsto and the demand for unskilled rural labor, head off famine. Governments can also the two main assets of the rural poor. Martin Ravallion act to alleviate chronic hunger and the Development policies to help the poor threat of destitution without waiting for should focus on: A new book on the use of public action to overall economic growth to solve the prob- * Furthering the process of institu- avo;id famines and reduce chronic hunger lem. tional reform ofthe incentive structure in not only prescribes things to do but also However, the right sort of growth can rural areas. recommends new ways to think about what have an enormously important role in * Changing the way resources are actions will be most effective in the future. alleviating chronic hunger and facilitat- channeled to rural areas (eliminatingprice ing public support, particularly in human subsidies and increasing investment in Ravallion's article is a commentary on a resource development. Fural roads, irrigation, extension services, new book "Hunger and Public Action," by Much remains unknown about the and the like), Jean Dreze and Amartya Sen. Ravallion most effective public action against hun- * Eliminating urban bias in social compares the book's conceptual approach ger in specific countries. Future research and infrastructure spending and policy recommendations to those of on development policy should make this a * Bringing private costs of produc- other recent writings on poverty andhun- high priority. tion in urban areas in line with social ger. This paper - a product of the Agri- costs. Dreze and Sen advocate a very broad cultural Policies Division, Agriculture and Policies to alleviate poverty must al- view of the factors determining human Rural Development Department-is part low for the fact that the extremely poor well-being, arguing that expanding ca- of a larger effort in PRE to understand are less able to bear risk, have higher pabilities for doing things ofvalue should better the causes ofhunger and how it can fertility rates, have higher price and in- be the criterion for public choice. be prevented. Copies are available free come elasticities of demand for food, and Researchers trying to understandthe from the World Bank, 1818 H Street NW, may experience more household inequal- causes of a particular famine or to an- Washington, DC 20433. Please contact ity. The moderately poor, on the other ticipate future famines have usually Cicely Spooner, room N8-037, extension 136 Policy Research Working Paper Series 30464 (38 pages). peting sectors. On the other hand, if rations of a joint portfolio-choice/savings imported inputs are used primarily in model. First they included equity, domes- exportables, import-competingsectors will tic bonds, and flight capital. In the second 681. Political-Economy Arguments seek tariffs even more actively. configuration they eliminated flight capi- for Uniform Tariff The third is the precommitment ef- tal. fect. Tariff uniformity increases the cost The second configuration, which Arvind Panagariya and Dani Rodrik to a future government of protecting fa- eliminated the possibility of double vored sectors. If these favored sectors are counting of assets, yielded substantially In recent years uniform tariffs have become small, relative tonational income at world better, more intuitive results. Among the increasingly popular but economists have prices, a precommitment to a uniform authors' conclusions: not formulated a rationale that demon- tariff is likely to enhance efficiency. * The intertemporal approach to stratestheirsuperioritytoalternativetariff Vague references to "political- consumption is supported by the data. structures. Do strong political economy economy reasons" are not sufficient to * The results imply rejection of the arguments exist that favor uniform tar- justify a preference for tariff uniformity. traditional, expected-utility approach. iffs? It is essential to be explicit about the logic * Risk aversion is significant but. that underlies advocacy of tariff unifor- lower than many have argued from analy- During the 1980s the Bank aggressively mity in specific cases. sis of static versions of the Capital Asset promoted greater uniformity in tariffs in This paper - a product of the Trade Pricing model. developing countries. The Bank's struc- Policy Division, Country Economics De- * Results on the intertemporal sub- tural adjustment and trade reform pro- partment - is part of a larger effort in stitution elasticity are much weaker. grams have often recommended abolition PRE to understand the design and imple- * Domestic bonds issued by the gov- of quantitative import restrictions and mentation of tariff reform. Copies are ernment probably are considered as part increased uniformity in tariffs. availabe free from the World Bank, 1818 of private wealth, although significantly This studybyPanagariyaandRodrik H Street NW, Washington, DC 20433. less than one for one, thus rejecting debt is a formal analysis of some political Please contact Karla Cabana, room N10- neutrality. economy arguments for uniform tariffs. 037, extension 37947 (29 pages, with fig- The results suggest that the large They present three models in which uni- ures). increase in volatility of asset returns has form tariff rules may be adopted as a way lowered the risk-adjusted rate of return of minimizing the welfare costs of endog- on savingsandmay therefore have lowered enously determined tariffs. 682. Intertemporal Substitution, private savings. This effect must, how- In the first two models, tariffs are Risk Aversion, and Private Savings ever, have been offset to some extent by demand determined: the government is in Mexico the sharp increase in real rates of essentially unable to resist the lobbying interest.The authors then suggest that pressure. In the third model, tariffs are Patricio Arrau and Sweder van Wijnbergen some of the decline in private savings supply determined in the sense that they could more plausibly be related to the result from the government's preference Private savings in Mexico have fallen dra- substantial increasein public savings that for certain sectors over others. matically since 1982. The drop could be took place during the period. After examining the three models, linked to a substantial increase in public This paper - a product of the Debt Panagariya and Rodrik conclude that in savings, more than to uncertainty or real and International Finance Division, In- each case it is possible for a uniform tariff interest rate developments. ternational Economics Department - is regime to yield higher welfare than a part of a larger effort in PRE to study the regime in which tariffs can diverge across The decline in private savings since 1982 links between external and domestic fi- sectors. is arguably the most important problem nance Copies are available free from the Three different effects may exert a in high-debt countries. A reversal of the World Bank, 1818 H Street NW, Wash- moderatinginfluenceon political pressure trend is essential if growth is to be re- ington, DC 20433. Please contact Sheilah for protection under a uniform tariff stored. Understanding the determinants King-Watson, room 88-040, extension structure. The first is the free-rider effect. of private savings behavior is thus ofmore 31047 (28 pages). In this case, a uniform tariff regime is than academic interest. likely to generate less lobbying activity Three factors predominate: (1) the than a regime under which sectoral tar- extent of intertemporal substitution, (2) 683. Vocational Schooling, iffs can differ. If the politically active attitudes toward risk, and (3) private/ Occupational Matching, and Labor import-competing sectors are numerous, public savings interaction. These factors Market Earnings in Israel adoption of the uniform tariff rule will lie at the core of Arrau and van enhance economic efficiency. Wijnbergen's research. It tests the issue Shoshana Neuman and Adrian Ziderman The second is the input-price effect. ofdebt neutrality - whether future taxes When imported intermediate inputs are are recognized as an offset for the value of Case studies in the past two decades have used predominantly in import-competing any government debt held - and the strongly argued against vocational sectors, as is often the case in developing response of private savings to real inter- schooling on cost-benefitgrounds but some countries, tariff uniformity will reduce est rates and uncertainty. recent studies have reached different con- the profitability of tariffs for import-com- The authors estimated two configu- clusions. Policy Research Working Paper Series 137 Neuman and Ziderman conducted a com- tries. Copies are available free from the policies. Copies are available free from parative analysis of the earnings of work- World Bank, 1818 H Street NW, Wash- the World Bank, 1818 H Street NW, Wash- ers in Israel who had last attended voca- ington, DC 20433. Please contact Cynthia ington, DC 20433. Please contact Jane tional schools and those who had last Cristobal, room S6-214, extension 33640 Sweeney, room S3-026, extension 31021 attended academic secondary schools be- (27 pages, with tables). (29 pages, with figures and tables). fore entering the labor force. Their find- ings suggest that Israel may provide an example ofaneducational systemin which 684. The Value of Intra-household 685. Children and Intra-household vocational schooling is economically ef- Survey Data for Age-based inequality: A Theoretical Analysis fective. Nutritional Targeting Vocational schooling in Israel has Ravi Kanbur proven more cost-effective than general Lawrence Haddad and Ravi Kanbur academic training. In particular, voca- Structural models of intra-household al- tional school attenders who later worked The design of nutrition interventions can location of resources must be modified to in occupations related to their course of be very susceptible to the level of aggre- make intra-householdallocation nonlinear study earned more. Their wages were up gation of available information. in total household resources. to 10 percent more a month than their peers who studied at academic secondary Age is a good indicator for identifying at- Arguing that resources within the house- schools and those who attended vocational risk population groups for interventions hold are not allocated according to need, schoolsbutfoundemploymentin occupations that focus on prevention rather than cure. several researchers have tried to model not related to the subjects they studied. But what is the ideal upper age limit for intra-household allocative behavior. The results of the research in Israel targeting interventions to minimize un- Haddad and Kanbur (1990) argued that reinforce similar findings in recent re- dernutrition? as households become better off, intra- search on vocational schooling in the Within the framework of upper-limit household inequality first increases and United States. indicator targeting, Haddad and Kanbur then decreases. The behavior of intra- A caveat is necessary to temper the addressed certain questions: household inequality as household wel- generally positive findings concerning * How far wrong can one go using fare improves is clearly important for vocational schooling in Israel. While vo- only household-level data on nutrition? policy, asinterventions are oftenrestricted cational school is cost-effective compared * How valuable is the extra informa- to the household level - although the with other forms of secondary schooling, tion one gets from costlier intra-house- objective is to improve the welfare of the it does not compare favorably with other hold. surveys on nutrition? least-well-off individual. forms of training for skilled trades, such * How far wrong can one go by ne- Kanbur shows here that many of the as apprenticeships and factory-based vo- glectingtheintra-householdrepercussions tractable derivations of intra-household cational schools. ofnutritionalinterventions-for example, resource allocation are available in what Another factor is the national con- supplements to a child being nullified by might be called the "linear expenditure sensus in Israel favoring education de- equivalent reductions in food to the child systems" framework. signed to equip young people for the social in the home? He analyzes the relationship between and cultural role of integrating the * How useful is it to know the calorie intra-household inequality and total country'sheterogenous,largelyimmigrant reallocation outcome if age is used as a household resources for models of intra- population. This consensus acts as a targeting instrument? household allocation that lead to a linear major constraint on the development of Age proved to be a good indicator of expenditure reduced form. training alternatives that are the norm undernutrition when researchers had data He then investigates three structural for youth in other countries. on individual nutrition and on the intra- models: The desire to meet manpower needs household allocation of calories. * Household welfare maximization for development plays an important role Age was apparently less useful as a * Cooperative bargaining in explaining the growth of vocational targeting instrument when only house- * A noncooperative game with chil- dchoolingin Israel. Apredominant factor, hold-level data on calorie adequacy were dren as public goods however, is the effectiveness ofvocational used. The errors in age-based targeting He indicateshow these models should schools in integrating youth from North were therefore significant. be modified to produce reduced forms that Africa and elsewhere in the Middle East Food sharing rendered age truly less are better represented in the evidence, into the mainstream of the nation's soci- useful as a targeting instrument because This paper - a product of the Re- ety. Many of these immigrant youngsters ofleakage within the household. Calories search Advisory Staff, Office of the Vice have low academic ability and relatively targeted to the younger household mem- President, Development Economics - is low socioeconomic status. bers end up reaching the older individu- partofalargereffortinPREtounderstand This paper - a product of the Educa- als. the design of poverty alleviation policies. tion and Employment Division, Popula- This paper - a product of the Re- Copies are available free from the World tion and Human Resources Department search Advisory Staff, Office of the Vice Bank, 1818 H Street NW, Washington, - is part of a larger effort in PRE to President, Development Economics - is DC 20433. Please contact Jane Sweeney, develop policies to improve private and part of a larger effort in PRE to under- room S3-026, extension 31021 (19 pages, public skills training in developing coun- stand the design of poverty alleviation with figures). 138 Policy Research Working Paper Series 686. Lending for Learning: Twenty * The most important determinant prospectsforcompetitioninthe world mar- Years of World Bank Support for of the outcome of primary education pro- ket for frozen concentrated orange juice. Basic Education grams is the quality of the implementa- tion at the school level. From 1965 to 1976, the United States was Adriaan Verspoor * The quality of the implementation a net exporter of frozen concentrated or- depends on its context -and what works angejuice; since the 1977 freezein Florida, Two decades of World Bank lending for in one place many not in another. Pro- it has been a net importer. In 1978, the education teach that flexibility, commu- grams must be adapted to each location. price differential between the Florida and nity involvement, and adaptation of pro- * Effective administration and effi- Brazilian concentrates exceeded the tar- grams to local conditions are some of the cientmanagement are vital preconditions iff wedge and the Brazilian product began critical elements of successful education for good implementation. to displace U.S. production and, indirectly, programs. * The lack ofsupport for mechanisms Florida-grown oranges. to assess the outcomes of the Bank's basic Brazil dominates the international Verspoor traces the development of the education programs is the critical weak- market for frozen concentrated orange World Bank's lending policies for educa- ness in their design. juice. By the mid-1980s, Brazil accounted tion and draws lessons and recommenda- Verspoor makes five principal recom- for about 80 percent of world exports of tions from the Bank's experience. mendationsfordesigningeducationprojects: the product. Brazilian producers sup- The evolution of the Bank's policies * Support the locally determined plied more than 94 percent of U.S. im- for education lending has paralleled the processes that drive educational develop- ports of the product in the 1980s and evolution of priorities in the development ment, such as school improvement, com- accounted for 50 percent of sales in the community. When the Bank began lend- munity mobilization, and the planning of U.S. market. Brazil is also the main ing for education in 1963, it concentrated schools' locations. supplier in the European Community. on training manpower for the modern * Invest in the most cost-effective The Brazilian frozen concentrated sector and limited Bank lending to gen- inputs. orange juice industry has been able to eral secondary education, vocational and * Test carefully how an investment expand rapidly despite heavy protection technical education, highereducation, and package works in a particular setting and in its major markets - especially the teacher training. As contribution of basic monitor outcomes constantly. United States - and erratic changes in educationtodevelopmentwasmorewidely * Strengthentheinstitutionalcapac- Brazilian policies at all levels. The dy- recognized in the late 1960s, the Bank ity for national and regional strategic namism of the Brazilian industry is at- began to support primary education. And planning and management, and for op- tributable to Brazil's comparative ad- as alleviating poverty and promoting eq- eration at the district and school levels. vantage and to the seriesofclimate shocks uity became priorities, the Bank began in * Design projects to allow a flexible to Florida's orange groves. the 1970s to expand its support for basic response to a wide variety of local needs In Brazil, the industry is largely in education - primary and nonformal edu- and unplanned events. the hands of four large firms - who sell cation to help buildup literacy, numeracy, This paper - a product of the Educa- 80 percent of their products to a few large and problem-solving skills. tion and Employment Division, Popula- U.S. firms (Coca Cola, Procter & Gamble, The Bank's lending for primary edu- tion, Health, and Human Resources De- Tropicana, Pasco, and Beatrice), at sig- cationhassupportedfourmainobjectives: partment - is part of a larger effort in nificant price rebates. expanding educational opportunities, PRE to analyze in detail the lessons of the Florida orange growers, beset by improving instructional quality, increas- Bank's operational experience in educa- import competition and climate shocks, ing efficiency, and strengthening man- tion. Copies are available free from the turned to unfair trade laws for protection agement in the sector. In nonformal World Bank, 1818 H Street NW, Wash- in the early 1980s, relying on them in- education, Bank lending has supported ington, DC 20433. Please contact Cynthia creasingly as a substitute for safeguard the goals of developing practical skills, Cristobal, room S6-214, extension 33640 actions. Because of Brazil's intervention- promoting basic literacy, and building (42 pages, with figures and tables). ist trade policies, the prevailing U.S. be- income-generating skills. lief was that any Brazilian industry was Verspoor argues that Bank support guilty of unfair trade practices until proven to education has been most successful 687. Brazilian Frozen innocent. when it provides for in-depth analysis of Concentrated Orange Juice: When U.S. firms accused Brazilian subsectoral issues, concentrates on a few The Folly of Unfair Trade Cases producers of unfair trade, the Brazilian objectives, sustains its commitment to producers were in a bind: the imbalance these objectives over a long period, and Carlos Alberto Primo Braga and between their production costs and sale delegates to the borrowing country the Simao Davi Silber prices was the result mainly of an excep- responsibility for sectoral analysis, policy tional lack of coordination among Brazil- formulation, and project developmentand The main effect of antidumping actions ian firms struggling to secure stable input implementation. brought against Brazilian producers of supplies. Butit was seizeduponbyforeign From his review of Bank experience frozen concentrated orange juice has been producers as unfair trade. In 1986, the in supporting basic education, Verspoor to strengthen the oligopoly-oligopsony re- Brazilian industry was accused of dump- draws four lessons for those who design lationship between Brazilian producers ingby both the United States and Austra- educational development programs: and their U.S. partners. This limits the lia. And unfair trade procedures in the Policy ResearchWorking Paper Series 139 United States, once initiated, have a high levels of investment and growth. logical development, Shah and Baffes probability of resulting in an affirmative Despite a surplus in the current ac- specify a dynamic production structure decision. count, the nonfinancial public sector has model with endogenous capacity utiliza- Unfair trade cases against Brazilian run deficits exceeding 10 percent of GDP tion. firms have had little direct impact on since 1981. Inflation is low but interest Taxes and incentives are part of the output or price levels. But apparently rates are rising because of partial finan- user cost of capital, and thereby affect they promote oligopolistic coordination cial liberalization and rising domestic producer decisions about choice ofinputs, amongBrazilian firms. To the extent that public debt stocks. technology, and capital accumulation. these unfair trade cases foster the market Heavy public spending crowded out Empirical estimates of this model power of Brazilian frozen concentrate private consumption and investment in allow one to infer both the impact of in- producers, they increase the likelihood of the 1980s. The private saving rate is a vestmentincentivesandtheirimplications -increased long-term welfare costs to con- staggering 20 percent of GDP, which fi- for revenues foregone by the government. sumers worldwide. nances all of Zimbabwe's investment. The model results yield an objective, Unfair trade actions have had a par- The fiscal adjustment begun in 1987 empiricallyderivedcost-benefitratio that .ticularly negative impact on their sup- helped stabilize the public debt and im- is superior to standard cost-benefit posed beneficiary, the U.S. citrus indus- proved recovery of investment. But more analysis and King-Fullerton type mar- try. The antidumpingcases werebasically fiscal adjustment is needed to improve ginal effective tax rate analysis. used to protect orange growers and higher- macroeconomic and financial stabilityand Shah and Baffes apply this model cost frozen concentrate producers at the growth prospects. empiricallyforPakistan. Theresultssug- expense of U.S. juice and soft drink pro- Public deficits must be reduced to en- gest that the investment tax credit has cessors and distributors linked by mar- sure a sustainable path for public debt. not been effective at stimulating invest- keting arrangements to Brazilian con- High deficits are crowdingoutboth private ments in Pakistan. The private invest- centrate exporters. Their effect has consumption and private investment. The ment stimulated has been less than the probablybeen to strengthen the oligopoly- public sector must be adjusted and foreign government revenues foregone. oligopsony relationship between Brazil- trade must be reformed to improve capital Allowing full expensing for research ian producers and their U.S. partners, formation - a prerequisite for improving and development expenditures, on the further hindering the prospects for com- growth prospects in Zimbabwe. other hand, has been cost-effective. petition in the world market for frozen This paper - a product of the Macro- This paper - a product of the Public concentrated orange juice. economic Adjustment and Growth Divi- Economics Division, Country Economics This paper - a product of the Trade sion, Country Economics Department - Department - is part of a larger effort in Policy Division, Country Economics De- is part of a PRE series of case studies on PRE to evaluate tax incentives for indus- partment - is part of a larger effort in the macroeconomics of public sector defi- trial andtechnological development. Cop- PRE to understand the economics of the cits. Copies are available free from the ies are available freefrom the WorldBank, emergence of "fairness" as a standard for World Bank, 1818 H Street NW, Wash- 1818 H Street NW, Washington, DC regulating international trade, its impli- ington, DC 20433. Please contact Susheela 20433. Please contact Ann Bhalla, room cations for the continued openness of the Jonnakuty, room N11-039, extension N10-053, extension 37699(25 pages, with international trading system, and its 39074 (109 pages with figures and tables, tables). continued functioning as an important plus 9 pages of appendix). vehicle for development. Copies are availabe free from the World Bank, 1818 690. The Terms-of-Trade Effects H Street NW, Washington, DC 20433. 689. Do Tax Policies Stimulate from the Elimination of State Please contact Nellie T. Artis, room N10- Investment in Physical and Trading in Soviet-Hungarian Trade 013, extension 37947 (46 pages). Research and Development Capital? Gabor Oblath and David Tarr 688. Macroeconomics of Public Anwar Shah and John Baffes A reduction ofthe Soviet "subsidy"toEast- ,Sector Deficits: The Case of ern European countries would impose Zimbabwe Among tax policies designed to stimulate greater transition costs on them just as investments in Pakistan, the investment they are attempting to make the drastic Felipe Morande and Klaus Schmidt-Hebbel tax credit has not been cost-effective. But adjustments they need to move to market allowing full expensing for research and economies. How much of a cost will the To improve growth prospects in Zimba- development costs has been. switchover of their CMEA trade relations bwe, foreign trade must be reformed and impose? the country's high public deficits - which Tax policy instruments are often used to crowdoutprivateconsumptionandprivate stimulate private investment in develop- Economists have debated whether the investment - must be reduced. ing countries. But researchers have not Soviet Union subsidized trade with its explored how well such policies have met Eastern European partners in the Coun- Zimbabwe has the uncommon combina- stated policy objectives. cil of Mutual Economic Assistance tion of a high public deficit, a balanced To evaluate the cost-effectiveness of (CMEA). current account, low inflation, and low tax incentives for industrial and techno- Effective January 1, 1991, former 140 Policy Research Working Paper Series CMEA members implemented their 691. Can Debt-Reduction with appropriate domestic policies. "switchover" decision to convert to world Policies Restore Investment This paper - a product of the Debt market prices denominated in convert- and Economic Growth in Highly and International Finance Division, In- ible currency. The switchover dramati- Indebted Countries? ternational Economics Department - is cally reduced the role of "state trading" by A Macroeconomic Framework part of a larger effort in PRE to investi- permittingdirectenterprisetoenterprise Applied to Argentina gate the benefits and costs to debtor transactions denominated and settled in countries and their creditors of voluntary, convertible currency. Jacques Morisset market-based debt and debt service re- Oblath and Tarr made an intensive duction arrangements. Copies are avail- study of the trading relationship between Since 1982, publicandprivate investment able free from the World Bank, 1818 H Hungary and the Soviet Union as a case rates have declined dramatically in most Street NW, Washington, DC 20433. Please study on the terms-of-trade issue. debtor countries. What would be theeffects contact Sheilah King-Watson, room S8- A detailed empirical investigation of of debt-reduction operations for heavily 040, extension 31047 (33 pages, with prices in Soviet-Hungarian trade before indebted countries like Argentina? tables). and after the switchover provides some indication of the terms-of-trade loss that Morisset devisedan analytical framework Hungary is likely to suffer as a result of to examine the implications of debt-re- 692. Health Financing in the Poor the switchover of its trading relationship duction operations for the economy of a Countries: Cost Recovery or Cost with the Soviet Union. typical middle-income, heavily indebted Reduction? Based on the assumption that oil country. would sell at about $21 a barrel, Hungary A major finding is that debt-reduc- J. Brunet-Jailly probably will suffer an income terms-of- tion policies can succeed in restoring in- trade loss of $1.5 billion to $2.15 billion, vestment and, consequently, growth in Providing adequate health care and ex- more than double the most recently pub- debtor countries. Such policies combine a panding access to care are crucialproblems lished careful estimate. In view of the liquidity effect resulting from the reduc- in many developing countries. Should volatile price of oil on world markets, tion in debt service payments and an governments direct their efforts to meeting however, the study estimates that for incentive effect resulting from the debt existing costs through cost recovery each dollar change in the world price of relief. mechanisms orshouldtheygi vepriority to oil, all energy costs would change by $76 A simulation designed to analyze the lowering the costs before trying to recover million. effects of debt-reduction policies in Ar- them? Contrary to conventional wisdom, gentina showed that a 30 percent reduc- Oblath and Tarr find that the majority of tion in debt had a 2.4 percent positive Many donor agencies, including the World Hungarian firms exporting to the Soviet effect on the level of GDP in the first year Bank, have tended to view the problem of Union have been disfavored by the combi- and a 5.4 percent effect in the fifth year. financing health care services in develop- nation of the payments mechanism, ex- The model identifies various chan- ing countries as a problem of cost recov- change rate, tax, and subsidy policies. nels through which a reduction in foreign ery. Policy reforms based on this view The experience of early 1991 sug- debt influences investment. Although have therefore focused on measures, such gests that a significant decline is likely to the direct effect of debt relief on private as user charges and insurance, intended occur in Soviet imports from Hungary investment is relatively weak, the indi- to generate additional revenues to meet during the remainder of the year. A rect effects through domestic assets are recurrent resource needs. However, the variety of problems account for the de- strong. potential to actuallyreduce costs by elimi- cline, many of them specific to internal The prospect of greater stability in nating waste in health systems has not conditions in the Soviet Union. the domestic economy increases the de- been given adequate attention. This paper - a joint product of the mand for domestic assets, particularly The health care situation in Mali Trade, Finance, and Public Sector Divi- bank deposits. This reduces domestic represents a case study in the difficulties sion, Technical Department, Europe, interest rates and increases the supply of of providing effective care in poor coun- Middle East, and North Africa Regional credit extended by the domestic financial tries. The share ofhealth expenditures in Office and the Socialist Economies Reform sector. Both effects have a positive influ- the governments budget amounted to Unit, Country Economics Department - ence on productive investment. nearly 9 percent at the beginning of the is part of alarger effort in PRE to examine The analysis includes a calculation of 1970s but has fallen to about half that the role of trade liberalization in the the debt-reduction and liquidity combi- level since then. Households bear most of transition from a socialist to a market nation that maximizes Argentina's GDP. the burden of health financing, account- economy. Copies are available free from The purpose was to determine the best ing for about 75 percent of total sectoral the World Bank, 1818 H Street NW, use ofa potential loan to the country from expenditures in 1986. Washington, DC 20433. Please contact international financial institutions. Revenues from user charges repre- Joe Smith, room H9-071, extension 37350 The empirical results suggest the sent only a small fraction of operating (30 pages). tentative conclusion that a Brady Initia- expenditures in government health fa- tive debt and debt service reduction op- cilities. Changing the present system so eration could establish the basis for sus- that cost recovery becomes a significant tainable growth in Argentina, ifcombined proportion of actual expenditures would Policy Research Working Paper SerIes 141 be extremely difficult. economy. 694. Labor Markets in an Era However, realistic possibilities exist Reforms such as those that Eastern of Adjustment: An Overview for reducing the costs ofpharmaceuticals, Europe is initiating now have little prece- which accounted for over 50 percent of dentinrecenteconomichistory. Evidence Susan Horton, Ravi Kanbur, and total health expenditures in 1986. Bru- from other countries indicates, however, Dipak Mazumdar net-Jailly's analysis shows that with im- that output levels are likely to suffer in proved drug management practices, Mali the early years of massive economic re- This overview of a symposium on labor would not need additional external aid to structuring. Governments mustbe aware markets and adjustment concludes that: make drugs available in its health units of these adjustment costs, which repre- (1) real wages are more flexible than gen- and dispensaries. This example suggests sent an investment in a better economic erally supposed, (2) labor reallocations that the therapy for improving public system. across sectors have been more or less in the -health services should be based primarily If they want their investment to be desired direction, and (3) the role oflabor oncostreduction,notsimplycostrecovery. highly profitable, they must prepare a unions, generally supposed to be an im- The conditions that govern access to coherent program, hold fast to their poli- pediment to adjustment, is more subtle .health care and drugsin the poorestcoun- cies, and remove impediments to factor than generally supposed. tries today are grossly inequitable. Only allocation. As the credibility of the re- cost reduction can diminish this enor- forms increases, investment and output Horton, Kanbur, and Mazumdar have mous inequity and give the poor better will respond. Recent experience in other written an overview of 19 papers in a access to health care services. Such a countries suggests several constructive symposium devoted to an examination of focus on cost reduction is consistent with steps that Eastern European countries the interaction between labor markets the goals of the Bamako Initiative. can take to ease their transition to market and adjustment. The purpose of their This paper - a product of the Popu- economies: commentary is to draw general conclu- lation, Health, and Nutrition Division, * Policymakers should place a high sions and policy lessons and to identify Population and Human Resources De- priority on dealing with high open or areas for further research. partment - is part of a larger study repressed inflation and other manifesta- The papers include 7 issue papers undertaken by PRE of African health tionsofseveremacroeconomicimbalances and 12 country studies (Argentina, Bra- policy. Copies are available free from the such as unsustainable current account zil, Bolivia, Chile, CostaRica, C6te d'Ivoire, World Bank, 1818 H Street NW, Wash- deficits or very large positive real interest Egypt, Ghana, Kenya, Korea, Malaysia, ington, DC 20433. Please contact Otilia rates. and Thailand). The country studies bring Nadora, room S6-065, extension 31091 * At the same time, they should re- together a wealth of information that will (41 pages, with figures and tables). move restrictions on labor mobility and be useful to researchers. on the exit and entry of firms at the same The evidence on real wages casts con- pace as they liberalize trade. In that way, siderable doubt on theoretical concerns 693. Report on Adjustment reforms can achieve an increase in output about aggregate real wage rigidity and Lending II: Lessons for Eastern early rather than causing increasing un- labor market inflexibility as a hindrance Europe employment. to adjustment. Declines in real wages Decisionmakers shouldmove early have been dramatic and often far greater Vittorio Corbo to create markets for working capital fi- than the fall in GDP. For some countries, nancing - with appropriate mechanisms the declines in real wages may have been Thecountries ofEasternEuropehave much to assess credit risks -in order to encour- large enough to have aggregate demand to gain from stabilizing their economies age economic restructuring. The creation effects that inhibit recovery. and integrating them with the world of a full-fledged financial system is not The country studies find that, by and economy. They should make trade re- urgent and should take place only after large, sectoral employment shifts have forms a high priority. Policymakers there the countrieshaveachievedeconomic sta- been in the desired direction, that is, should look at the recent economic history bilization. towards tradables. of other nations for lessons. This paper -a product of the Macro- In contrast to the general view of economic Adjustment and Growth Divi- labor unions as an impediment to adjust- The Bank introduced adjustment lending sion, Country Economics Department - ment, the papers in this symposium in 1979 to help member countries restruc- is part ofalargereffortinPRE toemprove present a more varied and subtle picture. ture their economies to create conditions the understanding of policy reforms in Union responses to adjustment programs conducive to equitable growth while Eastern Europe. Copies are available range from militant opposition to active maintaining a sustainable balance of pay- free from the World Bank, 1818 H Street cooperation. And the strength of unions ments. Adjustment lending sets policy NW, room N11-035, Washington, DC need not bear any simple relation to the reforms as conditions of a loan. 20433. For Bank staff please contact prospects for recovery. A review of the experience of other Aludia Oropesa by electronic mail (41 While in some Latin American coun- nations with adjustment problems pages, with tables). tries (Argentina and Brazil), unions re- may provide useful knowledge for East- ceive the blame for lack of adjustment, in ern Europe as the region attempts Costa Rica their presence did not prevent to make the transition to market econo- moderate adjustment. And in Bolivia, mies and to integrate with the world much labor legislation was dismantled, 142 Policy Research Working Paper Series yet a strong recovery has not yet begun. reduction may be especially desirable in cits. In Africa and particularly in Asia, the the highly indebted countries of Eastern Then they trace the effects of deficits, studies do not see unions as major ob- Europe. Rather than flood the public and their form of financing, on private stacles to adjustment in the aggregative sector with newloans, international orga- consumption and investment - focusing sense. nizations should attempt to improve do- on empirical estimates of the different The studies also discuss the conse- mestic creditworthiness by supporting channels through which public spending quences of labor market adjustment on debt reduction and borrowing restraints and taxation crowd in or crowd out pri- income distribution, gender, and human during the transition period. Such a vate spending. capital. The conclusions here are less strategy would also force governments to Finally, they measure the spillover clear-cut. finance their deficits internally, thereby effects from the deficit to the real ex- The issue papers highlight complexi- increasing accountability. change rate and the trade surplus. ties that point to country-specific answers. Debt for equity swaps represent an Chile's successful experience suggests While real wage declines will worsen pov- attractive vehicle for debt reduction in that fiscal stabilization is a prerequisite erty, improvement in the rural-urban the highly indebted countries of Eastern for structural reform - and that struc- terms of trade during adjustment will Europe. Such schemes, when tied to the tural reform need not be postponed until have the opposite effect. Similarly, while privatization effort, are not inflationary stabilization is fully achieved. employment shrinkages in general are - unlike the case of the public debt for This paper - a product of the Macro- likely to affect women adversely, given private equity schemes of Latin America. economic Adjustment and Growth Divi- their weaker attachment to labor mar- They simply represent a swap of public sion, Country Economics Department - kets, a high female-labor intensity of liabilities, and they create value to the is part of PRE's series of case studies on tradables can serve as a countervailing extent that foreign private investment the macroeconomics of public sector defi- force. leads to positive externalities. The chal- cits. Copies are available free from the This paper - a product of Studies lenge will be to create swap mechanisms World Bank, 1818 H Street NW, Wash- and Training Design Division, Economic that will allow the Eastern Europe coun- ington DC 20433. Please contact Susheela Development Institute -is partofalarger tries to retain a large share of those gains. Jonnakuty, roomN11-039, extension effort in PRE to understand the behavior This paper - a product of the Debt 39074 (99 pages). of labor markets in the process of struc- and International Finance Division, In- tural adjustment of the economy. Copies ternational Economics Department - is are available free from the World Bank, part of a larger effort in PRE to examine 697. Volatility Reversal 1818 H Street NW, Washington, DC the effects of external finance and exter- from Interest Rates to the Real 20433. Please contact Marshall Schreier, nal debt on the process of reforms in Exchange Rate: Financial room M4-023, extension 36432 (70 pages, Eastern Europe. Copies are available Liberalization in Chile, 1975-82 with figures). free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please con- Paul D. McNelis and Klaus Schmidt-Hebbel tact Sheilah King-Watson, room S8-040, 695. Long Term Prospects extension 33730 (42 pages). Data for Chile (1975-82) indicate that In Eastern Europe: The Role liberalizing the capital accounts does not of External Finance In an Era eliminate variations in the domestic inter- of Change 696. Macroeconomics of Public est rate but shifts them to the real ex- Sector Deficits: The Case of Chile change rate. Ishac Diwan and Fernando Saldanha Jorge Marshall and Klaus Schmidt-Hebbel McNelis and Schmidt-Hebbel analyze the What should the governments of Eastern dynamic adjustment of the real exchange Europe and thepublic andprivate institu- Chile's success suggests that fiscal stabili- rate, the domestic interest rate, and for- tions in the West do topromotethesuccess- zation is a prerequisite for structural re- eign borrowing under conditions of per- ful movement to a market economy? form - and that structural reform need fect and imperfect capital mobility during not be postponed until stabilization is fully financial liberalization. Private investors have an important role achieved. Making use of a two-sector model toplayinthe ongoingprocess of reformin with current and capital accounts inter- Eastern Europe. So external creditwor- Marshall and Schmidt-Hebbel analyze the acting, they show that the domestic inter- thiness is crucial to a successful transi- structure of public deficits in Chile, dis- est rate is more volatile under imperfect tion. Large governmentborrowing crowds tinguishing between consolidated mobility and the real exchange rate more out the formation of private contracts nonfinancial public deficits and quasifiscal volatile under perfect mobility. between international investors and do- losses of the Central Bank - focusing on So liberalizing the capital accounts mestic entrepreneurs and firms. Given the determinants and sustainability of does not eliminate variations in the do- the overall credit ceiling in international the deficits. mestic interest rate but shifts them to the lending, the public sector needs to curtail In the framework of an estimated real exchange rate. its external borrowing to leave room for portfolio model, they simulate the path of Studying data for Chile during the the private sector. domestic inflation and interest rates for periodoffinancialliberalizationfrom 1975 This also implies that public debt money-financed and debt-financed defi- to 1982, they found that the domestic Policy Research Working Paper Series 143 interest rate became less volatile and less improve welfare more than do increases laissez-faire. responsive to domestic variables - and in investment tax credits. Bradburd and Ross recommend the more dependent on the covered interna- Increasing the investment tax credit following hierarchy of regulatory re- tional interest rate. stimulates more capital formation than sponsestoimperfectcompetitioninLDCs: And the real exchange rate became does decreasing corporate taxes, but the * First, ensure that domestic mar- more responsive to domestic wealth, tax credits also have significant macro- kets are open to import competition to the Foreign reserve holdings and net ex- economic consequences. maximum feasible extent. ports followed a similar pattern: the cov- This paper - a product of the Public * Second, in cases of nontradables ered international rate had stronger ef- Economics Division, Country Economics and when free access to imports is impos- fects on reserve changes while real wealth Department - is part of a series of PRE sible, adopt streamlined antitrust poli- became more important for determining discussion papers evaluating the tax in- cies that minimize the need for discretion- net exports. centives for industrial and technological ary judgments. This paper -a product of the Macro- development. Copies are available free * Third, consider direct regulation economic and Growth Division, Country from the World Bank, 1818 H Street NW, of natural monopolies as a last resort, but Economics Department - is part of a Washington DC 20433. Please contact only in an economically important sector larger effort in PRE to understand the Ann Bhalla, room N10-053, extension and only if designed to minimize the like- role of structural reforms in macroeco- 37699 (27 pages). lihood of regulatory misdirection. nomic adjustment. Copies are available This paper - a joint product of the free from the World Bank, 1818 H Street Public Sector Management and Private NW, Washington DC 20433. Please con- 699. Regulation and Deregulation Sector Development Division, Country tact Susheela Jonnakuty, room N11-039, in Industrial Countries: Economics Department and the Private extension 39074 (34 pages). Some Lessons for LDCs Sector Division, Legal Department - is part of a larger effort in PRE to explore Ralph Bradburd and David R. Ross how to strengthen the efficiency of the 698. Tax Policy Options private sector in developing countries by to Promote Private Capital How regulatory misdirection often derailed redefining public and private boundaries. Formation In Pakistan efforts to offset marketfailureinthe United Copies are available free from the World States, and the implications for policy in Bank, 1818 H Street NW, Washington, Andrew Feltenstein and Anwar Shah developing countries. DC 20433. Please contact Ernestina Madrona, room N9-061, extension 37496 In Pakistan, at least, changes in corporate The United States experience with anti- (126 pages). tax rates are probably better instruments trust and with directive regulation in the for promoting capital formation than are rail, trucking, airline, and telephony sec- increased investment tax credits. Increas- tors offers useful lessons for developing 700. Trade Liberalization and the ing the investment tax credit stimulates countries. The experience highlights the Transition to a Market Economy more capital formation than does decreas- realities both of market failure and of the ing corporate taxes, but the tax credits also difficulties of implementing regulation to Oleh Havrylyshyn and David Tarr increase inflation. control it - and reveals that imperfect regulation may be no better than imper- Trade liberalization is more important to Feltenstein and Shah developed a simple fAct competition. Eastern and Central European economies two-period general equilibrium model to Antitrust measures to regulate price than to reforming nonsocialist economies analyze the macroeconomic impact of tax fixing and torequire approval for mergers - and will also benefit the reforming policies in Pakistan. They analyze two above some threshold level of industrial socialist economies more. But it must be scenarios. concentration are straightforward to accompanied, orquicklyfollowed, by rapid In scenario 1, the investment tax implement and have provided some gains privatization. credit rate is increased from 15 percent to in economic welfare. The regulation of 30 percent. The new fiscal regime in- price discrimination, restrictive vertical The fundamental issues in trade liberal- creases investment but also significantly practices, and predatory pricingis admin- ization are how, how much, and how fast increases inflation. istratively more difficult, and the poten- to liberalize. Experience outside Eastern In scenario 2, the original invest- tial gains are less clearly evident. In Europe indicates that speed is important ment tax credit rate is retained but the many situations, import competition can and reform should go as fast as political statutory corporate tax rate is reduced. be an efficient alternative. circumstances allow, so opposition can- Welfare improves more than under sce- Direct regulation of rail, trucking, not build up and reverse the process. nario 1. airline, and telephony was frequently in- The real reason for speed is that a big Feltenstein and Shah conclude that efficient, the regulatory apparatus often bang automatically meets the criteria for inPakistan, atleast, changesin corporate lost sight ofits original objectives, and the successful reform: the credibility that tax rates are probably better instruments regulators were captured by the regu- derivesfrom a comprehensive, coordinated for promoting capital formation than are lated. For rail and trucking regulation, reform package and a clearly prean- increased investment tax credits. the regulatory outcome probably was nounced statement of the content, sched- In particular, cuts in corporate taxes worse than it would have been under ule, and goals of the reform program. If 144 Policy Research Working Paper Series these conditions can be met under gradual the World Bank, 1818 H StreetNW, Wash- reform, gradual reform should work - ington, DC 20433. Please contact Nen but rarely is that true, and the instances Castillo, room N10-033, extension 37961 of failed or partial reform are many. (51 pages). Reforming socialist economies should accelerate rather than retard the pace and phasing of trade liberalization be- cause, compared with other developing countries, these countries have: * Far more price distortion. * More poorly functioning or nonfunctioning factor markets. * Amore concentrated domestic pro- duction structure, with associated lack of domestic competition. Consequently, itis only through trade liberalization that a rational price struc- ture can be achieved during the transi- tion. Trade and other reform will not suc- ceed without rapid and widespread pri- vatization. Without privatization, the resource reallocation and supply response to trade liberalization will be less vigor- ous (in state-owned enterprises) and it will be necessary to maintain central gov- ernment checks (such as wage controls) on the perverse behavior of decentralized firms without owners. But even if widespread privatization of large state enterprises occurs with a lag, trade liberalization should proceed rapidly for the following reasons: * The political environment is now favorable for trade liberalization. Failure to seize the opportunity to liberalize trade might create a permanently protected economy, as politically powerful interests are likely to emerge who will want to maintain protection in their sectors. * The supply response from small and medium-sized firms, which can be privatized almost immediately, and from large private firms created by foreign di- rect investment - should be strong. * Better price signals will improve resource allocation even in state-owned enterprises. * Trade liberalization often comple- ments, and therefore accelerates, the pri- vatization process. This paper - a joint product of the Trade Policy Division, Country Econom- ics Department and the Trade and Fi- nance Division, Technical Department, Europe, Middle East, and North Africa Regional Office - is part ofalarger effort in PRE to examine questions relating to the transition from a socialist to a market economy. Copies are available free from Volume VillI Numbers 701 - 800 Policy Research Working Paper Series 147 701. Education and Adjustment: ment (see WPS 510) and of how adjust- 703. The Political Economy A Review of the Literature ment-related operations affect the educa- of Fiscal Policy and Inflation tion sector. Copies are availablefree from In Developing Countries: Andrew Noss the WorldBank, 1818HStreetNW,Wash- An Empirical Analysis ington DC 20433. Please contact Cynthia There appears to be a causal link between Cristobal, room S6-035, extension 33640 Sebastian Edwards and Guido Tabellini adjustment and education but the nature (68 pages with figures and tables). of the link varies widely and is poorly Despite recent advances in understanding understood. More monitoring, research, the macroeconomics of fiscal policy in de- and analysis are needed. 702. Should Price Reform Proceed veloping countries, few studies has asked Gradually or In a "Big Bang?" why fiscal policies differ from country to -Many recent studies evaluate the effects country or what institutional or legal ar- of adjustment on economic growth and on Sweder van Wijnbergen rangements help maintain fiscal disci- the poor, but few assess the specific im- pline. This paper finds a positive correla- .pacts of adjustment on the education sec- Ina big bang. Under gradual decontrol, tion between political variables (coups, tor. Noss assesses what is known about speculation and hoarding create short- elections) and specificfiscal policy actions how adjustment(particularlyWorld Bank ages which make reformist governments using a political economy approach. adjustment lending) affects education. vulnerable to early perceptions of failure He concludes that reliable evidence - a strong argument againstgradualism Most economists treat fiscal policy as ex- about the effect of adjustment policies on in the decontrol of prices. ogenous and consider policymakers as education is limited. machines to be programmed. Rarely do Most critics of adjustment programs Should countries such as Poland or the they seek to determine why, for instance, say little about education directly and do USSR move toward more flexible prices some countries rely on the inflation tax not distinguish the effects of adjustment gradually or in a "big bang?" while others use direct taxation, let alone measuresfrom the effects ofinternational Why is it that governments commit- what political factors affect such deci- recession, fiscal constraints, or structural ted to eventual price flexibility so often sions. Yet without a theory of how fiscal problems. Early adjustment programs seem to be unable to let go of "temporary" policymakers behave, at both the revenue ignored education issues - but adjust- controls? and the expenditure levels, there is no ment lasted longer than expected, so the Why, after price increases early in a guarantee that policy advice will turn out Bank has broadened its approach to pro- program of price controls, does output to be sound. tect education from the negative effects of often rise at the same time that shortages Edwards and Tabellini present the adjustment. seem to increase? results of an empirical analysis of the Relevant data are scarce and of poor Van Wijnbergen argues that political economy of fiscal policy for a quality. The most common indicators - intertemporal speculation, hoarding, and group of developing countries. They look aggregate financing and enrollment indi- the political economy of price control help at alternative ways of incorporating po- cators - are difficult to interpret. More- explain these puzzles. litical variables into the explanation of over, analyses may compare indicators The interaction between shortages governmentpolicy actions. Dividing their between two before-and-after points but and the political vulnerability of reform- results into three sections, one each for say nothing about how or why indicators ist governments to early perceptions of inflation, budget deficits, and devalua- change. failureisastrongargumentagainstgradu- tions, they find that: The effects of changes in financing on alism in the decontrol of prices. * The equilibrium inflation rate is coverage, quality, and equity ofeducation An earlier version of this paper has higher the more citizens disagree about are by no means obvious. Education has been circulated under the title which party should hold office, and the a long gestation period, so the impacts of IntertemporalSpeculation, Shortages, and more unlikely it is that the government adjustment may not yetbe evident. Coun- the Political Economy of Price Reform. currently in office will be reappointed. try studies are probably the best frame- This paper is a product of the Coun- * Political instability and polariza- work for analyzing the adjustment pro- try Operations 1 (Mexico) Division, Coun- tion lead to a collective myopia that some- cess. The database of key education indi- try Department II, Latin America and the times tempts policymakers to borrow too cators must be improved. Caribbean Regional Office. Copies are heavily and to leave the bills to their This paper - a product of the Educa- available free from the World Bank, 1818 successors. tion and Employment Division, Popula- H Street NW, Washington, DC 20433. * Governments tend to implement tion and Human Resources Department Please contact Margaret Stroude, room adjustment policies - including major - is part of a larger effort in PRE to IS-155, extension 38831 (29 pages, with devaluations - early in their tenure in understand the education sector in the figures). office, when they command political au- broader context of Bank operations, par- thority. But if political conflict arises, ticularly adjustment programs. It is the they may lack the strength to change the second step in a research agenda that macroeconomic status quo and will resort includes analysis of how the education instead to inflation and deficits. sector should be treated in public expen- Edwards and Tabellini argue that diture reviews in the context of adjust- their results have importantimplications 148 Policy Research Working Paper Series for the design of adjustment and stabili- resources tofacultyandinstructional ma- high proportion of trained teachers, with zation programs. Institutional reforms terials. a good supply of textbooks, and with a that make it harder for a government to Studentperformanceinexaminations stable faculty (high teacher retention). reverse course without warning will in- is consistent with the level and use of Butonceresearcherscontrolforthese crease the credibility of the reforms, resources. Most students fail examina- factors, contrary to expectations, some thereby reducing political instability - tions, particularly in crowdedinstitutions underendowed local council and govern- and the equilibrium level ofinflation. The that offer few courses. And those who ment schools are more effective at boost- creation of independent central banks pass do so largely through their own ef- ing achievement than their counterparts should also be a priority. This and other forts, not because of the quality of teach- with more resources. reforms that take money creation out of ing. So, textbooks and teachers are im- the hands of governments will boost mac- There are no institutional incentives portant in raising achievement, but more roeconomic stability for achievement or penalties for failure. research is needed into what characteris- Their results serve as a general en- Colleges and universities are not held tics differentiate high-achieving schools dorsement of World Bank conditionality. accountable for the quality of instruction, from low-achieving schools. This paper - a product of the Public cost recovery is low, and the government This paper - commissioned by the Economics Division, Country Economics demands no standards. It would be im- Population and Human Resources Opera- Department - is part of a larger effort in prudent for the Pakistani government to tions Division, Southern Africa Depart- PRE to study the political economy of allocate more resources to the education ment, Africa Regional Office, jointly with fiscal policies in developingcountries. Cop- sector until mechanisms have been estab- the Education and Employment Division, ies are available free from the World Bank, lished for more effectively allocating re- Population and Human Resources De- 1818 H Street NW, Washington, DC sources within and among institutions partment and Zimbabwe's Ministry of 20433. Please contact Ann Bhalla, room and for establishing incentives and sanc- Education and Culture - was prepared N10-061, extension 37699(80 pages, with tions that create pressure to improve in- as a background paper for a review of tables). stitutional performance. primary and secondary education in Zim- This paper - a product of the Educa- babwe. Copies are available free from the tion and Employment Division, Popula- World Bank, 1818 H Street NW, Wash- 704. Costs and Finance of Higher tion and Human Resources Department ington DC 20433. Please contact Cynthia Education in Pakistan - is part of a larger World Bank sector Cristobal, room S6-214, extension 33640 study on higher education in Pakistan. (55 pages, with tables). Rosemary Bellew and Joseph DeStefano Copies are available free from the World Bank, 1818 H StreetNW, Washington DC Available educational resources could be 20433. Please contact Cynthia Cristobal, 706. Successful Nutrition used more effectively by reducing the pro- room S6-214, extension 33640 (57 pages, Programs in Africa: What Makes portion of nonteaching employees - most with figures and tables). Them Work? of them servants - and by reallocating those resources to faculty and instruc- Eileen Kennedy tional materials. Pakistan's government 705. What Causes Differences should not allocate more resources to the in Achievement in Zimbabwe's The seven factors associated with success- sector untilithasestablishedbettermecha- Secondary Schools? ful nutrition programs in Africa. And a nisms for allocating resources and has call for evaluations that focus on process established incentives and sanctions to Abby Rubin Riddell and Levi Martin Nyagura as well as outcomes. improve institutional performance. Textbooks and teachers are important in Little of the literature on nutrition be- Using data from colleges and universi- raising achievement, but more research is tween 1960 and the 1980s included as-- ties, Bellew and DeStefano investigate needed on what characteristics differenti- sessments ofeffective nutrition programs. the costs and effectiveness of higher edu- ate high-achieving schools from low- In this important study, Kennedy focuses cation in Pakistan, identify factors that achieving schools. on factors associated with successful nu-. influence those costs and effectiveness, trition programs in Africa. and estimate levels of study subsidies. Riddell and Nyagura found that students In 1989 the World Bank mailed a Not surprisingly, they find that most who attended high-fee-paying (trust) survey to 330 people: 110 responded, and colleges and universities are underfunded. schools, elite urban government schools, 66 nutrition programs were identified as They operate with minimal faculty, spend and mission schools scored betterin math- successes. Kennedy includes case studies little on learning materials, and cannot ematics and English achievement than for six of these (two in Mali and one each cut costs by enrolling more students (with did students in the less-well-endowed gov- in Ghana, Nigeria, Togo, and Zaire) in the current faculty levels) without jeopardiz- emient schools and those established by report. ing the quality of education. local councils. Seven factors (which Kennedy dis- Available resources could be used Much of the variation in student cusses at length, with illustrations from more effectively by reducing the propor- achievement was attributable to the the case studies) were mentioned repeat- tion of nonteaching employees - most of schools the student attended. Examina- edly as important to the success of nutri- them servants-andbyreallocatingthose tion results were higher in schools with a tion programs: Policy Research Working Paper Series 149 * Community participation. Forcom- 707. Population, Health, sideration by country operations and se- munity-based programs to be successful, and Nutrition: Fiscal 1990 nior management staff, as well as effec- even with active local involvement, some Sector Review tive and efficient delivery of family plan- implementors suggest that there needs to ning services. Second, while most PHN be awareness andcommitmentofthe lead- Population, Health, and Nutrition Division, staff appreciate the importance of ad- ership at higher levels of government. Population andHumanResources Department dressing management and institutional * Program flexibility. Donors should developmentissues, the quality and depth commit themselves to a project long The population, health, and nutrition of PHN interventions in this regard vary. enough that approaches that don't work (PHN) share of total Bank lending has The review suggests a number of rec- in certain areas can be modified. grown rapidly in recent years, increasing ommendations for further improving the * Institutional structure. It is more from 0.3 percent of total lending in fiscal Bank's performance in the PHN sectors. important to use an existing institution, 1987 to 4.5 percent in fiscal 1990. In On the technical side, the Bank should (1) even if it is not ideal, than to create a new addition, PHN work focuses much more continue to focus and improve its inter- institution. Donors are typically inter- on policy than it did in the past. ventions at the policy level; (2) address ested in working with the public sector, management and institutional develop- but many of the success stories had strong World Bank lending in the population, ment issues more rigorously and compre- ties to the private sector. health, and nutrition (PHN) sectors in- hensively through project, sector, and re- * Recovery ofrecurrent costs. A con- creased significantly in fiscal 1990. Over search work; (3) squarely address and tentiousissue. Some respondents claimed the past five years, PHN lending has encompass the role of the private sector that if cost recovery is an indicator of grown rapidly both in the number of and NGOs in the design and delivery of success, there are no success stories. The projects and in the amounts of loans and PHN interventions; and (4) continue ef- extent and depth of poverty in Africa will credits. The future lending portfolio indi- forts to address and resolve PHN financ- necessitate external financing for years cates continued growth. Bank support of ing issues, given its comparative advan- to come. nutrition activities, both within the PHN tage in this regard. * Multifacetedprogram activities. In sectors and as components ofprojects out- Internally the Bank should (1) ad- the more effective programs, nutrition is side the PHN sectors, has expanded sig- dress the need to expand staff to accom- linked to broader activities involving food nificantly. modate continued growth likely in Bank security andincome-generating activities. The content and focus of PHN lend- work in the PHN sectors and (2) encour- * Well-trained and qualified staff ing and sector work during fiscal 1990 age greater use of experts from develop- Projects cannot create the charismatic respond to the needs of borrowing coun- ingcountries and the participation ofben- leaders associated with many successful tries and to the Bank's emphasis on hu- eficiaries in Bank work. projects but inadequate support can stifle man resources development and poverty, Because a population strategy paper them. andreflects the pertinentissues that PHN is at an advanced stage of preparation, * Infrastructure. Programs and sector development work poses today. this review withholds suggestions for im- projects work better in areas where there PHN work now focuses much more on the proving the effectiveness of the Bank's is physicalinfrastructure andan adequate policy level than it did in the past. Health work in the population sector. health care delivery system. financing issues continue to be rigorously This paper - a product of the Popu- Kennedy concludes that these find- addressed as a priority. The use of local lation, Health, and Nutrition Division, ings are preliminary and require further consultants and the participation of ben- Population and Human Resources De- validation on the ground. If we are to eficiaries in Bank work is on the rise. partment - is part of a larger effort in understand what works, programs need Increased attention has been focused on PRE to increase awareness of the lessons to be evaluated better not only for out- NGOsin recognition ofthe important role learned from the Bank's operational work. comes but also for design and manage- they play in the PHN sectors. Social Copies are available free from the World ment. sector developmentoperations, anew fea- Bank, 1818 H Street NW, Washington, And all evaluations - internal and ture ofPHNlending, have presented chal- DC 20433. Please contact Otilia Nadora, external - should focus on process as lenges to the Bank because of the stream- room S6-065, extension 31091 (69 pages, well as outcomes. lining and coordinating of roles and re- with tables). This paper - a product of the Popu- sponsibilities in the Bank and at the na- lation, Health, and Nutrition Division, tional level that they require. Efforts to Population and Human Resources De- raise cofinancing and coordinate aid are 708. Nongovernmental partment - is part of a larger effort in being intensified because of the acute Organizations and Health Delivery PRE to identify "best practices" in pro- shortages of resources for the sectors in in Sub-Saharan Africa gram implementation in the population, many borrower countries. health, and nutrition sectors. Copies are The Bank still faces important chal- Jocelyn DeJong available free from the World Bank, 1818 lenges in its effort to improve the effec- H Street NW, Washington, DC 20433. tiveness of its interventions in the PHN This paper sets out the distinctive charac- Please contact Otilia Nadora, room S6- sectors. First and most important, the teristics -bothpositive and negative-of 065, extension 31091 (50 pages). Bank has not yet comprehensively ad- NGOs as institutions for providing health dressed all facets of the population issue, care in Africa. It raises questions about which encompass full and rigorous con- environments conducive to NGO activity 150 Policy Research Working Paper Series and how the role ofNGOs can be encour- most of their strengths. 710. Urban Property Tax Reform: aged without sacrificing their strength in This paper - a product of the Popu- Guidelines and Recommendations the development process. lation, Health, and Nutrition Division, Population and Human Resources De- William Dillinger Although nongovernmental organizations partment - is part of a larger study make an important contribution to health undertaken by PRE of African health Property taxes are a potentially attractive care in Sub-Saharan Africa, there has policy. Copies are available free from the way to finance municipal government, but beenlittle detailedinformationabouttheir World Bank, 1818 H Street NW, Wash- property taxes typically provide less than activities. And few African governments ington, DC 20433. Please contact Otilia 20 percent of municipal revenues. Proce- set guidelines for NGO performance or Nadora, room S6-065, extension 31091 dural, policy, and institutional reform can coordinate activities with them. The lack (27 pages). be achieved only in the context ofthe wider of knowledge about NGO activities and restructuring of local finance - because the lack of coordination and policy over- property tax carries a heavy political price. sight could impede African governments 709. An Empirical Macroeconomic in achieving the most efficient use of na- Model for Policy Design: The property tax is a potentially attrac- tional resources for health - whether The Case of Chile tive way to give local governments access public, private, or nongovernmental. to a broad and expanding tax base. Un- DeJong reviews the historical role of Luis Serven and Andres Solimano like the mix of intergovernment grants NGOs in health care in Africa and dis- and indirect taxes that now dominate cusses the economic and political forces A modelfocusingon the design and evalu- municipal revenues, it can also promote that have combined to bring the NGOs ation of macroeconomic policy is applied broader objectives of efficiency -linking into greater prominence and increase the to Chile. the provision of municipal services more funds channeled through them. She ex- closely to their financing, and rationing amines the advantages and the disadvan- Serven and Solimano construct, estimate, the consumption of municipal services by tages of NGOs operating in the health and simulate a macroeconomic model for price. sector. Some of the advantages propo- Chile. This model allows aggregate sup- Buturban property taxes, albeitubiq- nents of NGOs point out are greater moti- ply and demand factors to interact in uitous, typically yield less than 20 per- vation of staff, community-based struc- determining such key economic variables cent of municipal revenues. ture, small scale, a willingness to work in as inflation, the real wage, the real ex- In part, these low yields reflect fail- peripheral areas, intersectoral scope, and change rate, real output and employment, ures in the administration of the tax. greater efficiency. But NGOs depend on and the current account balance. Many properties are missing from the tax external funding, which may not continue The model ensures the consistency of rolls, or are inaccurately valued, and col- indefinitely, and on foreign personnel, different aggregates by imposing the rel- lection is extremely inefficient. There whose generally short stints with the evant budget constraints on the fiscal should be procedural reforms to improve NGOs create problems of continuity. sector, the central bank, and the balance coverage, the accuracy of valuation, and NGOs typically fail to document their of payments. To this consistent frame- the efficiency of collection. activities, making it difficult to evaluate work, the model adds behavioral equa- But procedural improvements alone the activities or to build on the NGOs' tions with sound analytical foundations. are not enough. Tax rates must also be experience. And differing standards of Serven and Solimanouse model simu- increased. The scope of reform must be qualification for personnel pose problems lations to explore the effects of domestic expanded to address the systems for rate- in transferring personnel between NGO policies and external shocks (like a bal- setting and revaluation and the incen- and government facilities. anced-budget fiscal expansion, a policy of tives confronting tax administrators. DeJong cautions that more rigorous increased growth in minimum wages, a Certain rules should apply: assessment and evaluation of NGOs' ca- fall in world copper prices, and an oil price * Control over tax policy (including pacity is of critical importance to ensure shock). These simulations help illustrate rate setting) should generally be assigned that the funds channeled through them the effects of economic policies and exter- exclusively to the entity most directly are used efficiently. She suggests pos- nal factors that shape current policy dis- affected by it - municipal government.. sible policy approaches that governments cussions in Chile. * Taxes must be indexed. To main- could adopt to reduce the likelihood of This paper-a product of the Macro- tain the real level of tax liabilities, tax conflict with NGOs -and ways that gov- economic Adjustment and Growth Divi- authorities must either revalue annually ernments can capitalize on the strengths sion, Country Economics Department - (which is expensive) or increase nominal of NGOs to increase their contribution to is part of a larger effort in PRE to design tax rates. One practical solution is to the national health care system. DeJong applied macroeconomic models for the address inflation by a4justing valuations urges NGOs to view themselves as an evaluation of macroeconomic policies. "from the office" on the basis of a common integral part of the national health care Copies are available free from the World inflation indicator. system, toconform tonational health poli- Bank, 1818 HStreetNW, WashingtonDC * To give the tax administration cies, and to do more in policymaking. 20433. Please contact Susheela agencyanincentivetoperform,theagency Finally, she encourages donors to con- Jonnakuty, room N11-039, extension should be placed on a paid, contractual sider how NGOs can be more than con- 39074 ( 79 pages, with figures, graphs, basis so it has a direct financial interest in duits for funds -and allowed to make the and tables). tax performance. Policy Research Working Paper Series 151 For all its economic virtues, the prop- business. However, in countries that fol- 712. Foreign Direct Investment In erty tax carries a high political price. Its low the universal model, banks could be Developing Countries: Patterns, effectiveness in confronting taxpayers owned by holding companies that would Policies, and Prospects with the cost ofmunicipal services gives it also own other financial intermediaries an unusually high political profile in de- butnotindustrial orcommercial ventures. Thomas L. Brewer veloping countries. As a result, where Long and Sagari rule out greater uni- local authorities have access to less effi- versalization of banking at this time to Absolute flows of foreign direct invest- cient but more politically acceptable rev- limit mismanagement, fraud, risk, and ment (FDI) might increase significantly in enue sources those tend to be exploited losses. They prefer simpler financial in- some countries, but the developing coun- first. termediaries because they are easier to tries' share of total world FDI flows will So property tax reform can be manage, more transparent, and easier to probably remain relatively low (about 15 achieved only in the context of wider re- supervise. percent) largely because FDIin the United structuring of local finance. The object of Equity in the banks or bank holding States will continue at high levels. To such reform should be to reduce the ex- companies should be widely distributed attract more foreign direct investment, tent of arbitrary subsidies between juris- to the private sector through whatever developing countries must maintain both dictions and to confront local taxpayers method is selected for privatizing firms. favorable macroeconomic policies and a with the cost of services they consume. But the banks should not be privatized climate favorable to FDI. This paper - a product of the Urban (unless by sale to foreign banks) until Development Division, Infrastructure they have been made financially solvent Drawing on the findings in 11 country and Urban Development Department - - by cleaning up their portfolios. For studies, Brewer concludes that the public was prepared for the municipal finance socialist economies with excessive bad policy environment for foreign direct in- component ofthejoint UNDP/World Bank/ debts, this means making hard decisions vestment (FDI) has improved in recent UNCHS Urban Management Program about the major loss-making industrial years. There is more appreciation ofFDI's (UMP). This report is the first of a series enterprises. contributions (such as the transferoftech- of management tools to be produced by Bank restructuring must proceed in nology and managerial skills, the devel- that component. Copies are available free pace with industrial restructuring, price opment of export markets, and the stimu- from the World Bank, 1818 H Street NW, reform, and macroeconomic stabilization. lation of local entrepreneurship, competi- Washington, DC 20433. Please contact Fast administrative restructuring of tion, and innovation) and greater appre- Vino David, room S10-139, extension the banks is preferable to slowrestructur- ciation of the role of the private sector and 33734 (46 pages). ing, contend Long and Sagari. But once private investment in development. the basic structure is efficient, further But to improve the flow of FDI into changes - such as new entries, mergers, development, more is needed - espe- 711. Financial Reform in Socialist and the sale of branches - can be left to cially changes in policies toward FDI and Economies in Transition the market process. changes in macroeconomic policies and Othermeasures that should be taken: conditions. Millard Long and Silvia B. Sagari * Interest rates should be raised on Positive policy shifts have improved the outstanding mortgages of the savings the climate for FDI in Korea, Mexico, and The restructuring ofbanks must be tied to banks and on other subsidized credits to Nigeria. Continuing restrictions limit the restructuring ofindustrialenterprises, market rates. FDIflows to India, Brazil, and some ofthe to macroeconomic stabilization, to price * Central banks should absorb the largest developing countries. Macroeco- reform, and to the resolution of ownership huge foreign exchange losses of the for- nomic conditions and policies will con- problems. These problems, which will eign trade banks. tinue to affect FDI flows and to dominate take years to resolve, require a commit- * In countries where it has not been investors'decisions, as recent experiences inent to reform, clear ideas about what is done, new legislation and regulations in Mexico and Brazil indicate. to be achieved, and realistic expectations should be drafted, auditing and account- Policy reform designed to attract in- about the difficulties that will be encoun- ing improved, supervisory procedures es- vestors will be only marginally effective tered. tablished, and bankers' training institu- unless accompanied by appropriate mac- tions developed. roeconomic policies. Marginal, isolated Focusing mainly onbankingreform, Long This paper -a product of the Finan- policy changes are not enough. Investors and Sagari propose a model for the finan- cial Policy and Systems Division, Country risk estimates are highly sensitive to per- cial structure of a socialist economy in Economics Department - is part of a ceptions of change and uncertainty. transition. larger effort in PRE to analyze sector Developed countries' guarantee pro- Such a financial system, they say, reform in socialist economies in transi- grams to protect their own investors would include a few large, competitive tion. Copies are available free from the against noncommercial risks associated national commercial banks. These banks World Bank, 1818 H Street NW, Wash- with FDI projects in developing countries would not be specialized in the sectors ington DC 20433. Please contact Maria - together with other developed country they serve or their type of lending. They Raggambi, room N9-033, extension 37657 promotional activities - are an impor- would be commercial rather than univer- (19 pages). tant part of the policy framework that sal banks - that is, they would not own affects FDI in developing countries. firms or engage in securities or insurance Total FDI flows to developing coun- 152 Policy Research Working Paper Series tries are unlikely to rise significantly in regardless of regime. Commander and H Street NW, Washington, DC 20433. the nextfewyears. Average flows ofabout Staehr show that this assumption is not Please contact Olga Del Cid, room M7- SDR15 billion a year (or 1 percent of warranted, given the use of incentive- 047, extension 39050 (62 pages). developing countries' GDP) are likely for based systems in these economies. the next three years. Both the classical planned economy 714. Women In Forestry In India Absolute flows of FDI might increase and the partially reformed regime face significantly in some countries but the the problem of motivating workers in the Ravinder Kaur developing countries' share of total world absence ofmonitoring and ofsuch conven- FDI flows will probably remain relatively tional penalties as unemployment. How Women play a much greater role in for- low (about 15 percent) largely because do these regimes try to resolve the incen- estry in India than has previously been FDI in the United States will continue at tive problem? documented - and their involvement in high levels. In a centrally planned economy, the forestry should be strengthened. This paper was completed under the piece-rate mechanism is an attempt to supervision of Kwang W. Jun. The back- stimulate more effort among workers. But For projects to succeed, it is essential to ground paper for this report is available Commander and Staehr show, using document women's relationship to forests. on request. The background volume re- game-theoretic models, that in coopera- - in the context of their roles in different viewed FDI experiences of 11 developing tive settings the outcome can be lower farming and food supply systems, domes- countries in three regions: Argentina, productivity than desiredand thatin non- tic tasks, and income-earning activities. Brazil, Colombia, and Mexico in Latin cooperative settings the outcome can be Such documentation would reveal ways America; India, Indonesia, Malaysia, Ko- higher wages than warranted. to generate employment and income for rea, and Thailand in Asia; and Kenya and They interpret the partially reformed women. Nigeria in Africa. The main author of the socialist economy as an attempt to refine The minor forest product economy, background paper was Gyorgy Becsky. the motivational structure byintroducing for example, which is dominated by Other contributors were Young-Hoi Lee a manager between the planner and the women, has never been the focus of gov- and Aloysius Ordu. workers. One objective is to provide a ernment policy or a specific component of This paper - a product of the Debt framework in which workers and manag- social forestry projects. Social forestry and International Finance Division, In- ers engage in a cooperative game to deter- projects tend to be oriented to cash crops, ternational Economics Department - is mine wages and output with the incentive which mostly benefit men. part of a larger effort in PRE to assess the structure given in effect by the planner. The fuelwood and fodder crisis has potential for increasing foreign direct in- They show how this can yield undesired focused on problems of domestic subsis- vestment in support of economic develop- results, when managers and workers co- tence; planners have been blinded to ment. Copies are available free from the operate, playing a noncooperative game women's equally important role in the World Bank, 1818 H Street NW, Wash- with the planner. nondomesticforesteconomy. Forest-based ington DC 20433. Please contact Sheilah They present a preliminary treat- activities are often poor women's main - King-Watson, room S8-045, extension ment of an economic regime such as the sometimes only - source of income, par- 31047 (58 pages). one that existed in Poland after January ticularly where women have no property 1990, where market-based rules almost rightsinland. Women whohave property fully predominate. Their objective is to rights only in livestock also depend on 713. The Determination of Wages provide coherent foundations for wage fodder, a product of forests and common in Socialist Economies: equations that can be tested empirically. property resources. Forests also provide Some Microfoundations They prepare estimates for the par- food, medicines, and other products use- tiallyreformedeconomiesofHungary and ful to poor people, especially in times of Simon Commander and Karsten Staehr Poland. famine. Data and other limitations limit the The urban poor bear the brunt of the Wages are commonly assumed to be exog- conclusions that can be drawn. But Com- fuelwood crisis, especially as fuel prices enously determined in socialisteconomies. mander and Staehr show wages to be rise. But the headloading of wood (collect- But wages in socialist economies have stronglyassociated with prices andrather ing wood for sale) by rural women partly' been determined by a combination ofinsti- less strongly associated with productiv- reflects their lack of jobs and income. tutional and economic factors. ity. Hence, wages should not be consid- Headloaders meet a crucial energy need ered fully exogenous, even ifinstitutional but also contribute to the degradation of Commander and Staehr address the is- and otherfactors indicate more exogeneity forests. This degradation can be reversed sue of how wages are determined in so- than would exist in a standard market only by increasing biomass production cialist economies. economy. and generating more jobs and income for They distinguish between different This paper - a product of the Na- women. Social forestryprograms mustbe types of economic regime, in terms ofhow tional Economic Management Division, broadened to include women, watershed much decentralization is permitted and EconomicDevelopmentInstitute-ispart management, the management of com- how extensive are market-based features of a larger effort in PRE to analyze the mon property resources, and such related or rules. sources and dynamics ofinflation in tran- enterprises as animal husbandry. Wages are commonly assumed to be sitional socialist economies. Copies are Women can and do carry out most exogenously given in socialist systems, available free from the World Bank, 1818 forestry tasks, even such arduous ones as Policy Research Working Paper Series 153 pit digging, watering, and soil work. male education so Bellew and King exam- that the cost-effectiveness of alternative Women involved in small-scale forest- ine what is known about which strategies options should be taken into account in the based industries - such as bidi-rolling worked, which failed, and which have design of such programs. (indigenous leaf cigarettes) and basket- produced mixed results or results that are making - must be helped to improve difficult to interpret. Many policymakers have assumed that their skills and to learn to manage the Strategies that have increased fe- the state should play a dominant role in entire process from collection to process- male enrollment are those that: providing training. Dougherty and Tan ing and sale. Rights to forest produce * Lower the costs of education by set out to appraise the rationale and scope must be more clearly delineated. providingculturallyappropriate facilities, for cost-effective government interven- Women have successfully organized scholarships, and alternative schools that tion to mobilize resources for training. groups, reclaimed degradedland, planted offer classes in the early morning or They also document international experi- forests on it, and managed forests jointly. evering. ence with alternative arrangements. Rights in degraded land allotted for affor- * Train girls and women in growth Their review indicates that the case estation can most easily be enforced and sectors of the economy at the same time for financial interventions and the analy- protected by organized women. The most that they make strong recruitment and sis of the incidence of interventions are important help nongovernment organiza- placement efforts. complex. Several factors demonstrate a tions can provide is to strengthen existing Strategies that seem to have failed need to make the analytical input into women'sorganizationsandhelpbuildnew include those that distribute school uni- evaluations of these interventions more ones. Collective organizations seem best forms and offer vocational training that is rigorous. adapted to exploit such development fa- not directly linked to employment. First, this analysis can reduce the cilities as credit, extension advice, and Too little information is available to risk of a misallocation of resources - a access to new technology, raw materials assess the effectiveness of programmed particular hazard when interventions in- sold in bulk, and the purchase and main- learning, day care, home technologies, volve subsidies that alter the effective tenance of labor-saving devices. informationcampaigns, school meals, and price of training services that employers This paper -a product of the Women the revamping of curricula and textbooks or trainees must pay. in Development Division, Population to introduce broader roles for women. Second, such analysis can reduce the and Human Resources Department - is More research is needed on: risk of unnecessarily increasing the bur- part of a larger PRE review of women and * The importance parents and girls den on the public purse. Rigorous inquiry development in India. Copies are avail- attach to the quality of available educa- about the need for an intervention, and its able free from the World Bank, 1818 H tion when making their schooling deci- likely impact, may disclose thattheinter- StreetNW, Washington, DC20433. Please sions. vention is not justified or is justified only contact Audrey Sloan, room S9-121, ex- * Girls' and women's participation onasmallerscale. Anotheroutcomemight tension 35108 (78 pages, with tables). in educational programs. be to demonstrate that intervention is * Individual,family,community,and justified but that it could take a school factors that limit girls'and women's nonfinancial form. 715. Promoting Girls' participation and achievement. Examples of nonfinancial interven- and Women's Education: There should also be more experi- tions include the exemption of appren- Lessons from the Past merits with different approaches andmore ticesfromminimumwagelegislation;cam- evaluation of program outcomes. paigns to increase the commitment of Rosemary Bellew and Elizabeth M. King This paper - a product ofthe Educa- firms to training; and pump-priming op- tion and Employment Division, Popula- erations such as providing technical help One way to increase female enrollment in tion and Human Resources Department to establish enterprise-based training schools is to lower the costs ofeducation by -is part of a larger effort in PRE to assist programs. providing culturally appropriate facili- the World Bank and developing countries Equity and social concerns provide ties, scholarships, and alternative schools in their efforts to incorporate females into perhaps the clearest argument for subsi- that offer classes in the early morning or the development process. Copiesareavail- dizing training through general public evening. Another is to train girls and able free from the World Bank, 1818 H revenue, focusing on training activities women in growth sectors of the economy Street NW, Washington DC 20433. Please with benefits for society beyond those andto make strong recruitment andplace- contact Cynthia Cristobal, room S6-214, accruing to individual trainees. Institu- ment efforts. extension 33640 (58 pages). tions where apprenticeship and other ini- tial training are an alternative to contin- Many societies underinvest in girls' and ued education, and a strong case exists for women'seducationforthreemainreasons: 716. Financing Training: Issues subsidizing those in the training stream * High direct, indirect, and cultural and Options to the same extent as their peers in gen- costs. eral education. * Too few private benefits. Christopher Dougherty and Jee-Peng Tan In concluding, the authors note that * Parents'failure to consider the so- policymakers often overlook the cial benefits of education. The need for justifying public training complementarity between basic educa- Research gives governments little programs is often under-appreciated. In- tion and later skill development. The guidance on how to raise demand for fe- ternational experience strongly indicates consequenceisthatresourcesmaybe spent 154 Policy Research Working Paper Series on expensive, low volume training pro- private investors to changes in interest ternational Economics Department, in grams when they might be used more rate policy in those 20 years was attribut- cooperation with the Kiel Institute for cost-effectively and more equitably to able not to the low values of interest World Economics - is part of a larger upgrade the quality of basic education. elasticities but to the interaction of the effort in PRE to study the determinants of This paper - a product of the Educa- mechanisms allowed for in the model, German foreign direct investment in de- tion and Employment Division, Popula- which tends to neutralize the impact of veloping countries. It was presented at tion and Human Resources Department such policies. the seventh conference of the European - is part of a larger effort in PRE to Morisset concludes that the effect of Association for Research in Industrial examine governments' role in the financ- changes in interest rate policy on the Economics held in Lisbon in September ing of training programs. Copies are demand for capital goods is weak in Ar- 1990. Copies are available free from the available free from the World Bank, 1818 gentina - and might affect the quality of World Bank, 1818 H Street NW, Wash- H Street NW, Washington, DC 20433. private investment more than its quan- ington DC 20433. Please contact Sheilah Please contact Cynthia Cristobal, room tity. King-Watson, room S8-045, extension S6-035, extension 33640 (68 pages). This paper - a product of the Debt 31047 (40 pages). and International Finance Division, In- ternational Economics Department - is 717. Does Financial Liberalization partofalargereffortinPREto determine 719. How Trade and Economic Really Improve Private Investment the interaction between external and do- Policies Affect Agriculture: In Developing Countries? mesticfinanceinsupportofinvestmentin A Framework for Analysis Applied developing countries. Copies are avail- to Tanzania and Malawi Jacques Morisset able free from the World Bank, 1818 H Street NW, Washington DC 20433. Please Ramon Lopez, Ridwan Ali, and Bjorn Larsen An increase in real interest rates, which is contact Sheilah King-Watson, room S8- a typical element of financial reforms, 045, extension 31047 (22 pages). This general equilibrium model shows does not necessarily involve a positive ef- that agricultural exports are highly re- fect on private investment unless the au- sponsive to price incentives -and that the thorities are careful to ensure that (1) 718. Impact of Investment Policies most effective policy instruments for ex- bank deposits are closer substitutes to un- on German Direct Investment panding agricultural exports are direct productive assets (cash, gold) and foreign In Developing Countries: export incentives and devaluation of the assets than to capital goods, (2) the finan- An Empirical Investigation exchange rate. cial sector assures an efficient allocation of domestic credit, and (3) the flow of Andrea Gubitz Lopez, Ali, and Larsen provide a general domestic credit to the private sector is not equilibrium model for analyzing the absorbed by the needs of the public sector. AsexperienceinGermanyshows, the source mechanisms by which macroeconomic, country's policies might influence foreign trade, price, and exchange rate policies Assuming that liquidity constraints exist direct investment (FDI) flows as much as affect agricultural export sectors. They in most developing countries, the major- the host country's policies do. estimate the model empirically for Tanza- ity ofanalysts believe that increasing real nia and Malawi to measure the supply interest rates will raise the volume of Many past empirical studies of foreign responses of agricultural exportables. lending and hence private investment. direct investment (FDI) flows have been They find that: Morisset, focusing on the demand for unsatisfactory because of poor data. * Agricultural exports are highly re- capital goods, argues that the positive Gubitz, using better data on German FDI, sponsive to price incentives. effect on the domestic credit market may found that: * The most effective policy instru- be offset by the negative effect of a portfo- * Developingcountriesmightattract ments for promoting the expansion of ag-' lio shift from capital goods and public more FDI flows by easing investment re- ricultural exports are direct export incen- bonds into monetary assets. He also dem- strictions or implementing incentives - tives and devaluation of the exchange onstrates that a policy offinancial liberal- but the effect of incentives could be mod- rate. ization could increase the public sector's est and does not justify costly subsidies. * Fiscal policies are not neutral with demand for domestic credit, thus limiting * A source country's policy instru- respect to the structure of agricultural the funds available to the private sector. ment (public guarantees) is an important production. This crowding out does not result from a determinant of German FDI outflows to This paper is a product ofthe Agricul- change in the government's behavior but developing countries - a factor that has ture Operations Division, Southern Af- from a shift in the portfolio of private been overlooked in the past. rica Department, Africa Regional Office. agents. Higher demand for bank deposits * Industrial countries can substan- Copies are available free from the World reduces the private sector's willingness to tially encourage their companies to invest Bank, 1818 H Street NW, Washington, hold government bonds, so the public sec- in developing countries by offering public DC 20433. Please contact Manel tor must finance a given budget deficit guarantees. Andactual costs in Germany Gunasekara, room H5-055, extension with more domestic credit. have been low, as defaults have been rare. 32261 (43 pages). His simulations for Argentina for This paper - a product of the Debt 1961-82 suggest that the low response of and International Finance Division, In- Policy Research Working Paper Series 155 private decisionmakers. 721. The Demand for Money In 720. The Outlook for Commercial * Severalstepscanbetakentoaccel- Developing Countries: Assessing Bank Lending to Sub-Saharan erate debt reduction through conversion the Role of Financial Innovation Africa mechanisms. Special funds could be cre- ated for the investment of debt, for ex- Patricio Arrau, Jos6 De Gregorio, Carmen Ellen Johnson Sirleaf and Francis Nyizjesy ample. Reinhart, and Peter Wickham * Given the small share of African Key issues in the future of long-term com- debt in most banks' portfolios and the Financial innovation is important in de- mercialbanklendinginAfrica,constraints conservative posture of those banks, a termining the demand for money and its on increased commercial bank lending strong case can be made to the regulatory fluctuations, importance that increases there, and special initiatives for removing authorities to eliminate mandatory pro- with the rate of inflation. - those constraints and stimulating lending visioning regulations as quickly as pos- to Sub-Saharan Africa. sible. Traditional specifications of money de- * There is scope for rethinking the mand have commonly been plagued by .Since its peak in 1980-82, medium and wayriskisallocatedinfacilitiescofinanced persistent overprediction, implausible long-term commercial bank lending to by commercial banks and official agen- parameter estimates, and highly Sub-Saharan Africahas been declining- cies. autocorrelated errors. partly because of many banks'perception * More open attitudes toward the Arrau, De Gregorio, Reinhart, and that lending to the African market repre- commitment of export cash flows appear Wickham argue that some of these prob- sents high risks unjustified by the avail- to be important in accelerating resumed lems stem from the failure to account for able returns. lending, until a country has adopted an the impact of financial innovation. The prospects for an appreciable in- open foreign exchange regime or has They estimate money demand for ten crease in such lending are not promising. achieved full convertibility. Concerns developing countries, using various prox- Despite some progress under economic about possible distortions could best be ies for financial innovation. They also adjustment programs, banks are skepti- mitigatedby setting alimit on the amount assess therelative importanceofthis vari- cal about Sub-Saharan African govern- of funds that can be so committed by a able. ments'ability and willingness to continue given country or borrower, and by im- They find that financial innovation with reform. Many of those countries proved appraisal of the underlying can be better modeled as a stochastic have been unable to establish creditwor- projects. (random-walk) trend rather than a deter- thiness and the ability to service commer- * Commercial banks are at a disad- ministic (time) trend. Financial innova- cial debt - and are saddled with debts to vantage in analyzing or projecting a de- tion plays an important role in determin- multilateral agencies. And in a time of veloping country's creditworthiness and ingfluctuations of the demand for money. tight regulation, most banks have ample fear of the unknown can be particularly Theimportance of thisrole increases with opportunities in other parts of the world. acute in Sub-Saharan Africa. The in- the rate of inflation. On the positive side, the portfolio depth economic analyses of the IMF and This paper - a joint product of the clean-up that has occupied commercial the World Bank are the closest the inter- Debt and International Finance Division, banks'resources for three years should be national community has come to estab- International Economics Department and nearing a close, making it possible for lishing an "independent audit function." the International Monetary Fund - is them to begin considering a resumption of These are not available to the public un- part of alarger effort in PRE to apply new lending to qualifiedborrowers under speci- less the member government authorizes monetary approaches to developing coun- fled conditions. their release. These authorizations should tries. It is also being distributed as an Sirleaf and Nyirjesy examine key is- be routinely granted - at least for basic, IMF working paper. Copies are available sues in the future of long-term commer- accurate, qualitative, and quantitative free from the World Bank, 1818 H Street cial bank lending in Africa, identify con- macroeconomic information. NW, Washington DC 20433. Please con- straintsonandopportunitiesforincreased This paper - a product of the Debt tact Sheilah King-Watson, room S8-040, commercial banklending(as perceivedby and International Finance Division, In- extension 31047 (44 pages, with figures some commercial U.S., European, and ternationalEconomicsDepartment-was and tables). Japanese bankers), and suggest special prepared for the Symposium on African initiatives for removing constraints on External Finance in the 1990s, held Sep- and stimulating lending to these Sub- tember 18-19, 1990, at the World Bank. 722. Is Rice Becoming an inferior Saharan African markets. Among points Copies are available free from the World Good? Food Demand they make: Bank, 1818 H Street NW, Washington, In the Philippines * Private investment and financing DC 20433. Please contact Sheilah King- will not improve in the region without a Watson, room S8-040, extension 31047 Merlinda D. Ingco satisfactoryenablingenvironment,includ- (46 pages, with tables). ing an appropriate policy framework, the Improving pricing and trade policy for protection of rights and properties, and cereals, feed, and meat in the Philippines wider political participation and consen- may be more cost-effective in improving sus - conditions that lead to political the balance of food supply and demand stability and engender confidence among than further investments in rice irrigation 156 Policy Research Working Paper Series - particularly if wheat consumption in- Washington DC 20433. Please contact needfor good training, management,com- creasingly substitutes for rice consump- Pauline Kokila, room S7-040, extension munications, and information systems. tion. 33716 (25 pages, with tables). But new and innovative institutional mechanisms are needed to address Africa's Using time-series data, Ingco estimates a nutrition problems. Each country must demand system model for food - includ- 723. Improving Women's and look for its own institutional strengths ingrice,corn,wheat,meat,fish,andfruits Children's Nutrition In Sub- and weaknesses in developing nutrition andvegetables-for the Philippines. She Saharan Africa: An Issues Paper programs. finds that: This paper - a product of the Popu- * Food demand is responsive to rela- Olayinka Abosede and Judith S. McGuire lation, Health, and Nutrition Division, tive price changes. Most of the other food Population and Human Resources De- products are particularly responsive to Nutrition is the number one health con- partment - is part of a larger study - changes in rice prices, an important vari- cern in Africa - and nutrition programs undertaken by PRE of African health able in agricultural policy in the Philip- can be a magnet for attracting community policy. Copies are available free from the pines. A marked change in rice prices support to the health system, especially World Bank, 1818 H Street NW, Wash- relative to other food prices would have maternal-child health programs. But nu- ington DC 20433. Please contact Otilia important policy implications because of trition is often a secondary concern of Nadora, room S6-065, extension 31091 its relatively large share in food budgets health policy, often ignored in food policy, (30 pages). and the relatively great response of other and too often left out oftraining programs foods to changes in rice prices. and work plans. * In particular, as wheat prices de- 724. Fiscal Issues In Adjustment: cine, wheat consumption shouldincrease The main sources of malnutrition in Af- An Introduction - resulting in some substitution away rica, as elsewhere, are inadequate food from rice - because wheat and rice are intake, excessive disease, maternal Riccardo Faini and Jaime de Melo net substitutes. malnutrition, and deleterious food and * The demand for wheat, meat, and health behavior (such as abrupt weaning, This summary of the fiscal issues in ad- fruits and vegetables is more responsive the early or late introduction of justment in developing countries focuses to own-price changes than are the staple nonbreastmilk foods and liquids, the on the macroeconomics ofadjustment (the foodstuffs. intrahousehold allocation of nutrients size of fiscal adjustment, the impact of * Rice, corn, wheat, and meat are net away from nutritionally vulnerable mem- deficit reductions, and methods for reduc- substitutes. Rice, fish, and fruits and bers of the family, the withdrawal of food ing the deficit), fiscal system reforms vegetables are net complements. Wheat during diarrhea, and poor food and sani- (spending cuts and tax reform), and new is a net substitute for rice, corn, fish, and tation practices). directions for research (the growth effects fruits and vegetables - but a net comple- Abosede and McGuire review several and the political economy offiscal policy). ment to meat (partly because of urbaniza- successful innovative approaches to ad- tion and the proliferation of fast-food out- dressing nutrition problems in Africa: the Adjustment to the macroeconomic crises lets in recent years). Iringa Nutrition Program in Tanzania, of the eighties was least successful on the * Urbanization increases the con- the Zimbabwe Children's Supplementary fiscal front. Faini and de Melo, in this sumption of wheat, fish, and fruits and Feeding Program, the Zaire Weaning introduction to a symposium on fiscal vegetables - and slightly decreases the Foods Processing Program, and the issues in adjustment, summarize the is- consumption of rice. Senegal Growth Promotion Program. sues raised by papers in the symposium. * Consumption ofrice and wheatcan They identify the lessons from these Those papers deal with various as- be expected to grow. Per capita consump- programs, including the need: pects of the fiscal crisis that many devel- tion of corn should decline slightly. * To involve the community actively oping countries faced in the eighties. Af- * These trends should be considered in program development. ter a brief introduction on the magnitude in evaluating the costs and benefits of * For training in nutrition at all 1ev- of the crisis, Faini and de Melo summa- further irrigation investments in the rice els, from doctor to village health worker. rize issues discussed in three areas. sector. An improved pricing and trade * For strong growth monitoring and On the macroeconomics of adjust- policy in the cereals, feed, and livestock- nutrition education components. ment, they discuss the size of fiscal ad- meat sectors may be more cost-effective in * For close supervision, including justment, the impact of deficit reductions, improving the balance of food supply and regular supervisory visits to villages and and the methods of reducing the deficit. demand than more investments in rice health huts, discussions with clients, and On fiscal system reform, they survey re- irrigation. observations. formsoccasionedbythefiscal crisis: choice This paper - a product of the Inter- * For a variety of institutional and of spending cuts and reform of the tax national Trade Division, International financing mechanisms. system. They close with a discussion of Economics Department - is part of a Africa's nutrition problems require new directions for research: the growth larger effort in PRE to understand the many of the same services as problems effects of fiscal policy and the political changes in food markets in developing elsewhere - growth monitoring, nutri- economy of fiscal policy. countries. Copies are available free from tion education, targeted feeding, and food This paper - a product of the Trade the World Bank, 1818 H Street NW, fortification. Africa shares the universal Policy Division, Country Economics De- Policy Research Working Paper Series 157 partment - is part of a larger effort in men. Increases in the importance of the World Bank, 1818 H StreetNW, Wash- PRE to study the sustainability of adjust- services will similarly increase the de- ington DC 20433. Please contact Audrey ment (RPO 675-32). This paper appeared mand for schooling more for women than Sloan, room S9-121, extension 35108 (43 in a symposium, Fiscal Issues in Adjust- for men. pages, with tables). ment in Developing Countries, published If health is equally valued by all sec- by Richerche Economiche, vol. 14, 1990. tors, but health and schooling are comple- Copies of the paper are available free mentary inputs to production, changes in 726. Perspectives on the Design of from the World Bank, 1818 H Street NW, production that encourage more school- Intergovernmental Fiscal Relations Washington, DC 20433. Please contact ing for men (or women) will also encour- Dawn Ballantyne, room N10-019, exten- age more investments in health for men Anwar Shah sion 37947 (26 pages). (or women). Gill and Khandker test these propo- Practical guidelines on fine-tuning the sitions usingprimaryand secondary school structureoftransfers betweenfederal, state, 725. How Structure of Production enrollment ratios and life expectancylev- and local governments - without reas- .Determines the Demand for Human els(as proxies for investments andschool- signing spending and taxing responsibili- Capital ing and health) for about 90 countries in ties. 1965 and 1987. The data for 1965 appear Indermit S. Gill and Shahidur R. Khandker to be broadly supportive of the proposi- The literature on fiscal federalism pro- tions; data for 1987 support them only vides much useful guidance in the design To promote gender equity, expansion of weakly. ofintergovernmental fiscal relations. But the services sector should be encouraged. The empirical analysis cannot deter- few developing countries have paid seri- But this runs counter to the World Bank mine whether changes in the economic ous attention to this guidance in design- and IMF policy of encouraging the pro- structure cause increases in the demand ing their transfers. duction of tradable goods (produced for education, or whether improved edu- Shah provides a framework for as- mainly in agriculture and less so in indus- cation facilitates alargely exogenous tran- sessingintergovernmental fiscal arrange- try) to service debt. So direct government sition from an agrarian to an industrial/ ments and develops some blueprints for intervention is needed to promote invest- service economy. Ifissues ofcausality are helping developing nations chart a course ment in women's human capital. resolved in favor of the views Gill and for reform. Except for centrally planned Khandker express in this paper, interest- economies in transition to market econo- Explanations of lower investments in fe- ing policy implications emerge. mies, most of these arrangements do not male schooling and health than in male Most important, expansion ofthe ser- require fully restructuring the economy assume that demand for these compo- vices sector would greatly help reduce so much as fine-tuning the existing struc- nents ofhuman capital somehow exists - gender inequity at the same time as fos- ture of transfers (without reassigning and they concentrate on the supply of tering growth. spending and taxing responsibilities). human capital by the household. This finding highlights the problem Shah observes that assignment prob- Gill and Khandker try to remedy the with relying purely on economic growth to lems go from one extreme to the other. In neglect of demand-side factors by exam- reduce the gender gap in human capital. Yugoslavia,for example, decentralization ining exogenous dimensions of develop- Ifincome growth is accompanied by struc- went too far and circumvented the federal ment. They include the structure of pro- tural transformation of an economy from governments role of stabilization and re- duction - represented by the shares of agrarian to industrial and then to domi- distribution. A conscious effort is needed agriculture, services, and industry in na- nation by the services sector, there is no to restore that federal role. But in most tional employment or income - as an assurance that the economic status of countries the national government's role identifying variable for the demand for women will improve in the early stages of is too pervasive and intrusive -reaching human capital. this transformation. beyond the important roles of national Their reasoning is that the produc- Because the human capital of women defense and security to such purely local tion functions of these three sectors differ has significant externalities - that is, functions as pothole repair and rat con- in their requirements for skills. Industry because social returns to women's educa- trol. and services requiremore educated work- tion and health are higher than private Usually these problems arise not be- ers than agriculture does - and industry returns - the case is strong for direct cause constitutional assignment conflicts requires more full-time educated workers government intervention in investments with theory but because de facto assign- than services does. in women's human capital. ment conflicts with de jure responsibili- The authors assume thatwomenhave This paper -aproduct of the Women ties. Often, major reform is possible with a comparative advantage over men in the in Development Division, Population and administrative orders, so constitutional home sector, so women spend more time Human Resources Department - is part amendments are not needed. at home. But industry favors males over of a larger effort in PRE to determine if Problems often arise, for example, females more than the services sector and how women's productivity (and thus from overlapping and uncoordinated ad- does. If the importance of industry in- familywelfare)areimprovedwhen women ministration of certain taxes, especially creases at the expense of agriculture, the are given more access to education, train- sales and excise taxes. The solution is demand for schooling will increase for ing, credit, health care, and other public often to fine-tune existing assignments both men and women, but especially for resources. Copies are available free from rather than redesign the system. One 158 Policy Research Working Paper Series alternative often ignoredis for the higher- real estate. Conclusions vary about whether people level government to determine the tax use contraceptives more when they are base and for the lower-level government Dailami and Kim argue that credit subsi- more accessible - partly because of dif- to levy supplementary (piggyback) rates dies are ineffective in stimulating busi- ferences in case studies and partly be- on the uniform tax base. nessinvestmentin productive assets. In- cause of differences in methodologies and Mostcountries, says Shah, ignore the stead, they lead to an increase in corpo- measures of access. Generally analysts basic rule of intergovernmental trans- rate holdings of financial assets and real conclude that access is important, which fers, that grant programs be designed to estate. is important for policy, since increasing meet grant objectives. For empirical verification, Dailarni access to contraception is the most direct Almost invariably, developing coun- and Kim examined investment patterns intervention available for increasing the tries have excessive specific-purpose pro- in a sample of 241 Korean corporations use of contraceptives. grams - often the result of pork-barrel listed on the Korea Stock Exchange be- In Africa, in particular - where fer- politics - for many of which program tween 1984 and 1988. They found a sig- tility began to be reduced only in the last objectives are vague or unspecified or are nificant positive relation between corpo- five years - it is important to study the decided after funds are released. This rate speculative asset holdings and ac- effect on contraceptive use of targeting increases flexibility and discretionary cess to subsidized loans. family planning services to motivated spending at the cost of transparency, ob- Their estimates indicate that with- families. jectivity, and accountability. Some have out interest rate controls and other forms Cochrane and Gibney, in theirreview a perverse economic effect -for example, of subsidy, corporate holdings of specula- of 49 case studies in the literature, found covering lower-level deficits or salaries, tive assets would have been one-seventh highly inconclusive results on the ques- thus discouraging tax efforts at the lower of observed levels. Moreover, most corpo- tion of whether a particular measure of level. Reviewing these programs must be rate real estate holdings appear to be access - or methods of estimating those high on agendas for public sector reform. unrelated to production activities. measures - influence findings on the Federal-local and state-local trans- They find little evidence that the relationship between access to and use of fers in most developing countries need Korean government's interest rate con- contraception. restructuring. National governments are trols and credit allocation policy have Perceived and actual measures of not equipped to monitor local use of na- accelerated expansion ofcorporate invest- access did not show different effects, and tional funds. Moreover, local jurisdic- ment. If anything, they are partly to evidence was also inconclusive on whether tions are better suited than national to blame for the overheated Korean stock the choice of independent variables - administering to local needs and should market during 1986-88. travel time, distance to source, access to be encouraged to raise local taxes to fi- This paper - a product of the Coun- personnel, density of sources, and costs- nance them. try Operations Division, Country Depart- influences the results. Also, local governments are not gen- ment IV(India), Asia Regional Office-is All the findings about density of out- erally allowed to borrow in credit mar- the second in a planned series of research lets were significant. This suggests that kets. Autonomous bodies should be set up on the performance of capital markets access measures that focus on the nearest to supervise and help local borrowing for and their role in providing risk capital to outlet are less useful than those that capital projects. the corporate sector in India and the Re- measure distance or travel time to a num- This paper -a product of the Public publicofKorea. The researchisfundedby ber of outlets. Economics Division, Country Economics the Bank's Research Committee (RPO Cochrane and Gibney emphasize that Department-is part of a larger effort in 675-84). Copies are available free from differences in travel time or distance toan PRE to reform public sector management the WorldBank, 1818 H StreetNW, Wash- outlet may not be as important an influ- in developing countries. It is one of a ington DC 20433. Please contact Adala ence on contraceptive use once a popula- series of discussion papers prepared for Bruce-Konuah, room D10-079, extension tion has reached a threshold level of ac- the Intergovernmental Fiscal Relations 80356 (22 pages, with figures and tables). cess. Project of the Division. Copies are avail- But generally the quality of the data able free from the World Bank, 1818 H available is poor, partly because data col- StreetNW, Washington DC 20433. Please 728. Does Better Access to lectors were poorly trained. Moreover, contact Ann Bhalla, room N10-059, ex- Contraceptives increase their Use? the relationship between measures of ac- tension 37699 (107 pages). Key Policy and Methodological cess and use may be different from what Issues researchers expect. Rather than the loca- tion of family planning outlets influenc- 727. The Effects of Debt Subsidies Susan Cochrane and Laura Gibney ing the demand for and use of contracep- on Corporate Investment Behavior tives, it may be that demand for contra- The only consistently significant results ceptives determines the location ofoutlets. Mansoor Dailami and E. Han Kim available on whether access to contracep- Analysis of the effects of access must tives increases their use relate to the den- first be based on a coherent theoretical Credit subsidies are ineffective in stimu- sity ofaccess: the more sources users have framework. It must also include a richer lating business investment in productive access to, the more they seem to use contra- measurement of the quality of services. assets. Instead, they lead to an increase in ceptives. Better data are needed on other This paper - a product of the Popu- corporate holdings offinancial assets and measures of access. lation, Health, and Nutrition Division, Policy Research Working Paper Series 159 Population and Human Resources De- achieve growth and stability in export * Unemployment will not cause sig- partment - is part of a larger effort in earnings is to increase and stabilize agri- nificant fiscal strain if dismissals of re- PRE to examine the impediments to con- cultural production and the volume of tired employees are made a priority, but traceptive use and fertility decline in dif- exports. there will be more open unemployment ferent environments. Copies are avail- Using several measures for horizon- that the government expects. able free from the World Bank, 1818 H tal export diversification of commodities * Unemployment will be afeature of StreetNW, Washington DC20433. Please in the existing export mix, Ali, Alwang, the economy for structural reasons and contact Otilia Nadora, room S6-065, ex- and Siegel found no clear relationship because of short-termmismatches of skills tension 31091 (30 pages). between the degree of export diversifica- and the normal fallout from the economic tion and export performance in Malawi, cycle. A scheme integrating government Tanzania, and Zimbabwe. Their analysis subsidies and an insurance system with 729. Is Export Diversification shows that different export diversifica- participation of both employee and em- the Best Way to Achieve Export tion policies can helpfulfill different policy ployer could be developed initially. Growth and Stability? A Look goals. * The wage indexation system is at Three African Countries This paperisaproductofthe Agricul- adequate to drive down inflationary ex- ture Operations Division, Southern Af- pectations and to stimulate employment RidwanAli, JeffreyAlwang, andPaulB. Siegel rica Department, Africa Regional Office. adjustments. But there will be practical Copies are available free from the World problems enforcing the wage policy. Policymakers -concerned with the insta- Bank, 1818 H StreetNW, Washington DC * Adequate mechanisms must be es- bility and downward trend in export earn- 20433. Please contact Manel Gunasekara, tablished for managing the minimum ings for Malawi, Tanzania, and Zimba- room H5-055, extension 32260 (44 pa- wage. The price must be used as a signal bwe between 1961 and 1987 - tend to ges). ofeconomic developments and of the basic propose the remedy of export diversifica- price for unskilled labor - and not as an tion. But horizontal diversification would instrument of income distribution. have produced lower export earnings and 730. Wage and Employment * As for labor mobility, breaking the more instability. Policies in Czechoslovakia link between providing benefits and jobs is fundamental to ensuring more rapid Malawi, Tanzania, and Zimbabwe depend Luis A. Rivems adjustment in job opportunities and en- heavily on export earnings from a narrow couraging the supply response. base of agricultural commodities. This Tke key short-term measures for reform of This paper - a product of the Educa- dependence increased between 1961-73 the labor market in Czechoslovakia are tion and Employment Division, Popula- and 1974-87, when international prices wage indexation, deregulation ofthe wage tion and Human Resources Department for those commodities were declining and structure, and the facilitation of labor -is part ofalarger effortin PRE to assess unstable. mobility. In the long term, it is important the role of labor markets in the process of Policymakers - concerned with the to reform the institutions responsible for economic adjustment. Copies are avail- instability and downward trend in export setting wages and unemployment com- able free from the World Bank, 1818 H earnings for the three countries - tend to pensation plans. Street NW, Washington DC 20433. Please equate these trends with the countries' contact Valerie Charles, room S6-228, narrow export commodity base. They Riveros discusses the short-term andlong- extension 33651 (24 pages). often propose export diversification as an term labor market policies Czechoslova- expedient remedy. kia needs for the economic reform envis- But Ali, Alwang, and Siegel found aged in the current economic program. 731. Efficiency Wage Theory, thathorizontal diversification wouldhave The policyimplications ofhis analysis can Labor Markets, and Adjustment produced lower export earnings and more be extended to other Eastern European instability. Policymakers introducing countries. Luis A. Riveros and Lawrence Bouton horizontal diversification must first con- Riveros emphasizes that wage index- sider price forecasts, comparative advan- ation, deregulation of the wage structure, Efficiency wage theory suggests that wages tage, the economy's changing structure, and facilitation of labor mobility are key (and hence labor markets) may be unre- and the costs of adjustment. Reactions to short-term measures. They increase the sponsive to typical macroeconomic policies historical price movements can produce prospects for success not only of struc- that seek to lower real wages, change re- unexpected, undesirable results. tural reform but of other macroeconomic source allocation, and reduce open unem- A shift during this period from favor- policies aimed at controlling inflation. ployment. Under this theory, firms will able to unfavorable price tends, and shifts In the long term, reforming labor react to macroeconomic shocks by altering in the covariances of deviations from price market institutions - especially those employment (laying workers off), not wages. trends, complicate the design of export responsible for setting wages and unem- diversification policies - especially poli- ployment compensation plans - must Conventional labor theory argues that cies aimed at stabilizing export earnings. take priority, to ensure that the labor wages are determined by the interaction Generally, although international com- market functions in harmony with the of labor supply and demand - the firm modity prices have fallen and instability overall market environment. takes the market wage as an exogenous has increased, the most effective way to Riveros further concludes that: parameter. Under conventional theory, 160 Policy Research Working Paper Series policy analysis on wage rigidity has em- PRE to identify the role of alternative reforming socialist countries, where sta- phasized distortions arising from exog- wage policies in achieving abetter supply bilization and structural reforms are much enous (union and government) interven- response to adjustment policies. Copies more closely intertwined. tion. Thus, one emphasis in adjustment are available free from the World Bank, This paper - a product of the Macro- lending has been deregulation of labor 1818HStreetNW, WashingtonDC 20433. economic Adjustment and Growth Divi- markets. Please contact Valerie Charles, room S6- sion, Country Economics Department - Efficiency wage models of unemploy- 228, extension 33651 (34 pages). is partof a larger effort in PRE to analyze ment try to explain persistent real wage the design and the effects of stabilization rigidities when unemployment persists. programs in Central and Eastern Europe. Their central assumption is that higher 732. Stabilization Programs in Copies are available free from the World real wages can improve labor productiv- Eastern Europe: A Comparative Bank, 1818 H StreetNW, Washington DC ity. A major implication of these theories Analysis of the Polish and 20433. Please contact Rebecca Martin, is that wages (and hence labor markets) Yugoslav Programs of 1990 roomN11-077,extension39065(67pages). may be unresponsive to typical macroeco- nomic policies that seek to lower real Fabrizio Coricelli and Roberto de Rezende wages, change resource allocation, and Rocha 733. The Consulting Profession In reduce open unemployment. Under this Developing Countries: A Strategy theory, firms will react to macroeconomic Two apparently similar programs for Development shocks by cutting back onjobs, not wages. launched at roughly the same time by The three central macroeconomic im- Yugoslavia and Poland yielded signifi- Syed S. Kirmani and Warren C. Baum plications of efficiency wage theory are cantly different initial results (output fell these: much more while inflation declined more Governments should emphasize quality * There is an equilibrium "natural" slowly in Poland than in Yugoslavia). over price in evaluating bids, stop favor- level of open unemployment, which dif- ing public sector firms, and establish bet- fers among groups in the labor force and Coricelli and Rocha compare the imple- ter contracting and compensation proce- cannot be affected by demand manage- mentation of two apparently similar sta- dures. There should also be more joint ment policies. Workers offering services bilization programs by two reforming so- ventures between developed and develop- at a lower wage rate are unable to drive cialist countries, launched two weeks ing country consulting firms. the wage down and to expand employ- apart (December 1989 in Yugoslavia and ment. January 1990 in Poland). The quality of domestic consulting firms * When reducing the level of produc- They investigate possible differences in developing countries has not kept pace tion - and to the extent that other firms' underlying the apparently similar pro- with their growth in number. Kirmani wages are perceived as given - the typi- grams that may account for the better and Baum recommend a strategy for cal firm will resort to laying off labor initial performance of Yugoslavia's pro- strengthening domestic consulting. instead of reducing wages, thereby intro- gram (a sharper reduction of inflation For developing countries: ducing a significant wage inertia and an with smaller losses in output). * Joint ventures of foreign and local overshooting ofopen unemployment. The The authors identify significant dif- consulting firms should be encouraged to firm's profit-maximizing wage may ex- ferences in initial conditions in the two foster technology transfer and training. ceed the opportunity cost of redundant countries as well as the sequence and * Localconsultingshouldbeconfined labor, but lower wages would entail a degree of some policy measures. These as much as possible to the private sector; greater loss associated with the reduction differences may explain the difference in public sector consulting firms should be of productivity and the "average quality" the early results. privatized or at least should get no prefer- of workers than would be gained from They also identify the most impor- ential treatment. reducing per-worker costs. tant issues the two countries must ad- * In the award of local contracts, * Wages do not respond to clear the dress in the second stage ofreform. These procedures should be changed to give pri- labor market and are not responsive to include the unfreezing of nominal vari- ority to quality in all but simple or routine macroeconomic policies and microeco- ables and resolving the critical structural assignments. Unless governments ex- nomic deregulation. problems affecting both economies. pect and demand quality performance, Riveros and Bouton conclude that Coricelli and Rocha conclude thatthe and create the environment to make it applying the theory in developing coun- microfoundations of socialist and market possible, they will not get it. tries requires suitably defining labor costs economies are clearly different. These * Consultants should be paid on the and tackling the problem of segmentation differences imply that in socialist econo- basis of "man-month contracts," except of the labor market (into formal and infor- mies the case for including incomes policy where the work can be precisely defined mal markets). in stabilization programs may be stron- inadvance and paymentmethods of"lump This paper - a joint effort of the ger. Different microfoundations also im- sum"or "percentage ofconstruction costs" Education and Employment Division, ply that the model of sequencing tradi- are acceptable. Population and Human Resource Depart- tionally applied to Latin American coun- * National development banks ment,andtheMacroeconomicAdjustment tries - where structural issues are rel- should provide financial and technical and Growth Division, Country Economics egated to later stages of the adjustment assistance tolocalflirmsfortraining, work- Department - is part of a larger effort in programs - does not seem to apply to ing capital, and physical facilities and Policy Research Working Paper Series 161 equipment. ment. care, and there are reasons why ministries For the World Bank and other donors: The study focuses on primary educa- of health might want toformulate an overt * The Bank should encourage joint tion in 60 nations and assesses the eco- policy toward traditional medicine. Here ventures, giving them preference in the nomic impact of an emphasis on eight are some policy options to consider. selection offirms to be short-listed and in differentprimarylevel subjectareas, with the acceptance of the developing country special attention to mathematics and sci- A wide range of traditional healers is partner as the sponsor or cosponsor in ence. active in Africa, but information about suitable cases. Benavot found that the curricular their number and activities is scarce. * Technical assistance loans or cred- content of mass education is directly re- There is growing recognition, however, its (usually in small amounts - sepa- lated to national economic growth. This that traditional practitioners provide ac- rately or as part of a larger loan or credit relationship, however, is not consistent cessible care, especially in rural Africa, for a related purpose) should be extended across all subject areas and all types of and that they are a valuable resource to support government programs for de- countries. which often should be incorporated into a veloping the profession. Countries requiring more hours of country's health care system. * The Bank should develop amethod elementary science education, for ex- Survey data indicate that about 20 for quantifying the financial and economic ample, generally experienced more rapid percent of Africans who seek medical care costs of quality defects in projects, par- increases in their standards of living dur- first consult traditional healers. Patients ticularly at the feasibility and design ingtheperiodsfrom 1960 to 1985. Whether tend to consult modern health care ser- stages, and reinforce it by selected case science education at the primary level is vices for infectious or acute diseases, or studies -to promote an understanding of the key causal factor and whether the those for which modern health care has the importance of the quality of profes- explicit content of the subject area is the been shown to be highly effective. But sional work. key mechanism remain unclear. patients tend to consult traditional prac- * The IFC should play a more active The design, reform, and study of na- titioners for chronic diseases, for diseases role in financial participation in local con- tional school curricula are increasingly related to psychological or social disrup- sulting firms, and EDI should give the visible in political and scholarly agendas. tion or to reproductive systems, for dis- subject more prominence in its curriculum. Conventional wisdom on these matters, eases that are slow to respond to treat- * The most important contribution however, may cloud rather than clarify a ment or are caused by organisms that of bilateral donors would be to waive or vision of the potential economic benefits have become resistant to drugs, and for modify the requirement of tying technical of different choices of subjects for cur- diseases deemed to be "magical" in origin. or financial assistance to the use of con- ricula. The prestige and credibility of traditional sultants solely from the donor country. The economic consequences of em- healers have been waning in the face of This paper - a product of the Infra- phasizing different subject areas should modernization and an increasingly edu- structure and Urban Development De- not be the sole criterion for decisionmak- cated public, but even so many highly partment - is part of a larger effort in ingin designingcurricula. However, these educated people consult traditional prac- PRE toimprove the quality ofthe consult- consequences can provide one useful ele- titioners. Asurveyinlbadanoftwogroups ing profession in developing countries. ment for promoting more informed dis- - one educated elite, the other a tradi- Copies are available free from the World cussion among such interested parties as tional, less privileged group - found that Bank, 1818 H StreetNW, Washington DC parents, school administrators, national roughly 70 percent of both groups used 20433. Please contact INUDR, room S10- and international planners, and educa- traditional health care, particularly tra- 045, extension 33758 (52 pages). tional researchers. ditional drugs. This paper- a product of the Educa- Governments have many policy op- t.ion and Employment Division, Popula- tions for traditional medicine. One would 734. Curricular Content, tion and Human Resources Department be simply to leave traditional health care Educational Expansion, and -- is part of a larger effort in PRE to alone, but that wouldmean not taking full Economic Growth examine the effects of primary education advantage of the positive contributions on development. Copies are availablefree traditional healthcare providers can make Aaron Benavot from the World Bank, 1818 H Street NW, and notbeing able to regulate their activi- Washington, DC 20433. Please contact ties in the interests of their clients. More Manyacademicians, politicians, and edu- Cynthia Cristobal, room S6-214, exten- active policy options open to governments cators strongly believe that knowledge, ,don 33640 (27 pages, with tables). include encouraging further organized in school curricula and trans- professionalization through such means mitted through school systems, contrib- as licensing and establishing professional utes to the economic strength of nations. 735. Traditional Medicine in Sub- associations, providing them with drugs How valid is this claim? Saharan Africa: Its Importance and training them in better techniques. and Potential Policy Options In Tanzania, for example, the govern- Benavotexanineswhethernationalvaria- ment has developed a program to train tions in curricular content and subject Jocelyn DeJong local midwives in the delivery of some area - as distinct from growth in enroll- maternal and child health services in ar- ment or qualitative provisions - have a Traditional health practitioners inAfrica eas with no modern health care. In some significant impact on economic develop- are an importanthumanresource in health instances trainingprogramshavereduced 162 Policy Research Working Paper Series the incidence of neonatal tetanus. sector alone are unlikely to provide a suf- the possible utility of contingent claims There are several potential areas of ficient restraining mechanism for wages. on capital - such as vouchers - in offset- cooperation andcomplementaritybetween ting capital depletion promoted by uncer- traditional and modern health care work- Certain inherited features of the socialist tainty about property rights. ers. The most obvious is working with economies - socialized ownership, full Finally, theyemphasize the way wage traditional birth attendants trained as employment, restricted job mobility, and taxrulescanaffectemploymentandwages referral agents to provide safe prenatal de facto wage indexation - mean that and how critical is their design. A wage and postnatal care and to manage drastic reform of the labor market must bill tax, as used in Poland through 1990, uncomplicated deliveries. Another is in figure prominently in overall economic not only reduces employment but will the treatment of psychosomatic and psy- reform. probably raise wages. Bycontrast, a wage- chological illnesses. Traditional practi- The question is how to implement per-worker tax will tend to raise employ- tioners may also have a comparative ad- that range of reforms to ensure compat- ment and lower wages. These effects are vantage in counselling patients with ter- ibility. One such tension relates to the likely to be reinforced in a two-sector minal illnesses, such as AIDS. Tradi- fact that governments must demonstrate context, where worker-controlled firms tional practitioners mightbe employed as their commitment to a more passive role and private firms coexist and where rela- community health workers. in the economy while maintaining direct tive wage considerations are important. DeJong shows that traditional medi- controls over wages and possibly job deci- They conclude that because of the cine is an important source of health care sions. inherited ownership structure and the for significant numbers of Africans and Commander, Coricelli, and Staehr uncertainty associated with reform, mar- that traditional healers, particularly those focus on the implications for wage bar- ket-based regimes will continue to need who wield authority within their commu- gaining and policy ofinherited ownership centralized controls over wages in worker- nities, are an important human resource arrangements and rules about wage set- controlled firms (the socialized sector). for health care. Traditional health care is ting during the transition. Unemployment and an expanding pri- unlikely to disappear, particularly if the In imposing unemployment on the vate sector alone are unlikely to provide a quality of and access to modern health system, by repudiating the soft budget sufficient restraining mechanism for care service do not improve significantly. constraint, the reforming government wages. The boundaries between traditional and tries to teach workers and managers that This paper - a joint product of the modern health care practitioners are be- behind it all lies a Phillips curve. But National Economic ManagementDivision, ginning to blur, with the former adopting fiscal and political constraints limit the Economic Development Institute and the many of the practices of the latter. The government's tolerance (if not stimula- Macroeconomic Adjustment and Growth consequent competition between the two tion) of unemployment - so agents may Division, CountryEconomics Department groups will likely necessitate health poli- be skeptical about government adherence - was prepared for a seminar on Central cies that address the entire spectrum of to announced policy. and Eastern Europe: Roads to Growth, health care, traditional and modern, and Commander, Coricelli, and Staehr sponsored by the Austrian National Bank the relationship between them. discuss the strong tendency toward and the International Monetary Fund, This paper - a product of the Popu- overemployment and wage drift in social- and held in Baden, Austria, April 15-18, lation, Health, and Nutrition Division, ist systems. They focus on the market- 1991. Copies are available free from the Population and Human Resources De- based transitional economy, exemplified World Bank, 1818 H Street NW, Wash- partment - is part of a larger study un- by Poland since 1990, setting up a series ington DC 20433. Please contact Olga Del dertaken by PRE on African health of models capturing the behavior of Cid, room M7-047, extension 39050 (38 policy. Copies are available free from the worker-controlled firms. pages). World Bank, 1818 H Street NW, Wash- They develop a simple policy game in ington, DC 20433. Please contact Otilia which government policy is conditioned Nadora, room S6-063, extension 31091. on output, through a subsidyinstrument. 737. External Shocks, Adjustment This reflects the problem typically faced Policies, and Investment: by reforming governments of whether to Illustrations from a Forward- 736. Wages and Employment enforce a hard budget constraint (and looking CGE Model of the in the Transition to a Market hence tolerate higher unemployment) or Philippines Economy whether to resort to subsidies and associ- ated departures from fiscal targets. Delfin S. Go Simon Commander, Fabrizio Coricelli, and Given the commitment to privatiza- Karsten Staehr tion and the consequentuncertaintyabout The rapid increase in investment and ex- future claims on capital, they also develop ternal debt of middle-income countries Because of the inherited ownership struc- -in a two-period model -the conditions like the Philippines during the 1970s was ture and the uncertainties associated with under which the worker-controlled firms perfectly "rational" behavior, given exist- reform, market regimes in reforming so- will deplete capital stock, possibly through ingpolicies. However, thesecountriescould cialist economies will continue to need excessive wage growth. They indicate have done better with an appropriate mix centralized controls over wages in worker- how an appropriate tax rule - in this of adjustment policies. The paper high- controlled firms (the socializedsector). Un- case, a wage-per-worker rule - can re- lights the intertemporal tradeoffs oftariff employment and an expanding private strain decapitalization. They also discuss reform, emphasizing the need for comple- Policy Research Working Paper Series 163 mentary measures to ease macro imbal- count deficits, and more debt. Other mea- tax rates? Are there simple forms of ances and short-term dislocations of the sures are needed. coordination from which all member states protected sector. * In general, Go finds that a combi- could expect to benefit? Is harmonizing nation ofpolicies is effective in maintain- tax rates desirable? Would the United Go developed a model that integrates ing growth and exports without a rapid States be wise to insist on a minimum tax intertemporal and forward-looking behav- accumulation of debts - even during a requirement on key economic activities in ior in investment and consumption deci- permanentimport price shock. Infact,an moving to free trade with Mexico? Or is it sions in a multisectoral general equilib- import price shock is an attractive occa- Mexico that should seek such a condition? rium framework applicable to developing sion for tariffreform, as it eases pressures If two countries make it easierfor goods to countries. It formulates and uses an infi- on domestic prices, prevents exports from move between them, how should they nite-horizon growthmodel to examine the declining too much, and does not lead to adjust their domestic tax structures? adjustment, growth, and debt problems of an expansion of import demand that nor- These and other policy questions re- a middle-income country, which Go illus- mally accompanies a tariff reduction. flect the increasing strain that the inter- trates using data for the Philippines. Combined with other policies, tariff nationalizationofeconomicactivityisplac- The simulations illustrate the impor- reform could rechannel investment and ing on existing national tax structures tance of dynamic, forward-looking behav- resources toward the more tradable sec- designed for a less integrated world. iorin consumption and investment. They tors and exports can be emphasized and Kanbur and Keen use a simple two- show how an import price shock could increased. If domestic resources are also country model toaddressarange ofpolicy lead to an investment boom and rapid mobilized through increased tax collec- concerns that arise as a result, focusing expansion of foreign debt, as happened in tion, the combined effect will be to reduce on the role of national size. Disparity in the mid-seventies to many developing or slow the accumulation of foreign debt. size between countries is a source of inef- countries. In other words, middle-income coun- ficiency in itself, exacerbating the loss This rapid expansion is hard to ex- tries like the Philippines missed a golden thateach country suffersasaconsequence plain without investigating the dynamic opportunity for policy reform in the 1970s of noncooperative tax behavior. competitive conditions between domestic and found it harder to implement adjust- The impact ofalternative formsoftax and foreign goods over time in response to ment policies under less favorable cir- cooperation is analyzed. The smaller coun- this shock. The increase in current ac- cumstances in the 1980s. try would lose from harmonizing tax rates count deficits and foreign debt after an This paper - a product of the Public but both countries would gain from im- import price shock, for example, is cer- Economics Division, Country Economics posing a minimum tax. tainly greater than would be implied by Department - is part of a larger effort in The optimal joint response to freer just the increase in foreign prices. Go PRE to examine open-economy tax re- cross-border trade, however, may be to do concludes, among other things, that: form and adjustment policies in develop- absolutely nothing. * Expectation is a key factor. Con- ing countries. Copies are available free This paper - a product of the Re- trary to the common suggestion that an from the World Bank, 1818 H Street NW, search Advisory Staff, Office of the Vice economy should adjust and contract in Washington DC 20433. Please contact President, Development Economics - is response to a permanent import price Ann Bhalla, room N10-059, extension part of a larger effort in PRE to under- shock, the behavior suggested in a model 371399 (48 pages). stand the policy implications of economic with rational expectations in investment integration. Copies are available free decisions is that the opposite can be true. from the World Bank, 1818 H Street NW, The expectations prevailing in the 738. Tax Competition and Tax Washington, DC 20433. Please contact mid-seventies were that the energy crisis Coordination: When Countries Jane Sweeney, room S3-026, extension was permanent, the days ofcheap oil were Differ In Size 31021 (38 pages, with figures). over, and petrodollars would continue to - be available. But conditions soon changed. Ravi Kanbur and Michael Keen The actions of the high-debt developing 739. Managing Financial Risks countriesappear"imprudent"viewedfrom Differences in country size exacerbate the In Papua New Guinea: An Optimal the perspective of the interest rate shock inefficiency of tax competition, harming External Debt Portfolio of 1979. The expectation that debts could both a smaller country and a larger one. be stacked indefinitely was clearly wrong But different forms oftax cooperation can Jonathan R. Coleman and Ying Qian and the interest rate shock after 1979 have very different effects. The smaller came as a surprise to many. country would lose from harmonizing tax Commodity-linked bonds issued with pay. * The results demonstrate both the rates, but both would gain from imposing ments linked to the prices of oil and cocoa promise and danger of liberalization, an a minimum tax. The optimal joint re- could significantly improve Papua New adjustment policy often recommended in sponse to freer cross-border trade, how- Guinea's risk management. the 1980s. Tariff reform shows the ex- ever, may be to do absolutely nothing. pected benefits in the primary sector and Papua New Guinea is vulnerable to insta. to some degree in exports. But it may Which kinds of countries choose to be- bilityanduncertaintyassociatedwithfluc- easily lead to a contraction in the pro- come tax havens? What is the likely pat- tuating commodity prices. This is be- tected sector like manufacturing, a de- tern of taxation in a border-free "Europe cause its GDP, export earnings, and gov- cline in tax revenues, more current ac- 1992" if there is no central coordination of ernmentrevenues depend largely on sales 164 Policy Research Working Paper Series of a small set of primary commodities 740. The Onchocerclasis Control Liese and his colleagues identify the whose prices fluctuate substantially on Program in West Africa: A Long- main reasons for the program's success the international market. Papua New term Commitment to Success as: Guinea is also exposed to fluctuating ex- * Limited, achievable, clearly defined change rates. The degree of exposure BernardlH.Liese,JohnWilson, BruceBenton, objectives and a realistic 20-year depends heavily on (1) how the currency and Douglas Marr timeframe. The request for a 20-year composition of net export earnings match commitment did not meet with potential the currency composition of net liabilities Among African health programs, this pro- donors' immediate approval, but the pro- and (2) how changes in commodity prices gram to control "riverblindness" is an ex- ponents of the program remained firm in affect exchange rates. ceptional recent success story. Here are their assessment that this much time was Based on these criteria, Coleman and some lessons from it. necessary to eliminate the parasite reser- Qian show that Papua New Guinea's as- voir in the human population. sets and liabilities may be poorly bal- Onchocerciasis is a devastating African * Use of the best technology avail-- anced for debt servicing. Thus, it could parasitical disease that causes severe de- able for any task. benefit substantially from active risk bilitation and intense itching. By the * Contracting out highly specialized management, especially through better time its victims are in their late twenties, tasks such as aerial spraying. selection of the financial instruments in they experience impaired vision, often * Operational research (considered its debt portfolio. blindness. River villages are particularly an equal partner in program implementa- Coleman and Qian present a model afflicted because the blackflies which tion). and estimate of an optimal debt portfolio transmit the worm parasite that causes * Program autonomy, which allowed that allows for the use of commodity- the disease breed in rivers - hence the flexibility in responding to strategic and linked bonds and conventional debt de- colloquial "riverblindness." technological issues. nominated in different currencies. They The connection between life by the * Delegation of authority to those judge the hedging effectiveness of this river and blinding onchocerciasis led to most closely involved in the program, thus portfolio by how much the variance of the virtual abandonment of many fertile assuring a clear focus and flexibility. expected real imports is reduced. river valleys, so potentially productive * Long-range planning to sustain The results indicate that commodity- lands lay idle for many years. Yet mil- donor commitment. linked bonds could play an importantrole lions continued to succumb to the disease * Transparency, made possible by a in Papua New Guinea's risk management until the onchocerciasis control program, comprehensive flow of information and strategy. The proportion of commodity- a large multidonor-supported effort initi- the program's openness to evaluation and linked bonds in the optimal debt portfolio ated in 1973 at the instigation of Robert review. ranges from 20 percent to 45 percent for McNamara, thenhead of the World Bank. This paper - a joint product of the real interest rates of 8 percent to 1 per- Today, 95 percent of the original Population, Health, and Nutrition Divi- cent. They show that commodity bonds seven-country area is virtually free of the sion, Population, Health, and Human issued with payments linked to the prices disease, and previously deserted lands Resources Department and the Health of oil and cocoa could substantially lower are being resettled and cultivated, in- Services Department -is part of alarger the variability of expectedfuture imports. creasing agricultural production. study undertaken in PRE of African Their results also show that Papua From the beginning, the program Health Policy. Copies are available free New Guinea's external debt structure is maintained a limited, specific objective: from the World Bank, 1818 H Street NW, not well balanced to hedge the foreign to control onchocerciasis in a clearly de- Washington DC 20433. Please contact exchange risk from the existing composi- lineated area in the savannah zones of Otilia Nadora, room S6-065, extension tion of non-U.S. dollar-denominated li- West Africa. The operational focus was to 31091 (14 pages). abilities. The debt portfolio contains an interrupt transmission of the disease and excess of Japanese yen- and Deutsche- eventually eliminate the parasite in all mark-denominated liabilities, while li- the human population. The only accept- 741. When Does Rent-Seeking abilities denominated in British pounds able approach was effective control of the Augment the Benefits of Price are substantially underrepresented. disease-transmitting blackfly. The strat- and Trade Reform on Rationed This paper - a product of the Inter- egy was to focus on destroying blackfly Commodities? Estimates national Trade Division, International larvae located in fast-flowing rivers, which for Automobiles and Color Economics Department-is part ofPRE's could easily be targeted with aerial spraying. Televisions in Poland research on the use by developing coun- The main challenges of the program tries of financial instruments linked to have been to combat the reinvasion of David Tarr commodity prices. Copies are available controlled areas by blackflies, to manage free from the World Bank, 1818 H Street multiple resistance to the larvicides that Price controls result in rents and in rent- NW, Washington, DC 20433. Please con- were used, avoiding any negative impact seeking. Where the rent-seeking dissi- tact Julie Carroll, room 87-069, extension on the environment, to develop a drug pates the rents, the costs of the price con- 33715 (30 pages, with tables). that would kill the parasites, and to hand trols are magnified enormously above the control of residual responsibilities over to traditional resource misallocation costs. the beneficiary countries once the pro- But there are cases where rent-seeking gram ends. does not dissipate the rents. Policy Research Working Paper Series 165 In January 1990, Poland embarked on a that would increase imports to the level in working order. "Big Bang" approach to economic reform before price controls were eliminated) to * Detailed costing of hospital activi- that in addition to macroeconomic reform be 43 percent for autos and 22 percent for ties is feasible in a low-income country decontrolled virtually all prices and de- color TVs. like Malawi. Mills's costing methodology valued the Polish zloty. These two re- This paper is a joint product of the could be used in other studies. formseliminatedvirtuallyovernightmas- Trade Policy Division, Country Econom- Mills's analysis provides firm sive excess demand for many Polish com- ics Department and the Trade, Finance, evidence to assess district resource allo- modities and allowed the authorities to and Public Sector Division, Technical cation patterns, by carefully disaggregat- make the zloty internally convertible. Department, Europe, Middle East, and ing district costs by level of care and To assess the impact of these reforms North Africa Regional Office. It is part of department. Mills focuses on average on the Polish market for autos and color a larger Bank effort to assess the impact costs and the distribution of cost by input televisions, Tarr develops a differenti- ofprice and trade reform on the reforming category, cost center, and direct service ated product model, in which consumers socialist economies of Eastern and Cen- department. maximize utility andfirms maximize prof- tral Europe. Copies are available free A strikingly low proportion of district its subject to rationing constraints and from the World Bank, 1818 H Street NW, recurrent costs was absorbed by salaries price controls. Washington DC 20433. Please contact and wages: between 27 percent and 39 Color televisions were rationed by Dawn Ballantyne, room N10-033, exten- percent, depending on the district. queueing. Tarr finds that wasteful rent sion 37947 (52 pages). A surprisingly high proportion was dissipation in color televisions exactly off- absorbed by drugs and medical stores: set the rents because queues formed that between 24 percent and 37 percent. dissipated the rents. Rent dissipation 742. The Cost of the District The hospital's largest cost center - was roughly 10 times the traditional tri- Hospital: A Case Study from in terms of resources it controlled - was angle of Harberger resource misalloca- Malawl the pharmacy. tion costs - so the benefit of price decon- Between 27 percent and 39 percent of trol which eliminated both rent dissipa- A. J, Mills total recurrent costs were spent outside tion and resource misallocation was a the hospital, and a corresponding 61 per- substantial 0.46 percent ofgross domestic Hospitals in Malawi absorb most ofrecur- cent to 73 percent were spent on district product. rent district health expenditures, and dis- hospital services. The hospital's second- With autos, however, rationing was trict hospital expenditures for drugs and ary care services alone absorbed 40 per- by two methods, which Tarr assesses as medical supplies are of the same magni- cent to 58 percent of district recurrent notsignificantlyincreasingthesocialcosts tude as that for personnel. Except for costs. of the price controls above the Harberger drugs and food, there is little scope for Average costsbyhospital department costs. One method was waiting lists. The major savings in Malawi's hospital oper- showed considerable variationby district, other, allocation to preferred individuals, ating costs, unless the inflow of patients with one hospital being consistently the wasted some resources through classi- can be reduced. most expensive and another the cheapest. cally rent-seeking or directly unproduc- Between three and ten new outpatients tive profit-seeking (DUP) activities. But Mills analyzes the cost to the Ministry of couldbe treatedfor the average costofone it also had the socially beneficial effects of Health of providing district health ser- inpatient day, and between 34 and 55 for improving efficiencyin other state-owned vices in Malawi, with an emphasis on the the average cost of an inpatient. firms. (In some firms, the autos were cost of the district hospital. She reaches This paper - a product of the Popu- awarded to the most productive coal min- several conclusions: lation, Health, and Nutrition Division, ers or factory workers - which improved * Except for drugs and food, there Population and Human Resources De- productivity in government factories seems to be little scope for major savings partment - is part of a larger effort in 'where lack of effort had been a problem.) in hospital operations costs, unless influ- PRE to analyze the costs and financing of Tarr also shows that import liberal- ences could be brought to bear to reduce hospitals in developing countries. Copies ization produces greater benefits when the flow of patients to the hospital. In are available free from the World Bank, .there are domestic price controls with general the hospitals were well (often 1818 H Street NW, Washington, DC rent dissipation, because import liberal- over-) used and lengths of stay were al- 20433. Please contactOtiliaNadora,room ization reduces the rent. ready relatively short by international S6-065, extension 31091 (36 pages, with All things being equal, the elimina- standards. Only one or two members of tables). tion of price controls for both autos and the hospital staff were obviously televisions had the effect of decreasing underoccupiedandcouldbereallocatedto imports, as more domestic autos were other duties. 743. Antidumping Enforcement produced and sold. The implication is * To increase the hospital's role in in the European Community that-contrarytothePolishgovernment's districtwide activities, efforts should prob- intention - price controls were a trade ably be made to increase staff motivation Angelika Eymann and Ludger Schuknecht distortion thatincreasedimports: thatis, to work outside the hospital, to provide they implicitly subsidized imports. Tarr vehicles (such as motorbikes) that are not Antidumping measures affecting develop- estimates the rate of subsidy of imports suitable for patient transport, and to in- ing countries are concentrated in indus- (the ad valorem rate of subsidy to imports troduce incentives to keep those vehicles tries with shifting comparative advantage 166 Policy Research Working Paper Series -in sectors with strong, politically influ- NW, Washington, DC 20433. Please con- Producersin the United States, mean- ential interest groups. So in following an tact Nellie Artis, room N10-013, exten- while, were shopping around for ways to export-oriented trade strategy, developing sion 37947 (27 pages, with tables). restrict imports ofSwedish stainless steel countries should probably concentrate on products. They actively sought protection sectors that have weak political influence under every available provision of U.S. in developed countries. 744. Stainless Steel In Sweden: tradelaws. Efforts under section 301 and Antidumping Attacks Good countervailing duty laws failed, but their In the European Community (EC), as in International Citizenship claims under section 201 resulted in the the United States, "injury" is what imposition of quotas and additional tar- antidumping is all about. Antidumping Gunnar Fors iffs covering most stainless steel products laws are a flexible tool for preventing for over ten years. Those under imports from displacing domestic produc- Swedish stainless steel has played by the antidumping provisions resulted in the, tion in politically influential industries. rules - private ownership, competitive imposition of duties that are still in effect The vehicle for achieving that goal in pricing,governmentsupportstrictly within for stainless steel plate (Avesta), welded the EC, however, is not protectionistrules, the GA7T rules, and the OECD guide. tubes (Avesta-Sandvik Tube), and seam- as in the United States, but protectionist lines. But when Sweden refused to "volun- less tubes (Sandvik Steel). This extensive discretion. tarily" restrict its exports, it was severely use of trade remedy cases against Swed- The empirical results of Eymann's set upon through antidumping actions. ish stainless steel is not an aberration but and Schuknecht's study have implications rather an illustration of how the system for EC trade policy after 1992. If protec- Fors argues that good economics, interna- generally works. tionist interests demand compensation tional competitiveness, private ownership, On the Sandvik steel antidumping for the abolition of national protectionist and limited support from a government case, Sweden complained to the GATT, barriers after 1992, EC antidumping demonstratinggoodinternational citizen- which established an antidumping panel measures offer them considerable scope ship are not enough to defend an industry to investigate the case. The panel's rec- for achieving their goals since measures against the application of antidumping or ommendation that the antidumping or- are largely determined by political discre- other import-restricting policy. der be lifted was based not on a consider- tion. Antidumping measures could there- The Swedish stainless steel industry ation of the broad issue of whose position fore become a pinnacle of "Fortress Eu- responded to the world crisis in the steel was right from a rational economic or rope." market in the 1970s with major indus- business perspective, but on a procedural The results also suggest certain stra- trial restructuring. By wholeheartedly detail. Just as "dumping" is whatever a tegic considerations for the trade policy of applying the principle of profitability to domestic industry can get its government developing countries. Eymann and decisionmaking,theindustrytransformed to act against under antidumping law, Schuknechtargue thatantidumpingmea- itself into a healthy, internationally com- concludes Fors, so"not dumping"is what- sures affecting developing countries are petitive industry. Today the two remain- ever a GATT panel cites as grounds to concentrated in industries with shifting ing stainless steel firms in Sweden are discredit an antidumping order. comparative advantage, such as steel prod- among the world leaders in their fields This paper - a product of the Trade ucts, basic chemicals, and synthetic fi- and are the world's largest producers of Policy Division, Country Economics De- bers. (Among the newly industrialized some stainless steel products. partment - is part of a larger effort in countries, high-tech firms are a frequent During this transformation, stain- PRE to understand the economics of the target of dumping investigations.) And less steel firms also learned to get along emergence of "fairness" as a standard for such protection is more likely in sectors without government intervention. After regulating international trade, its impli- with strong, politically influential inter- 1982, the government's policy toward the cations for the continued openness of the est groups. industry changed. The government ended international trading system, and its con- If that is indeed the case, it is not all direct support to the industry in 1982 tinued functioning as an important ve- sufficient that developing countries sim- and by the end of 1987 stainless steel hicle for development. Copies are avail- ply follow an export-oriented trade strat- firms had paid back all of their structural able free from the World Bank, 1818 H egy. They also need to concentrate on delegation loans dating from the late Street NW, Washington, DC 20433. Please. sectors that have weak political influence 1970s. In addition, the Swedish govern- contact Nellie Artis, room N10-013, ex- in developed countries. ment - in complying with OECD criteria tension 37947(43 pages, including tables). This paper - a product of the Trade guiding national steel policy - demon- Policy Division, Country Economics De- strated better international citizenship partment - is part of a larger effort in than either the United states or the Euro- 745. The Meaning of "Unfair" PRE to understand the economics of the pean Community. The negative findings in U.S. Import Policy emergence of "fairness" as a standard for of the U.S. countervailing duty and sec- regulating international trade, its impli- tion 301 cases against Sweden offered J. Michael Finger cations for the continued openness of the further support that the Swedish international trading system, andits con- government's role in the stainless steel Protection for U.S. production beset by tinued function as an important vehicle industry wasclearly withintheboundsof import competition is what the for development. Copies are available the international understanding of what antidumping and countervailing duty free from the World Bank, 1818 H Street that role should be. laws are all about. All the emphasis on Policy Research Working Paper Series 167 doing things the right way distracts the phasis on doing things the right way dis- interventions. United States from seeing that it is doing tracts us from seeing that we are doing the wrong thing. The focus of trade regu- the wrong thing. The unfair trade laws Financial regulation has a pervasive im- lation should be the following question: (with their broad definitions of what is pact on the structure and efficiency of Who in the domestic economy will benefit unfair) provide traditional American jus- financial intermediation. It is perhaps from the proposed restriction and who in tice: we give every horse thief a fair trial, the most important determinant of differ- the domestic economy will lose, and by and then we hang him, writes Finger. ences exhibited by countries at a similar how much? The focus of trade regulation should level of economic development and with be the following question: Who in the access to common technologies. Protection for U.S. production beset by domestic economy will benefit from the The 1980s witnessed extensive de- import competition is what the proposed restriction and who in the do- regulation andreregulation. Understand- antidumpingand countervailing dutylaws mestic economy will lose, and by how ing the rationale for removing some regu- are all about, contends Finger. Only in much? Then, get the economics right. lations and introducing others is essen- rhetoric are the unfair trade procedures The domestic economic costs of a trade- tial for designingand implementing effec- about what foreign sellers are doing and restricting action are as substantive as tive regulatory reform. about whether what they are doing is fair the gains. These costs have never been Vittas classifiesfinancial regulations or unfair. The legal definitions of what is given legal substance because the legal by their primary objective into six types: unfair offer so many possibilities that any profession has never been charged to do macroeconomic, allocative, structural, U.S. producer who would be better off if so, not because it cannot be done. prudential, organizational, and protec- imports were restricted can find a way to A domestic loss and a domestic loser tive. He notes that most regulations have qualify - if not now, then after the next from an impediment to imports should effects that cutacross differentobjectives. trade bill. have the same standing in law and in Historical experience suggests that This does not mean that any brief- administrative procedures as a gain or a macroeconomic and allocative controls case full ofinformation from a U.S. indus- gainer - including the administrative tend to be ineffective and inefficient. It try will be sufficient to win an affirmative mechanics to petition for removal of an also shows that prudential, organiza- determination, Finger argues. But a do- impediment to imports when that impedi- tional, and protective controls are neces- mestic interest stopped by a detail of the ment compromises his or her economic sary because financial systems (1) suffer law need only wait (or pay) for prepara- interests. This is hardly a new notion. frommoral hazard, adverse selection, and tion of a new petition, or revision of the The idea that there are gains from trade, the free rider problem; (2) are susceptible administrative regulation, oramendment usually greater than the costs, has been to imprudent and fraudulent behavior; of the law - as did the Louisiana sulfur around since Adam Smith, Finger con- and (3) are prone to instability and crisis. company whose problem was fixed by cludes. It is just that they have never Vittas argues that structural con- adding constructed value to the law. been made legal in the United States. trols are the most controversial types of In the long run, a winning portfolio This paper - a product of the Trade financial regulation. Such controls are can be pulled together by any industry Policy Division, Country Economics De- often motivated by political consider- that experiences substantive competition partment - is part of a larger effort in ations, such as preserving the monopoly from imports. The cost of putting that PRE to understand the economics of the position of domestic banks or protecting portfolio together and the tedium ofnego- emergence of "fairness" as a standard for the turfs of different types of financial tiating a voluntary export restraint that regulating international trade, its impli- institutions. will give the exporters enough extra prof- cations for the continued openness of the He maintains that many of the prob- its to buy off their sovereign right to re- international trading system, and its con- lems facing the U.S. financial system, taliate are the major limits on how much tinued function as an important vehicle such as the fragmented and fragile bank- protection the system will provide. Do- for development. Copies are available ing system, the financial crisis of the thrift mestic politics imposes only the necessity free from the World Bank, 1818 H Street industry, andthe segmented banking and of explaining that foreigners are unfair, NW, Washington, DC 20433. Please con- nonbanking parts ofthe financial system, while the trade laws themselves provide tact Nellie Artis, room N10-013, exten- can be attributed to the adverse effects of the podium from which to do so. sion 37947 (29 pages). structural regulations. Almost all the procedural changes Historical experience also suggests (not the substantive changes) that have that regulatory reform can take place been made are commendable. Standards 746. The Impact of Regulation more easilyifitcanbe accomplished with- are stated with increased precision, objec- on Financial Intermediation out cumbersome legislative changes. In tive application is guarded by court re- fact, the threat of regulation, if prompt view, and interested parties have a right DiMitri Vittas action is feasible, may be as effective as to review the evidence and to comment on actual regulation. its interpretation as well as its accuracy. Financial systems are subject to extensive Vittas argues that the most impor- Transparency, openness, and objectivity regulation in both developedand develop- tant task facing policymakers is creating are important parts of the American ideal ing countries. The challenge for policy- a sound and robust financial constitution ofrule oflaw. Yet these procedural refine- makers is to create a robust regulatory that governs what financial institutions ments seem to contribute more to the framework that promotes stability and are permitted to do and what basic condi- problem than to a solution. All the em- efficiency and avoids the need for costly tions they have to meet. But, he adds, the 168 Policy Research Working Paper Series financial constitution needs to be, as far low interest rates. Others argue that deviled directedcreditprogramsandcredit as possible, neutral between different access to funds and the cowbell effect subsidies in other countries. types of financial intermediaries and were far more important than credit sub- This paper -a product of the Finan- markets. Such a framework would con- sidies. Most papers in this group also cial Policy and Systems Division, Coun- tribute to higher efficiency and stability argue that private financial institutions try Economics Department - is part of a in the first place and would thus avoid the played a leading part in financing the larger effort in PRE to study the impact of cost of later interventions. growing or modern sectors of industry regulation in the financial sector. Copies This paper - a product of the Finan- and that most government support was are available free from the World Bank, cial Policy and Systems Division, Coun- directed toward declining and stagnant 1818 H Street NW, Washington, DC try Economics Department - is part of a industries. 20433. Please contact Wilai larger effortin PRE to study the impact of The third group of papers attributes Pitayatonakarn, room N9-003, extension regulation in the financial sector. Copies a negative effect to government policy and 37666 (25 pages). are available free from the World Bank, maintains that economic growth would 1818 H Street NW, Washington, DC have been even higher if the financial 20433. Please contact Wilai Pitayato- markets were not subject to extensive 748. European Trade Patterns * nakarn, room N9-003, extension 37666 regulation. Several papers argue that After the Transition (25 pages). Japan's industrial adjustmentprocess was slower and probably much costlier in so- 01eh Havrylyshyn and Lant Pritchett cial terms as a result of the Ministry of 747. Credit Policies in Japan and International Trade and Industry's (MITI) A gravity model of trade predicts that Korea: A Review of the Literature intervention; they challenge the view that trade with Northern Europe will increase Japan's high growth and successful in- from less than 25 percent to more than 70 Dimitri Vittas and Bo Wang dustrialization were masterminded by percent of Eastern Europe's trade. MITI. Well-functioning bureaucracies, effective In the literature on the effectiveness Eastern Europe's shift away from social- monitoring, and a high degree offinancial of credit and industrial policy in Korea, ism and an orientation toward the USSR discipline have contributed to the effec- very few authors, if any, challenge the is likely to cause large changes in its tiveness of credit polities in Japan and view that government intervention was bilateral pattern of trade - away from Korea. But the two countries'credit poli- extensive in Korea. Indeed, many au- the Eastern bloc toward the Western. cies are not without their critics. thors argue that government interven- Havrylyshyn and Pritchett quantify tion may have retarded growth by distort- the expected magnitude of this shift by Japan and Korea have long been associ- ing incentives and resource allocation. estimating a traditional gravity model of ated with extensive, generally successful An important feature of credit policy trade and using it to simulate post-transi- government intervention in the financial in Korea was the coercive nature of gov- tion patterns of trade. system. But their credit policies have not ernment intervention. Firms that failed In the base case - in which the total gone uncriticized. Vittas and Wang sur- to meet performance standards and ex- value of Eastern European trade is held vey the literature available in English on pandexports were denied additional credit constant at US$113 billion - Eastern the operation and effectiveness of credit or had their loans recalled, while success- European trade with Northern Europe policies in these two countries. They ful firms were given further access to increases by $53 billion. divide the literature on the Japanese ex- credit on preferential terms. Interest rate Northern Europe's share in Eastern perience into three groups. subsidies in Korea, unlike Japan, were Europe's trade increases to more than 70 Papers in the first group argue that sometimes quite large. percent, from the current level of less government intervention facilitated the Criticism of Korean credit policy fo- than one quarter. financing ofindustry and promoted rapid cuses on the experience in the late 1970s The basic tenor of these results is industrialization during the period of re- when the drive for heavy industrializa- robust to changes in the model's esti- construction and high growth. These pa- tion was under way. Several papers ar- mated coefficients and the measurement pers emphasize the role of indirect fi- gue that the drive was overambitious and of income in Eastern Europe and the' nance, the "overloan" position of the large costly and resulted in a serious misalloca- USSR. city banks (their reliance on credits from tion of resources, although many of the This paper - a product of the Trade the Bank of Japan for funding their loans targets were in fact achieved. Policy Division, Country Economics De- to industrial corporations); the In general the relative success of partment - is part of a larger effort in "overborrowing" or high leverage of in- credit policies in Japan and Korea is at- PRE to examine questions relating to the dustrial companies; and the artificially tributedtotheirwell-functioningbureau- transition from a socialist to a market low level of interest rates. cracies, effective monitoring, and finan- economy. Copies are available free from The second group includes papers cial discipline. These have limited the theWorldBank, 1818HStreetNW,Wash- that accept that government intervention diversion of subsidized credit funds into ington, DC 20433. Please contact Nen influenced financial flows, but maintain speculative assets and have ensured that Castillo, room N10-033, extension 37947 that its impact was not as great as the credit policies in these two countries have (29 pages, with tables). first group implied. Some papers deny not suffered from the problems of adverse that government maintained artificially selection and moral hazard that have be- Policy Research Working Paper Series 169 749. Hedging Commodity Price Copies are available free from the World accountingandinformationmanagement Risks in Papua New Guinea Bank, 1818 H Street NW, Washington, systems industrywide, all enterprises DC20433. PleasecontactSarahLipscomb, should be commercialized under central Stijn Claessens and Jonathan Coleman room S7-062, extension 33718 (31 pages, guidance and with expert assistance, ac- with figures and tables). cording to a preannounced timetable. With increasing awareness of commodity * To encourage the infusion of new price risks and with technical assistance resourcesfrom outside, uncertainty about -strategic advice and assistance in insti- 750. Reforming and Privatizing the ownership, assets, liabilities, and cash tution building and skills training - de- Poland's Road Freight industry flow of enterprises should be reduced - veloping countries such as Papua New partlybycreatingnew, self-contained sub- Guinea can learn to use market-based Esra Bennathan, Jeffrey Gutman, and sidiaries (daughter companies) of state- commodity-linked financial instruments Louis Thompson owned enterprises. This typically creates to improve their economic management. incentives for improved management and Options for restructuring and privatizing staff efficiency and productivity. To limit Papua New Guinea faces substantial ex- PKS, Poland's main state-owned enter- potential abuse, strict rules and mecha- posure to price fluctuations for its major prise for road transport ofpassengers and nisms for inspection should be set up. primary commodity exports: gold, cop- general freight. * Small-scale haulage enterprises per, coffee, cocoa, logs, and palm oil. Its should be encouraged, as trucking firms existing commodity risk management The Polish economy uses four to six times do not benefit significantly from econo- schemes - its mineral stabilization fund as much freight transport per dollar of mies of scale, middle-class entrepreneur- and agricultural commodity funds - are GDP as the European market economies. ship is socially desirable, and, through costly, provide only limited protection The trucking share ofthis transport, how- subcontracting, large-scale firms can vary against the impact of fluctuations in com- ever,, appears far too low. Bennathan, their capacity without committing capi- modity prices, and are unable to provide Gutman, and Thompson focus on options tal. protection for long periods. important to the privatization of road * The trend should be toward eco- Claessens and Coleman show that haulage in Poland. They recommend that nomic deregulation. Regulations should market-based financial instruments are in restructuring Poland's road haulage set quality standards (issuing operator better suited to manage external price industry the following options be consid- licenses on the basis of personal and tech- risk for a country that is a price taker in ered in connection with privatization, nicalcompetence,forexample)ratherthan world commodity markets. This is espe- regulation, financing, and taxation: restricting quantity(limiting entry ofnew cially the case for mineral and energy * The business of passenger trans- haulage enterprises). No organization price risks where financial instruments port (buses) should be completely sepa- should be given preference in the distri- (such as commodity swaps) exist for hedg- rated from the business offreight haulage bution of international permits, which ing export earnings overlong periods. For (trucks). Combiningfreighthaulage with might be issued by auction or by spot basis agricultural export earnings, short-term subsidized passenger transport in one to applicants upon proof of a genuine hedging tools, such as options and fu- enterprise, the common practice now, cre- order for transport. tures, could be used effectively. Claessens ates the possibility that passenger activi- * Private liquidity in Poland is low and Coleman design specific financial ties could subsidize freight (or vice versa). and commercial banks cannot yet grant strategies that Papua New Guinea could And combining activities with such differ- credit widely. There is a case for explor- use, and demonstrate the gains to be ent markets, operating techniques, and ing sources of technical assistance and made from active risk management. management style is inefficient. leasingfinance from WestEuropean leas- The lessons learned are not unique. * Road haulage is a large enough ing associations and European banks. Many developing countries are heavily industry and occupation in Poland to * Enterprise taxation and taxation dependent on primary commodities for justify a separate privatization program of road use need reform. Road user taxes foreign exchange, and their economic de- - but one that covers the entire indus- should be based on the relative cost of velopment has suffered from the result- try. damage to roads by different equipment ing risks and instabilities. With increas- * Poland's program of small- and - with heavy vehicles paying a higher ing awareness of these risks and with medium-scale privatization has ear- tax than lightvehicles, forexample-and technical assistance - strategic advice marked a number of road haulage enter- on the cost of congestion. and assistance in institution building and prises for privatization. To these, the This paper - a product of the Trans- skills training - developing countries roadhaulage sector privatization program port Division, Infrastructure and Urban can learn to use financial instruments to should add at least 10 (or 8 percent of all) Development Department - is part of a improve their economic management. state-owned haulage entities for assisted larger effort in PRE to develop improved This paper - a joint product of the privatization in the first year of the pro- approaches to enterprise reform in trans- Debt and International Finance and In- gram. Assistance should be in the form of port. Copies are available free from the ternational TradeDivisions, International guidance on accounting, auditing, valua- World Bank, 1818 H Street NW, Wash- Economics Department - is part of a tion, and legal steps toward commercial- ington, DC 20433. Please contact Bar- larger effort in PRE to study the use of ization. bara Gregory, room S10-045, extension financial instruments to manage the ex- * To guard against the dissipation of 33744 (41 pages, with figures and tables). ternal exposures of developing countries state assets and to rationalize and reform 170 Policy Research Working Paper Series 751. A Consumption-Based Direct 752. Inflation and Stabilization in pressures. Attempts to reimpose mon- Tax for Countries In Transition Yugoslavia etary control met considerable difficulty from Socialism at the end of the year, including a bizarre Roberto de Rezende Rocha episode of expansion of central bank cred- Charles E. McLure, Jr. its without the board of governors' ap- A successful stabilization program in Yu- proval. Countries emerging from socialism lack goslavia requires more political resolve It also became clear that the fiscal the accounting practices, the taxadminis- about wage indiscipline and loss-making component was not consistent with other tration, and the experience with tax com- enterprises than was observed in 1990. elements of the program. It was clearly pliance to make an income tax work. A But the ultimate question is whether sta- not enough to finance a social program of consumption-based direct tax - the sim- bilization can succeed without a compre- the magnitude required had loss-making plified alternative tax proposed here - hensive privatization program. enterprises really been forced into bank-. might be more effective. ruptcy and also to cover the needs of the Rocha examines the main reasons infla- bank restructuring program. Seen from Countries emerging from socialism must tion acceleratedinYugoslaviain the 1980s this angle, the Yugoslav program of 1990. move quickly to implement tax systems and reviews past and current attempts at resembles other heterodox programs that that will allow them to finance the proper stabilization. had initial success in reducing inflation functions of government in a noninfla- He shows that inflation in Yugosla- but later faltered because of the insuffi- tionary way. Yet they are ill-prepared to via shares common elements with infla- ciency of the fiscal adjustment. cope with the intricacies of a standard tion in other highly indebted countries, At the same time, the events in the income tax. They lack the accounting despite appearances otherwise. These second half of 1990 also indicate that, for practices, the tax administration, and the common elements include a large trans- a stabilization program to succeed in Yu- experience with tax compliance to make fer of resources abroad unmatched by an goslavia, there must be much greater po- an income tax work well. It is important internal adjustment, resulting in a large litical resolve to cope with wage indisci- to design tax policy with these limitations internal redistribution of real resources pline and loss-making enterprises than inmind,rather thansimplyignoringthem through inflation. was observed in 1990. And the question during the (possibly long) period when Yugoslavia differs from other coun- remains whether financial discipline can they remain significant impediments. tries in that these internal conditions are be imposed in the system only at the Indeed, administrative consider- not transparent. Instead of an open fiscal macroeconomic level and without intro- ations should weigh almost as heavily as deficit, there were complex interactions ducing private ownership of capital. The economic effects in the choice of a tax amongenterprises, commercial banks, and ultimate question may be whether stabi- system for a country emerging from so- the central bank, involving, among other lization can succeed without a compre- cialism. things, the absorption and servicing of a hensive privatization program. McLure suggests an alternative to large stock of foreign exchange liabilities This paper - a product of the Macro- the income tax: the simplified alternative by the central bank. economic Adjustment and Growth Divi- tax, a consumption-based direct tax. The Other factors contributed tothe sharp sion, Country Economics Department - simplifiedalternative tax encourages say- acceleration of inflation at the end of the is part of alarger effort in PRE to examine ings and investment in a way that is eighties - especially a large real devalu- the problems of transition faced by re- economically neutral and avoids many of ation in mid-1988, when an indexed forming socialist countries and to contrib- the administrative problems of an income economy drove inflation to a much higher ute to the Bank's policy dialogue with tax - especially those stemming from level. In 1989, a preemptive explosion of these countries. Copies are available free timing issues and the need to adjust for real wages added fuel to inflation's fire. from the World Bank, 1818 H Street NW, inflation. Rocha argues that the failure to cor- Washington DC 20433. Please contact The simplified alternative taxis not a rect hidden losses in the economy was the Lanha Ly, room N9-083, extension 37352 panacea, but McLure suggests that it de- main reason various stabilization at- (35 pages). serves serious consideration. tempts failed in the 1980s. The 1990 This paper - a product of the Social- program was the first to recognize the ist Economies Reform Unit, Country Eco- existence of those hidden losses and the 753. The CMEA System of Trade nomics Department - is part of a larger need for fiscal correction - although it and Payments: The Legacy and effort in PRE to study the processes of also introduced other elements to cope the Aftermath of its Termination reform in countries emerging from social- with inflationary inertia. The program ism. Copies are available free from the succeeded in eliminating the central Martin Schrenk World Bank, 1818 H Street NW, Wash- bank's own deficit and was initially suc- ington DC 20433. Please contact CECSE, cessfulinfightinginflation. Butitbecame A brief history and critique of the Council room N6-035, extension 37188 (44 pages). clear in the course of the program that for Mutual Economic Assistance and con- other losses had not been removed. Pres- jectures about the consequences of its de- sures to finance enterprises and avoid a mise. liquidity crisis in the financial system resultedinarelaxationofmonetarypolicy The Council for Mutual Economic Assis- in mid-1990 and a revival of inflationary tance (CMEA, sometimes referred to as Policy Research Working Paper Series 171 COMECON) was founded in 1949. Its 754. Estimating Returns to Scale Policy Division, Country Economics De- European members were Bulgaria, with Large Imperfect Panels partment - is part of a PRE research Czechoslovakia, the German Democratic project on Industrial Competition, Pro- Republic, Hungary, Poland, Romania, James R. Tybout and M. Daniel Westbrook ductive Efficiency, and their Relation to and the USSR. Mongolia, Cuba, and Viet- Trade Regimes (RPO 674-46). Copies are nam were non-European members. Alba- Do policies that promote "bigness"in manu- available free from the World Bank, 1818 nia was a member but left after its break facturing plants also promote greater pro- H Street NW, Washington DC 20433. with the USSR. Yugoslavia was an asso- ductivity? Does correlation between size Please contact Sheila Fallon, room N10- ciate member. and profitability constituteacasefor anti- 021, extension 37947 (47 pages). Past analyses of the economies of the trust activity? socialist member countries tended to downplay trade and payment relations Tybout and Westbrook provide system- 755. Hedging Crude Oil Imports through the CMEA. The key concern of atic panel-based econometric estimates of in Developing Countries analysts was with Western external debt, plant-level returns to scale for various 3- . borrowing requirements, and creditwor- digit and 4-digit manufacturing indus- Stijn Claessens and Panos Varangis thiness in convertible currencies. In that tries, using panel data for Chilean plants. context, relations within the CMEA were Their findings shed light on several is- How a state oil-importing company can peripheral. Moreover, the paradigm of sues of interest to policymakers. use risk management instruments to in- multilateral trade and currency convert- First, do policies that promote "big- sure against price fluctuations for crude oil. ibility was not suited for analysis of ness" in manufacturing plants also pro- CMEA's system of trade and payments. mote greater productivity? As plants grow, Crude oil prices have become more and Schrenk describes the CMEA system do they become more efficient? more volatile since the 1973 oil crisis. of trade and payment (the "CMEA re- They find that although several 4- Particularly since the recent Gulf crisis gime") and considers how the transition digit sectors showincreasingreturns, gen- (crude oil prices rose and fell sharply from traditional socialism to a market eral expansion of the manufacturing sec- between August 1990 and March 1991), economyislinkedtochangesin the mecha- tor cannot be expected to yield strong producers, refiners, and consumers have nism for international transactions. economies of scale at the plant level. Tak- been interested in acquiring more assur- The author gives abriefhistory of the ing their "best" estimates at face value, ances about the prices they would pay or CMEA, describingits organizational struc- the returns to scale in manufacturing are receive over future periods. Increasingly ture, institutional principles, and reform scattered across the range of 0.8 to 1.2 at they have used such risk management efforts, and provides a brief statistical the 3-digit level and 0.7 to 1.6 at the 4- instrumentsasfutures, options, and swaps overview of the relative importance of digit level. None of the 3-digit returns-to- to protect themselves against adverse oil CMEA trade for its members. The paper scale (RTS) estimates is significantly dif- price movements. sets out the traditional "institutional ferent from unity, and only two of the 4- Claessens and Varangis show how model"of the CMEAregime, discusses its digit estimates are. riskmanagementinstrumentscanbe used defects, and briefly evaluates the CMEA Second, it appears that plants that by a state oil-importing company to in- regime. are inherently more efficient tend to grow sure against price fluctuations for crude After describing the events surround- larger, as Demsetz and others have ar- oil. The main benefit of risk management ing the CMEA's demise in 1990, Schrenk gued. This inference is based on a corn- is reduced uncertainty about the oil prices conjecturesaboutthe consequences ofthat parison of RTS estimates that control for consumers and the state oil-importing demise. He explains that because there is unobservable efficiency effects with esti- company will pay rather than lower aver- so little hardevidence and statistical data mates that do not. It implies, among age crude oil import prices. - and because the implicit political as- other things, that positive correlations Claessens andVarangis simulate two sumptions are so uncertain - many con- between size and profitability need not scenarios: the short-term hedge, in which clusions in this final section must be con- constitute a case for antitrust activity. the state oil-importingcompany locks ina jectural. A corollary to this finding is that price for its imports for one month ahead, This paper - a product of the Social- most RTS estimates based on cross-sec- and the long-term hedge, in which it locks ist Economies Reform Unit, Country Eco- tional data tend to overstate plant-level in the price for six months ahead. The nomics Department - is part of a larger returns to scale. short-term hedge reduces oil price volatil- effort in PRE to analyze the systemic As a byproduct, their analysis ap- ity a potential 72 percent to 85 percent; legacy which militates against the struc- pears to have reopened the possibility of the long-term hedge, a potential 65 per- tural adjustment and economic recovery using Stigler's survival test to gauge the cent to 81 percent. For these reductions to ofEastern Europe's socialist economiesin importance ofreturns to scale. But unlike be realized, the prices of the crude oils transition. Copies are available free from earlier applications of this test based di- hedged must move together with the fu- theWorldBank, 1818HStreetNW, Wash- rectly on the distribution of plant size, tures prices. Tests are carried out to see ington DC 20433. Please contact CECSE, their results suggest using Probit esti- if this is so. room N6-043, extension 37188(27 pages). mates of the elasticity of failure probabili- Apparently oil-importing developing ties with respect to plant size as crude countries could gain considerably from proxies for RTS. using financial risk management instru- This paper - a product of the Trade ments. But several constraints - par- 172 Policy Research Working Paper Series ticularly negative publicity and legal ob- so total profits decline. gary, Poland, Romania, and Yugoslavia): stacles - can impede a state oil-import- They also find that even if countries * Giving a broad-brush overview of ing company's use of risk management choose taxes or quotas optimally, growth what is known about capacity constraints instruments. Educatinggovernmentpoli- in a country can lead to a decline in the in key public institutions involved in the cymakers and state enterprise officials combined real income of the exporting transition. about the proper use, limits, and benefits countries. * Identifying current and proposed of risk management instruments will Their simulations cast doubt on the actions of the World Bank and other do- make them more acceptable. hypothesis analysts often advance that a nors. This paper - a product of the Inter- market with five or more players can be * Indicating critical institutional is- national Trade Division, International regarded as roughly perfectly competi- sues on which future operational work Economics Department - is part of a tive. If this hypothesis were valid for and research might focus. larger effort in PRE to study the benefits policy formulation in the cocoa market, Rice finds that a consensus has of using financial instruments to hedge the optimal export taxes would be about emerged on five principles that establish the external exposures ofdevelopingcoun- zero. But Panagariya's and Schiffs re- the socially acceptable domain for govern- tries. Copies are available free from the sults indicate that the outcome of the ment economic activity in Eastern Eu-. World Bank, 1818 H Street NW, Wash- nine-country game is far from the zero- rope: ington DC 20433. Please contact Dawn tax solution. So the optimal taxes exceed * Retreat from the discredited cen- Gustafson, room S7-044, extension 33714 10 percent for the largest producers (Cbte tral government, as subnational govern- (46 pages). d'Ivoire, Ghana, and Brazil) in the Nash- ments and private enterprises assume tax game and in all countries except Indo- many functions of central governments. nesia and Oceania in the Nash and * Improved channels of communica- 756. Taxes Versus Quotas: Stackelberg quantity games. tion between governments and their citi- The Case of Cocoa Exports This paper - a product of the Trade zens, in response to increasing demand Policy Division, Country Economics De- for more transparent policy and an insti- ArvindPanagariya and Maurice Schiff partment - is part of the World Bank tutionalized voice for the public in research project on Commodity Exports policymaking. What are the implications ofoptimalNash and Real Incomes in Africa (RPO 676-70), * A hospitable business environ- quotas and taxes when two or more coun- an effort aimed at analyzing the interac- ment, which means clarification of prop- tries compete against each other in the tions of commodity exports, real incomes, erty rights; policy stability, consistency, world market for primary commodities - and trade policies. Copies are available and accountability; low-cost provision of in this case, cocoa? free from the World Bank, 1818 H Street government services and infrastructure; NW, Washington DC 20433. Please con- and the protection of agents from abuses Panagariya and Schiff are particularly tact Sheila Fallon, room N10-021, exten- in the marketplace. interested in evaluating the concern that sion 37947 (25 pages). * Concern for public welfare and so- efficiency or policy-induced changes in cial justice, as citizens of post-communist the supply of exports of primary com- Eastern Europe hope to obtain both the modities - including cocoa, coffee, and 757. Managing the Transition: familiarbasic securities(job security, sub- tea - may lead to such a large decline in Enhancing the Efficiency sidized consumption, and universal ac- the prices of those commodities that ex- of Eastern European Governments cess to basic health care and education) as port revenues and incomes of the export- well as new rights and freedoms. ing countries actually decline. In this Eric Rice * Efficient government administra- paper, they focus on the implications of tion at all levels, under the scrutiny of quantitative restrictions. The consensus ofdozens ofBank and out- elected legislatures, citizens groups, and They compare the implications of side experts on issues and measures essen- internal audit and review agencies. optimal Nash quotas and taxes when two tial to government reform in six Eastern Rice identifies five areas in which or more countries compete against each European economies changing to a mar- externalinstitutionalassistanceisneeded: other in the world market. ket economy -and on how external agen- (1) policy advice on a range of issues; (2) They find that the outcome under cies can best aid the reform process. more in-depth technical assistance; (3) a taxes is less restrictive than under quotas large-scale training effort to help close -butthatthecountries'profitsarehigher The transition to a market economy in Eastern Europe's massive "skills gap" in under quotas than under taxes. EasternEuroperequireseliminatingsome economics and business; (4) diagnostic In simulations undertaken for the institutions and practices and introduc- research; and (5) the design of broad, world cocoa market, they find that for ing new agencies with new goals, staffed medium-term action plans. For each of most countries optimal Nash taxes yield by people with different attitudes and these issues, he describes numerous mea- lower profits than the initial taxes or behavior. After interviewing 42 World sures to be pursued. quotas. If one of the countries becomes a Bank experts and other experts in the This paper -a product of the Public Stackelberg leader, its profits rise and donor and academic communities, Rice Sector Management and Private Sector those of the others fall. But the rise in the synthesizes their views on World Bank Development Division, Country Econom- Stackelberg leader's profit is lower than member countriesin Central and Eastern ics Department -is part ofalarger effort the decline in the other countries' profits, Europe (Bulgaria, Czechoslovakia, Hun- in PRE to evaluate the economic and Policy Research Working Paper Series 173 institutional issues surrounding Eastern In monthly series, however, the tests and the voluntary sterilization program Europe's current transformation. Earlier applied may be inappropriate, given the 30 percent. versions of this paper were presented in existence of non-normality in the regres- Amadeo, Chernichovsky, and Ojeda seminars at Harvard's Russian Research sion errors. In other words, the tests address the question: Could Profamilia Center and the World Bank, and at an applied have the wrong size. Using an- have provided more protection with the economics conference sponsored by IREX nual data, the explanatory power of the same resources? They found that: in Bucharest in April 1991. Copies are macroeconomic variables increases sig- * Operations tend to be constrained available free from the World Bank, 1818 nificantly, but other commodity prices by limited personnel and supplies. With H Street NW, Washington DC 20433. still do not contribute much in explaining more of each, more protection could be Please contact Priscilla Infante, room N9- the variations of a commodity price. delivered. 059, extension 37642 (45 pages). This paper - a product of the Inter- * The labor costs and unit costs of national Trade Division, International contraception are lower in the outreach Economics Department - is part of a and clinical programs, which can be ex- 758. Is There Excess larger effort in PRE to explain commodity panded with availableinfrastructure. The -Co-Movement of Primary price behavior and model the global mar- marginal unit cost of voluntary steriliza- Commodity Prices? kets for primary commodities. Copies are tion is higher partly because surgeons are A Co-Integration Test available free from the World Bank, 1818 paid "by the piece." (But the effects of H Street NW, Washington DC 20433. educating the people about sterilization TheodosiosB.PalaskasandPanosN.Varangis Please contact Dawn Gustafson, room S7- may make sterilization more cost-effec- 044, extension 33714 (41 pages). tive in the long run than this study found Tests that cast doubt on the existence of to be true for the short term.) excess co-movement in commodity prices. * The clinical program (delivering 759. The Profamilla Family mainly the IUD) and the outreach pro- Commodity analysts and traders have Planning Program, Colombia: gram (delivering mainly the pill) are the long held the perception that primary An Economic Perspective most cost-effective. The voluntary steril- commodity prices tend to move together ization program is the least cost-effective over time - even if they are unrelated Jesus Amadeo, Day Chernichovsky, because of the higher cost of sterilization, commodities(withnocross-price elasticities). and Gabriel Ojeda the heavy subsidy for sterilization, and In the case of unrelated commodities, the higher mean age of clients who are common shocks should account for the co- Profamilia, an affiliate of the Interna- sterilized. It might be more efficient to movement of commodity prices. At issue tional Planned Parenthood Federation, shift emphasis from sterilization to the is whether there is co-movement beyond provides more than 60 percent of other two programs. what can be explained by the common Colombia's family planning services. In * Fees for service should be seri- shocks, that is, macroeconomic shocks, as 1986, Profamilia recovered more than half ously considered, and more research done Pindyck and Rotemberg recently sug- of its costs, which is rare for family plan- on the issue. More demand could be met gested. ning services. But it could have provided with more workers, and higher prices - As afirst step, Palaskas andVarangis more protection for the same amount of particularly for sterilization - might not used the cointegration technique to ex- money. reduce revenues. amine whether there is a long-term sta- * More resources should be targeted tionary relationship between seven unre- Profamilia, an affiliate of the Interna- to areas where there are proportionately latedcommodity prices. All testsaccepted tional Planned Parenthood Federation, more mothers and where people are bet- the hypothesis of co-movement between provides more than 60 percent of ter educated (and hence more receptive to all commodity pairs. Colombia's family planning services. family planning). In their second step, they used the Profamilia's outreach effort (CBD) * Experienced and married workers results from the cointegration to build delivers mainlypillsin rural and outlying sell more in the outreach program than error correction models for each of the urban areas, through 100 field workers. theirjunior, unmarried colleagues. Expe- * commodities. They used the error correc- Its two clinic-based programs provide (1) rienced workers tend tobe paidmore than tion models to examine the hypothesis of voluntary sterilization and (2) clinical inexperienced workers, butmarried work- short-run excess co-movement - that is, services: gynecological consultation, in- ers tend to be paid less than unmarried co-movement above and beyond what can trauterinedevice(IUD)services,andover- workers. It would pay to retain experi- be explained by shocks with common ef- the-counter sales of contraceptives. enced staff (who are more likely to be fects (macroeconomic variables). In 1986, these three programs deliv- married). With some exceptions, the tests cast ered more than 1 million "couple years of * In both the clinical and surgical doubt on the existence of excess co-move- protection" (CYP) at a cost of about programs, output would increase if there ment in commodity prices. When they US$6.43 million. The sterilization pro- were proportionately more nurses and used monthly data for most of the com- gram provided the most protection. The fewer doctors. modities tested, neither the macroeco- clinical and CBD programs each provided The underlying hypothesis of this nomic variables nor the other commodity about 43 percent of revenues. The out- study (which remains untested) is that prices explain much of the variation in a reach programaccountedfor 31 percentof there is sufficient demand for the various commodity price. costs, the clinical program 39 percent, operations to expand. 174 Policy Research Working Paper Series This paper - a product of the Popu- the UNIDO (trade) and most agencies' and industry), where rates of return can lation, Health, and Nutrition Division, output definitions but are excluded from be altered through external market forces Population and Human Resources De- the trade definition used by UNCTAD, or domestic policy shocks. Estimatedrates partment - is part of a larger effort in GATT, and the World Bank. ofreturn seem more stable for infrastruc- PRE to examine the relative importance Clearly, international organizations ture projects. of constraints of demand and supply on mustresolvetheseinconsistenciesindefi- One alternative to correcting modal the use ofcontraception. Copies are avail- nitions of output and trade statistics. estimates ofimplementation variablesfor able free from the World Bank, 1818 H This paper - a product of the Inter- "bad surprises" might be to set different Street NW, Washington, DC 20433. Please national Trade Division, International minimum rate-of-return criteria for dif- contact Otilia Nadora, room S6-065, ex- Economics Department - is part of a ferent types of projects (10 percent for tension 31091 (113 pages, with tables). larger effort in PRE to improve the qual- transport, for example, but 15 percent for ity and consistency of statistics needed to agricultural and industrial projects), analyze developing countries' trade per- based on observed divergences in rate of 760. How Conflicting Definitions formance, industrialization, and growth. return. of "Manufactures" Distort Output Copies are available free from the World Project analysis simply has to cope and Trade Statistics Bank, 1818 H Street NW, Washington, with a large degree of uncertainty. Tradi - DC 20433. Please contact Jean Jacobson, tional methods of project evaluation and Alexander J. Yeats room S7-037,extension 33710 (21 pages). selection have been unable to reduce this large measure of uncertainty. Inconsistencies in definitions of "manu- This paper is a product of the Eco- factures" used to compile output and trade 761. Uncertainty and the nomic Advisory Staff, Office of the Senior statistics produce a discrepancy of $60 Discrepancy between Rate-of- Vice President, Operations. Copies are billion in estimates of developing country Return Estimates at Project available free from the World Bank, 1818 exports. Clearly, international organiza- Appraisal and Project Completion H Street NW, Washington, DC 20433. tions must resolve these discrepancies. Please contact Patricia Lee, room E 3- Gerhard Pohl and Dubravko Mihaljek 087, extension 81950 (44 pages). Economists often stress the importance of increasing the production and exports of This statistical survey of more than 1,000 manufactures in developingcountries, but World Bank projects reveals a sharp di- 762. Debt, Debt Relief, and national and international agencies are vergence between estimated rates ofreturn Growth: A Bargaining Approach inconsistent abouthowthey define"manu- at appraisal and at project completion. factures." Traditional methods ofproject evaluation Daniel Cohen and Thierry Verdier The definition of"manufactures" used and selection have been unable to reduce in compiling production data for indus- the high degree of uncertainty associated Accumulation of reserves and debt-equity trial and developing countries is far with project analysis. swaps can help a debtor country alleviate broader than the definition used for trade the distortionary burden of taxing its citi- statistics. This limits the analytical util- Pohl and Mihaljek analyze the World zens. But caveats and qualifications ap- ity of output and trade data for studies Bank's experience with project analysis ply. using, say, apparent consumption or im- from a sample of 1,105 projects. They port penetration ratios. compare estimated rates of return at ap- Debtor countries in the 1980s paid credi- International agencies also use dif- praisal with re-estimated rates of return tors with taxes the governments had to ferent definitions of manufactures when at project completion (that is, at the levy on their citizens. Because taxes must compiling trade statistics. For some coun- completion of construction works, usually be collected in a distortionary way, how- tries, these definitional changes produce five to ten years after appraisal). ever, governments are tempted to "up- major differences in the value and share Their findings confirm a high degree front" the adjustment effort. Doing so of manufactures exports and imports. of uncertainty in project analysis. Only a helps relieve investment and growth of Yeats assesses the analytical impli- small part of the discrepancy between the burden of expected future taxation. cations of six different definitions by com- estimatedrates ofreturn at appraisal and Governments have two ways of up- paring results when each is used to tabu- the re-estimated rates of return at project fronting: accumulating reserves and en- late exports of the "manufactures" of 72 completion can be explained, even with gaging in an equity swap. Cohen and developing countries, the benefit of hindsight. Verdier compare these methods with a He shows that the different defini- World Bank appraisal estimates of constant rescheduling agreement. In the tions produce a discrepancy of $60 billion rates of return are too optimistic. But, rescheduling agreement, it is assumed in estimates of developing country ex- explain Pohl and Mihaljek, factors usu- that no reserves can be accumulated and ports. ally associated with this optimistic bias that all tax collections go to the creditors. Sensitivity tests show that five or six (cost overruns, implementation delays) Their findings: products - especially refined petroleum seem to explain only a small part ofunex- Rescheduling agreement. A (SITC 332) and some processed food prod- pected changes in project performance. "memoryless"(past-independent)resched- ucts - are responsible for the main dis- Uncertainties seem to be higher in the uling game was studied. It is Pareto- crepancies. These items are included in directly productive sectors (agriculture inefficient. Two Laffer curves can take Policy Research Working Paper Series 175 place. In one, the lenders would want to immediately raises the price - by as goods and services (excluding interest), reduce the vulnerability of the debtor to much as 45 percent when half the debt is debt service obligations, targets for in- their sanctions (that is, required taxa- repurchased. A favorable (small) buy- creases in international reserves, and tion). In the other, the debtor would back price is shown to be (on average) private transfers. High levels in the early actually prefer less growth than more. about half the observed market price. years are the result of heavy debt service The role of reserves. Use of reserves The value of guarantees, Cohen ar- obligations; the later decline in these ob- can improve a country's welfare, over the gues, cannot exceed 25 percent of the ligations helps reduce requirements mid- case of the rescheduling agreement. The marketprice ofthe debt. Typically they're decade. Debt service obligations rise in country must, however, be able to commit worth only about 10 percent. 1991-93 on nonconcessional debt con- itself to a tax rate before negotiations As for the degree of tradeoff, Cohen's tracted in the last half of the 1980s but start. Otherwise, reserves are useless. formula finds that a 1 percent additional decline in 1994-97 and stabilize after that. Debt-equity swaps. The outcome al- growth rate is worth a 15 percentincrease The rising requirements in the lastpart of ways Pareto-dominates the outcome of in the flows of payments. the 1990s result mainly from the continu- the rescheduling equilibrium. Banks al- Cohen also offers an assessment of ally widening trade deficit. ways gain a fraction of the country's capi- the Mexican debt-relief agreement Debt service obligations - before re- tal above the share of output that they reached in 1990. scheduling and before the accumulation gaininthereschedulingequilibrium. Thus This paper - a product of the Debt of anyadditional arrears -comprisemore banks are relativelyless"impatient"than and International Finance Division, In- than half of the gross external financing the country to reach a debt-relief agree- ternational Economics Department - is requirementsin the firsthalfofthe 1990s, ment. part of a larger effort in PRE to under- but fall to about 40 percent by the end of This paper - a product of the Debt stand the determination of secondary the decade. Debt service obligations were and International Finance Division, In- market prices for developing country debt equivalent to about three-fourths of the ternational Economics Department - is and the impact of debt buy-backs on de- gross external financing requirements in part of a larger effort in PRE to under- veloping countries. Copies are available 1988 but only about a third in 1982. stand the impact of debt reduction on free from the World Bank, 1818 H Street The importance of debt service in developing countries. Copies are avail- NW, Washington, DC 20433. Please con- total requirements reveals that the exter- able free from the World Bank, 1818 H tact Sheilah King-Watson, room S8-040, nal financing problem in Africa is much StreetNW, Washington, DC 20433. Please extension 31047 (20 pages). more than a structural imbalance of im- contact Sheilah King-Watson, room S8- ports and exports. Debt relief measures 040, extension 31047 (27 pages). will be an important source of financing. 764. African Financing Needs For low-income countries, however, in the 1990s debt relief alone will not solve their fi- 763. A Valuation Formula for LDC nancing problem because their trade bal- Debt Jarge Culagovski, Victor Gabor, Maria Cristina ance will continue to deteriorate. But for Germany, and Charles P. Humphreys most middle-income countries where the Daniel Cohen trade balance is positive, debt relief may Arrica's external financing problem is have a much more decided impact. Looking at the true cost of debt buy-back much more than a structural imbalance This paper - a product of the Eco- on the secondary market requires a valu- between imports and exports. Debt relief nomics and Finance Division, Technical ation formula for LDC debt. measures will be an important source of Department, Africa Regional Office - financing. was presented at the World Bank sympo- A large gap may lie between the amount sium on African External Finance in the of debt relief that is nominally granted to The gross foreign financing requirements 1990s, held in September 1990 in Wash- a debtor and that which is actually given for all of Sub-Saharan Africa - before ington, DC. A condensed version of the up by the creditors. To help put that gap debt relief of any kind or the accumula- paper will appearin the forthcoming sym- in perspective, Cohen proposes a valua- tion of new arrears - are projected to posium volume. Copies of the complete tion formula that provides: average about $28 billion a year (in nomi- paper are available free from the World * The price at which a buy-back of nal prices) between 1991 and 2000, or Bank, 1818 H Street NW, Washington DC the debt, on the secondary market, is about $50 per capita annually. These 20433. Please contact Mavita Gomez, advantageous to the country. f1gures compare with estimated gross fi- room J3-282, extension 34349 (87 pages, * The value to creditors of having nancing of $27-$28 billion in 1988 and with figures and tables). the flows of payment guaranteed against $24-$25 billion in 1982. This is equiva- factors that hinder a country in servicing lent to only about 12 to 14 percent of total its debt. capital flows to the developing world in 765. Withholding Taxes and * The degree of tradeoff between 1988. International Bank Credit Terms growth of payments and levels of pay- The annual levels decline in mid- ments. decade to about $26-$27 billion a year but Harry Huizinga Itis not good business for a country to rise to more than $30 billion by 2000. This announce its intention to buy back debt. variation in the trend reflects combined International differences in withholding According to Cohen's calculation, doing so movements in the balance of trade in tax rates on interest payments on interna- 176 Policy Research Working Paper Series tional loans are reflected in bank credit income from foreign sources probably still tive of agricultural incomes. terms. As a result of the limits on tax has an important effect on credit terms. The effect of structural adjustment credits for foreign-interest withholding In particular, limits on tax credits for on the health sector in C6te d'Ivoire is taxes introduced in the 1986 U.S. tax re- foreign-interest withholding taxes, as ef- unclear. The structure of public health form, credit terms for developing coun- fectively introduced by the 1986 U.S. tax spending in 1985 suggests that the em- tries will probably be less favorable. reform, will probably lead to less favor- phasis on curative care, based dispropor- able credit terms. tionately in Abidjan hospital centers, has Many countrieslevy withholding taxes on This paper - a product of the Debt not shifted. And immunization coverage interest payments on international bank and International Finance Division, In- showed no signs ofimprovement between loans and other debt instruments. These ternational Economics Department - is 1980 and 1984. As subsidies to urban withholding taxes can be credited against part of PRE's continuing effort to under- consumers have been curtailed and real taxable income in the major creditor na- stand what determines the cost andquan- urban income has declined, child health tions, such as the United States and the tity ofcommercial bank credit available to in the urban areas has deteriorated, par- United Kingdom. developing countries. Copies are avail- ticularlyin the postneonatal period. This Internationalbankloan contracts con- able free from the World Bank, 1818 H deterioration has disproportionately af- ventionally state the interest rate or Street NW, Washington DC 20433. Please fected families in the top 40 percent of - spread above the benchmark rate net of contact Sheilah King-Watson, room S8- urban income distribution - mostly civil withholding taxes. For a given net inter- 040, extension 31047 (32 pages). servants. est rate, an increase in the withholding The LSMS data suggest that families tax rate increases the withholding taxes with no savings have been severely af- paid in the borrower country as well as 766. Economic Crisis, Structural fected by these changes in child health. In creditable in the creditor country. So Adjustment, and Health In Africa the rural areas, child health has not been international bank loans become more significantly affected by the economic cri- profitable to the banks the higher the rate Francois Diop, Kenneth Hill, sis or adjustment policies. This finding is of withholding tax imposed by the bor- and Ismail Sirageldin consistent with the notion that when fami- rower country. lies are insulated from (or marginally As banks compete for loans, one ex- Has the economic crisis of the 1980s in affected by) public services and subsidies, pects these institutions to offer low inter- Sub-Saharan Africa increased mortality they will also be insulated from changes est spreads to countries that impose high or at least reduced its rate of decline? in these services and subsidies during withholding taxes. Huizinga shows em- Nationally, no. But the urban poor suf- adjustment. pirically that international differences in fered more, the rural nonpoor less. It would be surprising if economic withholding tax rates are indeed largely crisis and adjustment, both of which im- reflected in bank credit terms. Diop, Hill, and Sirageldin applied two ply falling real wages for some compo- Using a sample of 510 loans to 14 typesofanalysistotwotypesofdatatotry nents of society, had no effect on child debtor nations originated between 1971 toquantifyany short-term effect economic mortality. But countries of Sub-Saharan and 1981, he finds that the developing crisis and adjustment might have had on Africa have not yet reached the levels of countries have been able to reduce their child mortality in Sub-Saharan Africa. development and industrialization that interest expense by an estimated 56 cents First they analyzed aggregate data now-developed countries had reached for every dollar of tax withheld at the for ten countries covered by the Demo- when the link between their economic source. U.S. banks passed on close to 100 graphic and Health Surveys project. Then and health indicators weakened. percent of their potential U.S. income tax they analyzed an elaborate data set for Diop, Hill, and Sirageldin found no credits to developing countries by way of Cote d'Ivoire collected in the mid-1980s. across-the-board increase in mortality. lower interest spreads during the go-go Both analyses used time-period dummy Rather, they found a change in relative lending years of 1976-78. variables to identify the effects of crisis levels among groups that favors the rural The cost of bank credit to developing and adjustment. Despite very different nonpoor at the expense of the urban countries is made unstable, however, as methodologies and data sets, the two middle-income and the urban poor, with loan spreads reflect the cyclical marginal analyses produced surprisingly similar little net effect at the national level. value of tax credits to the commercial results. Of course, child survival interven- banks. In particular, tax credits were They found that in the short run, tions expanded greatly in the 1980s, and fully reflected in loans with maturities of neither crisis nor adjustment increased would have had their greatest impact in four years or less, but only partially in child mortality at the national level, rela- rural, poorly served areas. How much the longer-term loans. The rationale appears tive to countries not undergoing adjust- effect of crisis and adjustment has been to be that banks have doubts whether tax ment (but not necessarily avoiding crisis). cancelled out by immunizations and oral credits flowing from long-term loans will Because of economic decline and ad- rehydration therapy it is impossible to still be allowed in the future. They may justment policies, real income declined in tell. also doubt whether they will have enough urban areas. But rural incomes among Diop, Hill, and Sirageldin examined taxable income to actually realize the full producers of cash crops may not have only short-term effects - the only ones tax savings offered by the tax credit. been negatively affected, because the ag- they could expect to measure. The long- Huizinga concludes that tax treat- ricultural policy components ofstructural run effects of crisis and adjustment will ment in the creditor country of interest adjustment have been relatively protec- depend on adjustment's success in boost- Policy Research Working Paper Series 177 ing sustained long-term growth. Such for currency, demand deposits, and time 768. Going to Market: growth shouldreduce child mortality and deposits. The targets include domestic Privatization In Central speed the reduction of fertility as well, inflation and sectoral growth rates. and Eastern Europe thus reinforcing declines in child mortal- Initially, they use the framework to ity. project detailed national and sectoral ac- Manuel Hinds and Gerhard Pohl This paper - a product of the Popu- counts, including the financeable fiscal lation, Health, and Nutrition Division, deficit. But they are especiallyinterested Insights into the major task ofprivatiza- Population and Human Resources De- in the external financing gap and the tion facing Eastern European countries: partment - is part of a larger study residual public sector borrowing require- about the key decisions to be made and undertaken by PRE of African health ment (PSBR) that emerge in these base about such important issues as whether to policy. Copies are available free from the projections. For ease of exposition, these sell state enterprises or give them away World Bank, 1818 H Street NW, Wash- gaps are assumed to be independent. (and to whom and in what sequence). ington DC 20433. Please contact Otilia Next, Bruce and Ndii illustrate the Nadora, room S6-065, extension 31091 mcdel'susefulnessincalculatingthepolicy Privatization is one of the most challeng- (73 pages). a4justments - exchange rate, interest ing elements of economic reform in Cen- rate,andmonetization-thatwouldelimi- tral and Eastern Europe. The task is nate internal andexternal macroeconomic misunderstood, as is evident in misplaced 767. Framework for imbalances. The policy adjustments are analogies about privatization in France, Macroeconomic Analysis (Applied applied independently and jointly. Pre- Chile, the United Kingdom, and other to Kenya) dictably, the exchange rate depreciates to countries - where state enterprises had eliminate the external financing gap. operated in a predominantly market-ori- Colin A. Bruce and David Ndii Similarly, the real domestic loan interest ented environment and in a business cul- rate rises, crowds out private investment, ture dominated by private enterprise. Models ofthe RMSM-Xgenre can - while and releases financing for the residual The centrally planned economies lack preserving their logical structure-incor- PSBR. The model also calculates the level the institutional infrastructure ofmarket porate behavioral equations and provide to which domestic inflation would have to economies, and the magnitude of their useful insights into policy actions that rise to finance the residual PSBR through task is totally different. would correct internal and external mac- an inflation tax. State enterprises account for most of roeconomic imbalances. When activatedjointly with exchange the output in these economies, for one rate depreciation, a smaller increase in thing. The declared objective of reducing Bruce and Ndii develop a macroeconomic the interest rate eliminates the residual state ownership tolevelsresemblingthose model for Kenya that projects detailed PSBR. This is because the exchange rate of Western Europe within, say, five years national, fiscal, monetary, and private adjustment improves the net foreign as- would entail privatizing 10 percent to 20 sector accounts, and the balance of pay- sets position and increases the scope for percent of output and employment per ments. With no changes in its logical creating domestic credit. Understand- year. This will require entirely different structure, the model also calculates the ably, therefore, the increase in interest solutions. magnitude of policy adjustments that rate is even smaller when action in the Moreover, privatization is taking would eliminate external and internal exchange rate is combined with partial place at the same time as other far-reach- imbalances. monetization of the fiscal deficit. ing economic and political reforms, and Their approach emphasizestranspar- As an important by-product, these before the barest elements of the legal ency and user-friendliness, which they simulations also illustrate the impact of framework of a market economy and a achieve in two ways. First, historical data exchange rate and interest rate adjust- rudimentary capital market are in place - the basis for projections - are entered ments on the fiscal deficit. and functioning. in worksheets that are similar (in format, Subsequent versions ofthe model will Hinds and Poh1 briefly discuss other coverage, and units of account) to stan- endogenize growth and extend coverage majorelementsofeconomic reform closely dard tables produced by the data generat- to the consolidated public sector. linked with privatization: macroeconomic ing agencies. Second, key behavioral as- This paper - a product of the Coun- stability, price and market reforms, and a sumptions and targets are entered in a try Operations Division, Eastern Africa redefined role for the state. clearly designated worksheet. This Department, Africa Regional Office - is They explain the key choices to be worksheet contains details such as com- part of a larger PRE effort, led by the made in privatization: which state assets modity price projections and the LIBOR Macroeconomic Adjustment and Growth should be privatized, whether assets rate that would normally be provided by Division, CountryEconomicsDepartment, should be sold or given away, how to the Bank's International Trade Division. to develop a macroeconomic projection physically and financially restructure This worksheet also accommodates coef- model that will improve and extend the enterprises to meet present realities, and ficients for the import and export price Bank's RMSM model. Copies are avail- what role to allow foreign investors. andincome elasticities by major commod- able free from the World Bank, 1818 H Three factors determine the maxi- ity groups; the interest and income elas- StreetNW, Washington DC 20433. Please mum speed at which privatization can be ticities of private investment; and the contact Margaret Lynch, room J10-271, carried out: political factors, the physical impact of inflation, income growth, and extension 34046 (104 pages, including limits imposed by the institutional ar- changes in interest rates on the demand figures and tables). rangements needed to design and imple- 178 Policy Research Working Paper Series ment the privatization program, and the 769. Entry-Exit, Learning, ally speed up their productivity growth. speed at which minimum institutional and Productivity Change: Moreover, competitive pressures have arrangements essential for the function- Evidence from Chile driven both incumbents and entrants to ing of a market economy can be put in improve their productivity. place (the laws and provisions regulating Lili Lin * The ratio of skilled labor to un- private activity) and the main obstacles skilled laboris higherandincreasingmore removed (such as monopolistic privileges The effects ofplant turnover and learning rapidly among incumbents and entrants now enjoyed by many enterprises). onproductivitygrowthareeconometrically than among exiting plants, providing an One of the most important decisions measured using a large panel of Chilean important source of learning and produc- is whether such restructuring should be establishments covering the period 1979- tivity growth. carried out by the private sector or the 86. * Although the economywide reces- government - whether privatization or sion affected the productivity of each co- restructuring should come first. Hinds Do competitive pressures really force in- hort to different degrees, there are steady and Pohl argue that restructuring could efficient producers to shut down? Does increases in productivity over the sample be done in two stages. The first, which the entrance of new producers typically period, reflecting both the replacement of would not include major investments, increase or worsen industrywide effi- inefficient producers by efficient ones and couldbe carriedoutby the government, or ciency? Is there evidence of systematic the improvement of productivity by in- after partial privatization. Major invest- learning processes? If there is, do these cumbents and entrants. ment should await full privatization. processes differ across plant cohorts? How These efficiency gains have not been Another key problem is the sequenc- do the effects of plant turnover combine to isolatedby traditional total factor produc- ing of reforms - in particular, in what shape overall rates of industrial produc- tivity studies based on sectoral data. These order to reform enterprises and the finan- tivity growth? gains suggest that microeconomic reform cial system. This problem could be solved Liu addresses these largely unex- - including trade liberalization, privat- by splitting the banking system, creating plored questions by applying econometric ization, and the deregulation of markets private banks to lend to new private ven- techniques from the efficiency frontiers - have been effective in promoting effi- tures and privatized enterprises andleav- and the panel data literature. She con- ciencyimprovements in the Chileanmanu- ing the old banks to clear up past loans. structs plant-specific time-variant tech- facturing sector. In discussing the design of the privat- nical efficiency indices for surviving, exit- This paper - a product of the Trade ization process, Hinds and Pohl consider ing, and entering plant cohorts. She then Policy Division, Country Economics De- how to balance the pros and cons of both uses these to compare productivity growth partment - is part of the PRE research major approaches: selling enterprises or rates across plant cohorts and to examine project on Industrial Competition, Pro- making uncompensated transfers (direct the net effect of plant turnover and learn- ductive Efficiency, and Their Relation to transfers of shares, distribution through ing patterns on manufacturing-wide pro- Trade Regimes (RPO 674-46). Copies are vouchers, and distribution through inter- ductivity growth. available free from the World Bank, 1818 mediaries). The analysis is based on plant-level H Street NW, Washington, DC 20433. Finally, they briefly describe initial panel data for all Chilean manufacturing Please contact Dawn Ballantyne, room experiences with privatization in Hun- plants with at least 10 workers, covering N10-023, extension 37947(41 pages). Sep- gary, Poland, Czechoslovakia, Yugosla- eightyears in the post-reform adjustment tember 1991. via, Romania, Bulgaria, Albania, and the period 1979-86. Soviet Union. Liu finds the importance of plant This paper is a product of the Trade, turnover and different learning patterns 770. Privatization In Eastern Finance, andPublicSector Division, Tech- across cohorts in driving the Chilean and Central Europe: Objectives, nical Department, Europe, Middle East, manufacturing-wide productivity Constraints, and Models and North Africa Regional Office. The changes. She finds that: of Divestiture paper was presented at the World Bank/ * The evidence supports the hypoth- Treuhandanstalt Seminar on Privatiza- esis that competitive pressures force less Farid Dhanji and Branko Milanovic tion in East Germany and Eastern Eu- efficient producers to fail more often than rope, held in Berlin in May 1991. Copies others. Average technical efficiency lev- The privatization process must be seen as are available free from the World Bank, els are higher among surviving and enter- transparentandabsolutely above reproach 1818 H Street NW, Washington DC 20433. ing plants than among exiting plants. and the rules ofthe "market"game must be Please contact Lus Hovsepian, room H9- These differences in productivity across clearly enunciated and adhered to in di- 065, extension 37297 (22 pages). cohorts are both systematic and persis- vestitures. Improvements in economic tent over time. The gap in productivity performance will be considerably diluted between incumbents and exiting plants, if the new market economy is based on an and between entering and exiting plants, extensive network of special privileges. has widened over time, while the gap between incumbents and entering plants This paper is devoted largely to a taxo- has shrunk over time. This is because nomic discussion ofobjectives, constraints, exiting plants have declining productiv- and models of divestiture in privatization ity over time, while entering plants gradu- programs, but Dhanji and Milanovic also Policy Research Working Paper Series 179 present some concluding observations. 771. Macroeconomic Structure 772. Macroeconomic Adjustment The plethora of divestiture options and Policy in Zimbabwe Analysis to Oil Shocks and Fiscal Reform: makes choice difficult. From an indi- and Empirical Model (1965-88) Simulations for Zimbabwe, 1988-95 vidual government perspective, the choice ofpreferred model will vary depending on Ibrahim Elbadawi and Klaus Schmidt-Hebbel Ibrahim Elbadawi and Klaus Schmidt-Hebbel the objectives, the weights given to the objectives, and the estimation of practical A macroeconomic general equilibrium Deep fiscal reform will significantly help difficulties in implementation. In this model for Zimbabwe Zimbabwe achievea sustainable debtpath, respect, there is no correct answer about a decline in interest rates paid on public how to privatize. Decisions are highly Elbadawi and Schmidt-Hebbel develop debt, and a recovery of private consump- political, mediated through still inchoate and apply a macroeconomic general equi- tion and investment. political processes, invoking strong inter- librium model for Zimbabwe. ests and lobbies, and with a genuine pos- Zimbabwe faces the challenge of en- Elbadawi and Schmidt-Hebbel develop sibility of popular backlash in societies gaging in a program offiscal stabilization and apply a macroeconomic general equi- sensitive to wide discrepancies in wealth. and structural reform to address its cur- librium model for Zimbabwe. The model . Privatization models are not exclu- rentfiscalimbalance,highunemployment, integrates a behavioral estimated model sive. Itmaybe possible, in fact, to combine and low growth prospects. Elbadawi and structure, taken from a companion paper, solutions that give workers and manag- Schmidt-Hebbel discuss macroeconomic with the relevant budget constraints for a ers a stake in their firms, grant a propor- changes over the last two decades, pro- six-sector disaggregation into a compre- tion of enterprise equity to the general vide a model of the macroeconomic struc- hensive framework. population (either directly or through ture, and estimate aggregate equations Starting with 1988 as a base year, mutual funds), and provide revenue for for the main goods and asset markets. they present simulations for a base sce- the state through general sales. Such The macroeconomic framework they nario covering the period 1988-95. From combined options are beginning to sur- model integrates three features of the the different macroeconomic issues and face in privatization debates. country's macroeconomy: reformrequirementsidentifiedin the com- During the period when firms are * The noninflationary and almost panion paper as relevant for Zimbabwe beingreadiedfor divestiture, governments exclusively domestic financing ofthe pub- today, they select two for performing al- canbe expected tobebesiegedby waves of lic sector deficit, which has been similar ternative scenario simulationshere:acon- requests for exemptions, concessions and in gross terms to the private sector sur- tinuation of the current oil shock and protection from firms about to be privat- plus. strong fiscal stabilization. ized or from prospective owners. It will be * Sustained negative or low real in- The oil shock is shown to reduce extremely important to resist these pres- terest rates, together with no apparent growth, increase inflation, depreciate the sures. The improvement in economic per- sign of excess demand in credit markets. real exchange rate, and reduce private formance that is one of the major objec- * Most important - after the dra- investment in Zimbabwe, a country tives ofreform programs will be consider- matic economic declines of the late 1970s heavily dependent on imported oil. ably diluted if the new market economy is that resulted from economic sanctions Fiscal adjustment is a major chal- based on an extensive network of special and civil war - the fact that sustained, lenge for stabilization and growth faced privileges. Moreover, experience from high growth has never materialized. by Zimbabwe's policymakers today. The elsewhere testifies to the difficulty of re- The framework presented in this pa- paper's simulations show that deep fiscal moving concessions once given. per is integrated into a general equilib- reform will significantly help Zimbabwe This paper - a joint product of the rium macroeconomic model (a RMSM-XX achieve a sustainable debt path, a decline Socialist Economies Reform Unit, Coun- model) in a companion paper, "Macroeco- in interest rates paid on public debt, and try EconomicsDepartment, andthe Coun- nomic Adjustment to Oil Shocks and Fis- a recovery of private consumption and -try Operations Division, Country Depart- cal Reform: Simulations for Zimbabwe, investment. ment IV, Europe, Middle East, and North 1988-95 (WPS 772). In that paper it is (See companion paper, "Macroeco- AfricaRegional Office-is partofalarger used to analyze alternative fiscal and oil nomic Structure and Policy in Zimbabwe: .effort in PRE to study transition in for- price scenarios for Zimbabwe. Analysis and Empirical Model, 1965-88," merly planned or non-market economies. This paper- a product of the Macro- WPS 771.) This is a revision of a paper prepared for economic Adjustment and Growth Divi- This paper - a product of the Macro- the Conference on Privatization and Own- sion, Country Economics Department - economic Adjustment and Growth Divi- ership Changes in Central and East Eu- is part of the division's development of sion, Country Economics Department - rope held at the World Bank in Washing- RMSM-XX, an applied macroeconomic is part of the division's development of ton, DC in June 1990. Copies of the paper generalequilibriummodelforpolicysimu- RMSM-XX, an applied macroeconomic are available free from the World Bank, lations and economic projections. Copies generalequilibriummodelforpolicysimu- 1818HStreetNW,WashingtonDC20433. are available free from the World Bank, lations and economic projections. Copies Please contact CECSE, room N6-025, ex- 1818 H Street NW, Washington, DC are available free from the World Bank, tension 37188(28pages). September1991. 20433. Please contact Susheela 1818HStreetNW,WashingtonDC20433. Jonnakuty, room N11-039, extension Please contact SusheelaJonnakuty, room 39074 (79 pages). September 1991. N11-049, extension 39074 (94 pages). September 1991. 180 Policy Research Working Paper Series 773. Are Ghana's Roads Paying If raising the licensing fee for heavy loss. Gersovitz evaluates the benefits Their Way? Assessing Road Use trucks is not feasible, certainly the gov- available from alternative uses of the in- Cost and User Charges in Ghana ernment should cancel heavy trucks' ex- struments available to the marketing emption from import duties. An import board: Reuben Gronau tax of 15 percent and a 10 percent pur- * The purchase price for the crop at chase tax (the standard rate on consump- a particular location (and, implicitly, the The study of road use costs in Ghana tion imports) will go a long way toward cost of transport to the farmer). showed, first, that such studies are in fact recovering the marginal cost of road use - * The location of depots. feasible in LDCs, notwithstandinggaps in - and will be much harder to evade than * The scheduling of the evacuation the data, and second, that they can reveal the license fee. of crops by location. important inefficiencies in the tax system. Gronau found the issue of redistribu- If the state taxes the crop, the best tion of costs and fees of secondary impor- policy is to provide a partial subsidy of Gronau studied how much road damage tance in Ghana, because of the country's transport. The worst policy is pan-terri-- contributes to road use costs in Ghana low fuel consumption, the current low torial pricing (paying the same price per and how the marginal social costs should level offuel taxes, and the fact that expen- unit at any depot, an implicit 100 percent be recovered. This required understand- ditures on fuels are proportionately the subsidyoftransportfrom depot to port). A. ing the road deterioration process better same for the poor and the nonpoor. pure export tax (farmer transports crop to and analyzing the implications forvehicle This paper - a product of the Trans- port at own cost) is only slightly better. operating costs and road user charges. port Division, Infrastructure and Urban The deadweight loss from pan-terri- The most important thing Gronau Development Department - is part of a torial pricing (for a given tax yield) in- learned is that studies of road-user costs larger effort in PRE to study and demon- creases with the supply elasticity of the are feasible in reputedly data-poor coun- strate methods for designing transport crop. And the relative cost of pan-territo- tries. In Ghana, the problem was not so user charges and efficient transport prices. rial pricing rises as the needed amount of much missing data as conflicting sources This research was funded by the World tax revenue rises. of data. Many of these data sources did Bank's Research Support Budget, RPO Gersovitz finds that returns (in terms not exist a few years ago and have been 674-37, "Transport Taxation and Road of producer surplus) to transport invest- established as part of the transport reha- User Charges in Sub-Saharan Africa." ments (lower transport cost) are largest bilitation program. The data sources need Copies are available free from the World under pan-territorial pricing, lower un- consolidating, butthe experienceinGhana Bank, 1818 H Street NW, Washington, der optimal pricing (a partial subsidy of proves the feasibility ofinformation gath- DC 20433. Please contact Jennifer transport), least under a pure export tax. ering and its importance as part of any Francis, room S10-063, extension 35205 Gersovitz also examines different major transport program. An important (44 pages). September 1991. patterns of depot location. He finds that component missing in Ghana is data on unless depots are densely spaced, farm- the axle-loading of heavy vehicles - as ers may deliver their crops to the depot different types of axle-load inflict signifi- 774. Agricultural Pricing Systems nearest to thembut not nearest to the port cantly different degrees of damage. and Transportation Policy in Africa - the heavier the transport subsidy, the Gronau found that to bridge the gap greater the risk of this raising transport between road-user costs (including the Mark Gersovitz costs. cost of road maintenance) and charges, He also finds that evacuating crops in the annual fee for heavy trucks should be When agricultural production is taxed, an irrational order - from the furthest raised tenfold - to about $800 per ve- the system of producer prices, transport depots first, and the closest depots last - hicle. Fuel taxes alone are not adequate logistics, and decisions on investments in tends to increase postharvest losses and to distinguish fully the large difference in transport for exports must be considered to engender inefficient use of and invest- road damage costs incurred by heavy together. ment in transport. trucks and private cars. The taxing in- The significance of the research for strument most deficient in Ghana is the Many African states raise revenue by operations is to demonstrate the interde- annual licensing fee. Not only should taxing export crops. A common tool for pendence of agricultural pricing policy licensing fees for heavy trucks be ten this purpose is marketing boards. Mar- and marketing board logistics with trans-' times higher than they are now, but ex- keting boards purchase crops at depots port use and the demand for transport emptions from the licensing fee should be established near areas of cultivation - at investments, and to present orders of canceled and registration rules strictly prices that yield a profit to the board. magnitude of cross-effects that ought to enforced. They also arrange for processing and the be investigated in decisions about agri- Even then, charges on heavy vehicles transport of the product from depots to cultural pricing policies and transport will not cover costs unless current legal port. The cost of transport to the farmer, investments. limits of axle loading are obeyed. A more given the price offered for his crop at the The parameters for Gersovitz's ana- efficient means ofreducing the damaging depot, will affect his decision on produc- lytical model oftransport are derivedfrom effects of heavy vehicles lies in structur- tion and on the use of his own transport data for 56 cotton-producing zones of C6te ing the annual fees to reflect how much resources. The best policy for the state (or d'Ivoire. more damaging two-axle heavy vehicles marketing board) is to raise the needed This paper - a product of the Trans- are than multiaxle vehicles. amountofrevenueattheleastdeadweight port Division, Infrastructure and Urban Policy Research Working Paper Series 181 Development Department - is part of a play a secondary role in the cyclical varia- tematic way. larger effortin PRE to analyze the macro- tionandstructuralchangesofnonfinancial Responses of private investment to linkages of sector investments and pric- public sector deficits. Active fiscal poli- the public capital stock (or to public in- ing policies. This research was funded by cies, under the direct control of policy- vestment) range widely. And the fiscal the the World Bank's Research Support makers, are both the main culprit offiscal deficit explains agreat deal ofvariation in Budget for research project "Transporta- crisesandaneffectiveinstrumentinbring- the trade deficit and the real exchange tion and Agricultural Supply Responses ing about fiscal adjustment. Fiscal ad- rate. The "fundamentals"approach tothe in Africa" (RPO 674-75), and by a grant justmaent is achieved by reducing over- real exchange rate is vindicated, which from the Lynde and Harry Bradley Foun- blown government bureaucracies, cutting should serve as an antidote to the notion dation to the Research Program in Devel- inefficienttransfers and subsidies,reform- that nominal devaluation alone can re- opment Studies at Princeton University. ing tax systems to increase broad-based store macroeconomic balances. Copies are available free from the World taxation, and reforming or privatizing This paper - a product of the Macro- Bank, 1818 H StreetNW, Washington DC public enterprises and commodity mar- economic Adjustment and Growth Divi- 20433. Please contact Barbara Gregory, keting boards. sion, Country Economics Department - room S10-053, extension 33744(24 pages). Inflation does not show any simple is a synthesis ofa research project on"The October 1991. correlation withfiscal deficits across coun- Macroeconomics of Public Sector Defi- tries. The cross-section relationship be- cits" (RPO 675-31). An earlier draft was tweeninflation andmoney creation shows presented at the World Bank Conference 775. The Macroeconomics of a "Laffer curve" pattern, with maximum on Macroeconomics of Public Sector Defi- Public Sector Deficits: A Synthesis seigniorage at inflation between 68 per- cits, Washington, DC, June 1991. Copies cent and 160 percent. In contrast, the are available free from the World Bank, William Easterly and Klaus Schmidt-Hebbel studies using individual countries' time 1818HStreetNW, WashingtonDC 20433. series data find revenue-maximizing in- Please contactRebecca Martin, room Nil. Ten case studies suggest that two unortho- flation rates that seem to rise with actual 053, extension 39065 (91 pages). October dox methods of deficit financing - infla- average inflation - the "optimum"rate is 1991. tion tax and financial repression - are estimated to be only 4 percent in Thai- both ineffective in raising revenue and land, but 966 percent in Argentina. The disruptive of macroeconomic stability. assumption of a money demand with con- 776. Enforcement of Canadian Fiscal stabilization leads to both higher stant semi-elasticity for inflation overes- "Unfair" Trade Laws: The Case private consumption and increased in- timates the "optimum" inflation rate in for Competition Policies vestment and to external adjustment - high-inflation countries and underesti- as an Antidote for Protection characterized by a lower trade deficit and mates it in low-inflation countries. a depreciated real exchange rate. Seigniorage is unimportant as a steady- Mark A. Dutz state phenomenon, but it can be impor- Easterly and Schmidt-Hebbel examine tant as a temporary source of revenue in An "economywide"perspective - examin- the macroeconomic consequences of pub- times ofcrisis. Evenlargesurgesofmoney ing all allegations of 'unfair" dumping lic deficits by summarizing the results of creation are not closely linked to acceler- and subsidization by comparing the im- ten case studies of developing countries ated inflation. pact on economic efficiency ofexisting for- - Argentina, Chile, Colombia, C6te Financial repression is a common eign pricing practices with the impact of d'Ivoire, Ghana, Morocco, Mexico, Paki. resort for countries in a fiscal crisis. But alternate forms of intervention - would stan, Thailand, and Zimbabwe - as well the collapse of private credit, investment, provide a more rational way ofresponding as by examining broader evidence. and growth in those countries following to problems that trade laws now deal with. Cross-section correlations of fiscal episodes of financial repression hardly -balances with macroeconomic variables makes it the recommended way to deal Canada was the first country to enact are surprisingly strong. Stable and low with crises. comprehensive antitrust legislation (in fiscal deficits are associated with good Private consumption andinvestment 1889) and the first to institute an .growth performance. Fiscal balances are are significantly affected by the public antidumping system (in 1904). Canada's positively related to investment and to budget structure, the overall deficit, and original "unfair"trade legislation reflected current account balances. Highfiscal defi- its financing. Private consumption is re- a desire to prohibit predatory dumping - cits show an association with highly nega- duced by income taxes - with the size of pricing practices by foreign exporters de- tive real interest rates (financial repres- the effect in between what the Keynesian signed "to crush out the native Canadian sion), money creation, and high black andpermanent-incomehypotheses would industry." But the result of Canada's marketexchangeratepremia. Theaggre- predict. Public saving (or the public sur- recent enforcement of unfair trade laws gate of the ten case studies shows an plus) tends to raise consumption some- has been high levels ofprotection for a few association between fiscal adjustment in what - particularly in countries where well-organized firms. Serious predatory, the 1980s, improvement of the current the public sector has preferred access to anticompetitive concerns were probably account, and real depreciation of the ex- resources of the financial system. Real not at issue in any of the cases in which change rate. interest and inflation rates - and hence antidumping duties were assessed. The case studies show that both for- how the public deficit is financed - do not Canada's recent overhaul of its un- eign and domestic macroeconomic shocks affect private consumption in any sys- fair trade legislation was not followed by 182 Policy Research Working Paper Series any dramatic change in enforcement prac- Unfortunately, international stan- maintain lower inflation levels than their tice. If anything, the protection bias of dards, as codified in the GATT and as neighbors. The framework Devarajan Canadianenforcementhasincreased. The practiced by Australia, the EC, and the and Rodrik have devised provides a way bias against exports from developing coun- United States, weigh against Canada to weigh these costs and benefits. tries has also increased significantly in modifying its current standard. Canada The inflation differential between the years following implementation ofthe - the first country to institute an CFA and non-CFA African countries has revised antidumping and countervailing antidumpingsystem-isnowconstrained been about 14 percentage points. duty legislation (known as SIMA). from adopting more sensible policies by Devarajan and Rodrik attribute this dif- Comparingcasesinvolvingdeveloped the weight and momentum of the system ferential to the problems faced by coun- and developing countries suggests a pro- it helped to develop. tries with discretion over their exchange- tectionist bias against the developing This paper - a joint product of the rate policy - namely, that the govern- country bloc. This bias increased in the Industry Development Division, Indus- ment cannot credibly commit against us- years following the implementation of try andEnergyDepartment andtheTrade ing this instrument to pursue its own' SIMA: while the share of imports from Policy Division, Country Economics De- objectives (which may deviate from that developing countries fell to 11 percent, partment - is part of a larger effort in of the private sector). In non-CFA coun- their share of unfair trade cases increased PRE to understand the economics of the tries, the private sector raises its prices,' to 44 percent. emergence of "fairness" as a standard for anticipating the government's capricious Dutz argues that an approach based regulating international trade, its impli- use of the exchange rate. The higher on competition policy principles or on an cations for the continued openness of the prices, in turn, force the government to economywide perspective, by focusing on international trading system, andits con- devalue - and inflation results. the broader impact of policies, offers an tinued functioning as an important ve- By contrast, the fixed exchange rate economically more rational way to deal hicle for development. It is a product of a ofthe CFAZone acts as a credible commit- with issues currently addressed by unfair research project on "Regulations Against ment. The government"ties its own hands" trade remedies. While unfair trade laws Unfair Imports: Effects on Developing so that it will not be tempted to use the aim to protect domestic competitors, com- Countries"(RP0675-52). Copies are avail- exchange rate, thereby eliciting lower petition laws strive to protect the com- able free from the World Bank, 1818 H wage and price increases from the private petitive process. Although existing com- StreetNW, Washington DC 20433. Please sector. petition laws could be adapted to deal contact Nellie Artis, room N10-013, ex- Weighing this benefit against the with cross-border pricing practices of for- tension 37947 (52 pages). October 1991. costs of nonadjustment to external shocks, eign private enterprises, they do not Devarajan and Rodrik conclude - from readily address pricing practices of for- some highly simplified calculations-that eign governments. Under an 777. Do the Benefits of Fixed fixed exchange rates have been a bad "economywide" perspective, on the other Exchange Rates Outweigh Their bargain for the CFA member countries. hand, both private and public contentious Costs? The Franc Zone in Africa Under reasonable tradeoffs between out- pricing practices could be evaluated to put and inflation, these countries would determine how, on balance, the national Shantayanan Devarajan and Dani Rodrik have been better off having the flexibility economic interest would best be served. to adjust to external shocks. All allegations of unfair dumping and Fixed exchange rates have been a bad Their conclusion is qualified by some subsidies would be examined by compar- bargain for the CFA member countries. of the other benefits of Zone membership ingtheimpact of current pricingpractices Under reasonable tradeoffs between out- as well as by the stylized nature of their on economic efficiency with the impact of put and inflation, these countries would framework. alternate feasible forms ofintervention so have been better off having the flexibility This paper - a product of the Public that the chosen policyaction results in the to adjust to external shocks. Economics Division, Country Economics largest possible net economywide gains. Department - is part of a larger effort in - The concrete proposals Canada pre- Devarajan and Rodrik develop a simple, PRE to analyze structural adjustment in sented during the Free Trade Agreement formal framework for clarifying the Sub-Saharan Africa. The paper was pre- negotiations to regulate Canada-U.S. tradeoffs involved in choosing between a sented at the CEPR/OECD conference on cross-border pricing issues by competi- fixed and flexible exchange rate system. International Dimensions to Structural tion principles demonstrate that the com- They apply this framework to the coun- Adjustment: Implications for Developing petition policy alternative is workable. tries of Africa's CFA Zone, which have CountryAgriculture heldin ParisinApril But as Canada's unfair trade laws are maintained fixed parity with the French 1991. Copies are available free from the administered currently, the economywide franc since independence. World Bank, 1818 H Street NW, Wash- perspective fits in more readily than com- Because a few agricultural products ington DC 20433. Please contact Ann petition policy. Relatively minor changes and natural resources dominate their ex- Bhalla, room N10-059, extension 37699 toexistinglaws-requiring,forinstance, ports, member countries of Africa's CFA (32 pages). October 1991. mandatory public interest hearings for Zone have suffered frequent shocks in each case considered by the Tribunal, to terms of trade. A flexible exchange rate explicitly consider the economywide im- could possibly have alleviated the costs of pact of various forms of policy interven- these external shocks. On the other hand, tion - are readily feasible. CFA member countries have managed to Policy Research Working Paper Series 183 smaller payments, because of the associ- Bank's role is important to policy coordi- 778. A Dynamic Bargaining Model ated cost to banks of future collections. nation and to sustaining donor commit- of Sovereign Debt * Smaller countries, which are gen- ment to the program. erally more open and specialized, can be The Bank's commitment of$2 million Eduardo Fernandez-Arias expected to be stronger negotiators and to a year represents 10 percent of HRPs make relatively smaller payments. total funding. HRP has gained interna- A model ofthe determinants of negotiated This paper - a product of the Debt tional respect, and its solid record of commercial sovereign debt payments in and International Finance Division, In- achievementjustify the Bank's continued an import-dependent economy subject to ternational Economics Department - is - and expanded - support. foreign exchange and fiscal constraints. part of a larger effort in PRE to under- This paper - a product of the Popu- stand the economic relationships between lation, Health and Nutrition Division, ,Eduardo Fernandez-Arias models a dy- developing countries and external credi- Population and Human Resources De- namic bargaining game between a highly tors in the context of credit rationing and partment - is part of a larger effort in indebted country andits commercial bank debt negotiations. Copies are available PRE to provide information on activities consortium, to analyze the determinants free from the World Bank, 1818 H Street in population, health, and nutrition as- 'of the resulting rescheduling agreements NW, Washington DC 20433. Please con- sistedby the Bankunder its Special Grants and the net transfer of resources over tact Sheilah King-Watson, room S8-040, Program. Special Grants Programs sup- time. extension 31047 (64 pages). October 1991. portmulti-countryactivities, complement- The bargaining game is based on the ing the Bank's direct lending operations. simple paradigm that if no agreement is Copies are available free from the World reached for a current (possibly partial) 779. Special Programme Bank, 1818 H StreetNW, Washington DC payment, the banks would apply default of Research, Development 20433. Please contactOtilia Nadora, room sanctions. Fernandez-Arias found that and Research Training in Human S6-065,extension31019(13pages). Octo- under general conditions settlements Reproduction ber 1991. would be reached and default sanctions would not be applied in equilibrium. But Janet Nassim the default sanctions would be a credible 780. Optimal User Charges threat underlying the negotiations and This highly regarded organization is one and Cost Recovery for Roads determining the equilibrium payments. of the few engaged in contraceptive re- In Developing Countries Theseequilibriumpaymentsinturnwould search and development that focuses on determine the credit ceiling (the present the needs of the developing world. The Ian G. Heggie and Vincy Fon discounted value of expected payments) Special Programme ofResearch, Develop- and the later commercial discounts on the ment and Research Training in Human What impact do road user charges have on debt market. Reproduction (HRP) merits the Bank's cost recovery? And when they fail to cover Unlike other bargaining games, this continued and expanded support. total costs, how should the resulting defi- one explicitly models the debtor country's cit be financed? economic structure, featuring an import- The Special Programme of Research, De- dependent economy subject to foreign ex- velopment and Research Training in Hu- The optimal charge for road useis equal to change and fiscal constraints. Moreover, man Reproduction (HRP-- which began variable costs for road maintenance, to- the model is truly dynamic in the sense as a special program of the World Health gether with the costs road users impose that the future negotiating environment Organization - is one of the few organi- on other road users and on the rest of - current investment - is endogenously zations engagedin contraceptiveresearch society (usually confined to the costs of determined by current bargaining out- and developmentthat focuses on the needs road congestion). comes. of the developing world. One persistent question raised about Under plausible refinements and as- Nassim reviews the factors that led such charges is what impact they have on sumptions, Fernandez-Arias obtains a the World Bank to begin providing the cost recovery. And when they fail to cover .closed-form solution for net transfers, organization with financial support in total costs, howtheresultingdeficitshould dependentonvarious structural andpolicy FY88 and examines the program's accom- be financed? parameters. plishments and present direction. The theoretical literature argues that An analysis of comparative static re- Major evaluations of HRP strongly if there are constant returns to scale in sults showed that: endorse the program, concluding that the road construction and in road use, the * Fiscal constraints, not foreign ex- program has had a major impact - the optimal user charge will recover the capi- change constraints, lead to smaller pay- principal, if not the only impact, in many tal costs of the road network and the total ments. areas (such ascoordinating world research expenditures on road maintenance. Em- * Fast-growing countries get less efforts and developing new methods for pirical estimates for such a system ofroad favorable deals because they have less regulating fertility). user charges in Tunisia similarly suggest bargaining power. The Bank's cosponsorship of HRP that they would generate twice the rev- * Investment disruptions as a result has strengthenedtheprogram'slinks with enues currently spent on roads. It seems of default sanctions may work in favor of governments and facilitated its access to therefore that optimal road user charges debtor countries, possibly leading to ministries outside the health field. The would not only recover all costs but would 184 Policy Research Working Paper Series constribute substantially to general fiscal Development Department - is part of a recent domestic macroeconomic problems revenues. larger effort in PRE to understand pric- and social concerns, created skepticism Heggie and Fon examine these issues ing, cost recovery, and efficient use of about Korea's commitment to liberalized from both theoretical and practical per- resources in transport. Copies are avail- trade policies. Second, Korean industrial spectives. They conclude that there are able free from the World Bank, 1818 H groups, which own the major Korean pro- substantial economies of scale in both Street NW, WashingtonDC 20433. Please ducers of consumer electronics products, road construction and road use. Also, contact Pain Cook, room S10-055, exten- also own or control most of the retail road maintenance costs include a number sion 33462 (50 pages). October 1991. outlets for consumer electronics and ap- of fixed costs that do not vary with traffic pliances. This distribution system (up to half ofannual expenditures on road dampens the effects of lowered import maintenance are usually fixed). More- 781. The Korean Consumer barriers and prevents Korean consumers over, since roads cannot be smoothly ad- Electronics Industry: Reaction from having access to the same variety. justed to traffic, marginal costs for the to Antidumping Actions and prices of goods as consumers in mar- entire road network are significantly lower kets that are truly open to international than average costs in most developing Taeho Bark competition. countries, unless capacity is artificially Bark stresses two major lessons to be constrained by environmental or other Antidumping actions by importing coun- learned about antidumping policy. First, constraints. Under these (realistic) con- tries do not protect their own consumers. antidumping actions by importing coun- ditions, optimal user charges result in a What protects domestic consumers is com- tries do not protect their own consumers. substantial financial deficit. petition -and the wise choice of opening What protects domestic consumersis com- The question is, how should this defi- domestic markets to international compe- petition - and the wise choice of opening cit be financed? tition. It is Korean consumers who are the internal market to international com- On roads carrying heavy volumes of paying for the development of Korean in- petition. In the consumer electronics in- traffic, it is not economically efficient to dustry, not consumers in the countries dustry, the impact of U.S. antidumping bridge the financing gap by cutting back that import Korean goods. actions has been to improve the situation on maintenance. The gap has to be bridged of Korean consumers, with only minimal by collecting the required revenues Akey element ofKorea's industrial devel- effect on U.S. consumers or producers. through user charges, or by mobilizing opment strategy has been to maintain There is a risk, however, that U.S. additional general tax revenues. But the stringent import restrictions while pro- producers will push further, for negoti- costs of mobilizing additional general tax moting the development of a few large ated export constraints. Such restraints revenues are high and, given the gener- domestic firms. This strategy implies would not only raise costs to U.S. consum- ally low price elasticity of demand for minimal competitionin the domestic mar- ers but, by removing the incentive for roads, it is nearly always more economi- ket, and allows Korean firms to maintain Korean companies to set lower prices at cally efficient to collect the required rev- lucrative prices there. High profits from home, would impose a burden on Korean enues from road users. domestic sales give firms an important consumers as well. It is generally agreed that marginal source of capital for investment. Across Second, it is not consumers in the costs - corresponding to variable road the economy as a whole, this policy strat- countries that import Korean goods who maintenance costs - should be the floor egy shifts the distribution of income from are paying for the development of Korean below which user charges should never worker-consumerstoentrepreneur-inves- industry. Those consumers get what they fall. But there is no reason to stop at tors, helping to keep consumption low and pay for; there is little "excess" or "rent" in marginal costs. An important group of investment high. those prices. It is Korean consumers who costs are avoidable, attributable to indi- Korean companies have reacted to are paying. vidual groups of users (although not to antidumping actions by lowering the Finally, from the perspective of the the individual users themselves), and it prices they charge in Korea rather than exportingcountry, Barkstrongly suggests seems reasonable - on grounds of sim- by raising their export prices. Korean the need toimplement progressive import plicity, equity, and political expediency - companies followed this course because liberalization policies that will allow for- to charge these costs against the appro- they have significant market power in eign competition in the Korean market.- priate user group. Korea but virtually no power to price Import policy regimes in exporting coun- The remaining costs, although also other than competitively in any market tries have played a critical role in creating avoidable, are common to all users and, to open to international competition. an environment that makes it possible for minimizelossofeonsumersurplus, should Specific concerns expressed by profit-maximizing firms to follow a price- be charged to them using the inverse Korea's trading partners (notably the discriminating marketing strategy. Pro- elasticity rule (Ramsey pricing). United States) have been complemented gressive liberalization will eliminate the Heggie and Fon point out that there by internal pressures for a higher stan- incentive for following such a marketing are significant differences between cur- dard of living - for higher wages and strategy as monopoly profits are slowly rent user charges in Tunisia and the user lower import restrictions. The result has eroded. charges calculated using the avoidable been to open the Korean market consider- This paper - a product of the Trade cost methodology described in this paper. ably to international competition. Policy Division, Country Economics De- This paper - a product of the Trans- But problems remain. First, the aus- partment - is part of a larger effort in port Division, Infrastructure and Urban terity program, introduced to deal with PRE to understand the economics of the Policy Research Working Paper Series 185 emergence of "fairness" as a standard for signed to it - to offset completely the 783. The Origins and Evolution regulating international trade, its impli- price impact of dumping and return the of Antidumping Regulation cations for the continued openness of the world economy to the predumping equi- international trading system, and its con- librium. Rather, when imposed they act J. Michael Finger tinued functioning as an important ve- more as protective policies to insulate the hicle for development. This was funded import-competing sector from competi- Antidumping is ordinary trade protection by the research project on "Regulations tion and as optimal tariffs to improve the with a grand public relations program. Against Unfair Imports: Effects on De- purchasing power of all residents of the veloping Countries" (RPO 675-52). Cop- importing country. They do not end the From the beginning, antidumping has ies are available freefrom the WorldBank, dumping because they do not remedy the been part of the rhetoric and mechanics of 1818 H Street NW, Washington DC 20433. root cause: market segmentation and the ordinary protection. The protectionist Please contact Nellie Artis, room N10- difference in perceived price elasticity of action is in antidumping because it is 013, extension 37947 (21 pages). October demand in the two markets. broad and flexible enough to handle all 1991. * Although dumping is undertaken the action. by private firms, it cannot occur without The magic of antidumping is how it the cooperation of the exporter govern- harnesses the righteousness oftrust-bust- 782. The Economic Effects ment. Both segmentation of foreign from ing to propel the bureaucratics ofcustoms of Widespread Application domestic markets and restrictions on en- valuation to restrict imports. of Antidumping Duties to Import try of firms are necessary to assure the Antidumping began as an extension of Pricing profitability of dumping. The former can antitrust regulation, but only when en- be guaranteed through trade restrictions forcement became an application of cus- Patrick Conway and Sumana Dhar on the re-import of the dumped good; the toms valuation procedures did it become latter may be a component of industrial an effective weapon against imports. Simulation results provide a quantitative policy. Removal of these preconditions In both theory and practice, antitrust argument against the imposition of anti- will eliminate dumping. is an instrument to defend the public dumping duties. * Antidumping quotas appear to be interest. But antidumping is different. an attractive alternative to antidumping Free of the constraints that rule of law Conway and Dhar develop a model to duties in attaining a fair trade outcome. impose on antitrust, antidumping is an address a theoretical issue: what is the In fact, they introduce the possibility of a instrument that one competitor can use impact of widespread dumping and the third distortion in the world trading against another-like advertising, prod- use of antidumping duties on the export- economy through their encouragement of uct development, or price discounting. ing and importing countries? collusion in the dumping sector, and are The onlyconstraintis thatthe beneficiary They take as their null hypothesis welfare-reducing in comparison with interest must be a domestic one and the the typical response that dumping is an antidumping duties. Negotiated export apparent victim a foreign one. unfair trade practice and that appropri- restrictions have similar andin some cases Antidumping is the fox put in charge ate antidumping duty restores outcomes more pronounced drawbacks. of the henhouse: trade restrictions certi- obtained through fair trade (the This paper - a product of the Trade fied by GATT. The fox is clever enough predumpingoutcome). Theycompare that Policy Division, Country Economics De- not only to eat the hens, but also to con- to the alternative hypothesis that partment - is part of a larger effort in vince the farmer that this is the way antidumping duties do not eliminate the PRE to understand the economics of the things ought to be. Antidumping is ordi- distortions to the world economy inherent emergence of "fairness" as a standard for nary protection with a grand public rela- in dumping behaviorbut rather introduce regulating international trade, its impli- tions program. ,a protectionary distortion that can fur- cations for the continued openness of the The history of antidumping (pre- ther reduce the welfare of trading part- international trading system, andits con- sented in this paper) suggests that we pay ners. tinued functioning as an important ve- tribute to the durability of an idea. The After indicating analytically and hicle for development. This was funded notion that underlies contemporary through simulations the impact of dump- by the research project on "Regulations antidumping - that protection should ing behavior and antidumping duty re- Against Unfair Imports: Effects on De- bring the price ofimports uptoalevel that taliationonexportingandimportingcoun- veloping Countries" (RPO 675-52). Cop- would cover all production costs plus a tries, Conway and Dhar conclude that: ies are availablefreefrom the WorldBank, reasonable allowance for profit - seems * The credible threat to impose 1818 H Street NW, Washington DC 20433. tobe one for the ages. It inspired Canada's antidumping duties promptly and in an Please contact Nellie Artis, room N10- pioneering development of antidumping amount equal to the dumping margin can 013, extension 37947 (41 pages). October in 1904, the U.S. Congress's writing of the dissuade exporting firms from undertak- 1991. Smoot-Hawley Tariff in 1930, and it iL% ing dumping activity. But instances of today the potential foundation for For- dumping and the imposition of tress Europe. antidumping duties indicate that the du- This paper - a product of the Trade ties have failed at that task. Policy Division, Country Economics De- * Theimpositionofantidumping du- partment - is part of a larger effort in ties does not have the impact often as- PRE to understand the economics of the 186 Policy Research Working Paper Series emergence of "fairness" as a standard for tween the two systems, the antidumping with that of 12 highly indebted Latin regulating international trade, its impli- rules teach the capitalists to behave like American and African countries studied cations for the continued openness of the socialists - rather than to teach the by the Bank in the mid-1980s. international trading system, anditscon- socialists to behave as capitalists. No The Asian countries, with a few ex- tinued functioning as an important ve- wonder the socialists came out well. ceptions, pursued an outward-oriented hicle for development. This was funded This paper - a product of the Trade strategy andprudentmacroeconomic poli- by the research project on "Regulations Policy Division, Country Economics De- cies. They made quick adjustments to Against Unfair Imports: Effects on De- partment - is part of a larger effort in external shocks by switching expendi- veloping Countries" (RPO 675-52). Cop- PRE to understand the economics of the tures, expanding exports, and curtailing iesare available freefrom the WorldBank, emergence of "fairness" as a standard for consumption. Most borrowed and locally 18181H StreetNW, Washington DC 20433. regulating international trade, its impli- raised funds were invested in productive Please contact Nellie Artis, room N10- cations for the continued openness of the uses, improving the economy's ability tq 013, extension 37947 (51 pages). October international trading system, andits con- repay the debt. These countries relied 1991. tinued functioning as an important ve- heavilyondomesticsavingsandresources hicle for development. This was funded to finance investments. They did not by the research project on "Regulations allow crises to drift or be aggravated. 784. Chemicals from Poland: Against Unfair Imports: Effects on De- In China, India, and Korea, invest- A Tempest In a Teacup veloping Countries" (RPO 675-52). Cop- ment rates were relatively high, financed iesareavailablefreefromthe WorldBank, mostly from domestic savings; foreign Andrzej Olechowski 1818HStreetNW, Washington DC 20433. loans were use judiciously, as a comple- Please contact Nellie Artis, room N10- ment to domestic savings. Foreign capital The Polish chemical industry has been the 013, extension 37947 (26 pages). October accounted for only 2 to 3 percent ofGDPin object of a disproportionately large num- 1991. these countries, although investment ber of antidumping cases - not because rates averaged 30 percent of GDP. the industry dumps but because it is so By contrast, the Latin American gov- easy to win an antidumping case against 785. How Did the Asian Countries ernments expanded external borrowings a socialist country's exports. Avoid the Debt Crisis? to offset the effects of external shocks. In Brazil, foreign resources were substituted In the early 1980s, the Polish chemical Ishrat Husain for domestic savings to support an import industry got caught up in a battle waged substitution strategy; in Mexico, fiscal by the European Community's chemical Economic stability, sound macroeconomic deficits were financed by external bor- industry to preserve the EC market for policies, and appropriate microeconomic rowing. itself. The Polish share of that market incentives hold down a country's external At the same time, the residents of was very small, and the performance of debt burden. Most of the Asian countries these countries transferred billions of the Polish companies did not depend onit, pursued prudent macroeconomic policies, dollars abroad. Husain attributes this sotheyemergedfrom the battle unscathed. paidattention topricestability, and mini- massive capital flight to overvalued ex- But an aftertaste of the experience mized price distortions. These countries change rates and uncompetitive interest remained. Interviews with representa- avoided the overvaluedexchange ratesand rates. These were intended to curb infla- tives of the companies involved indicate uncompetitive interest rates that caused tion but instead eroded creditworthiness that their recollection of the antidumping massive capital flight from Latin Ameri- because of their depressing effect on ex- investigations is vivid. Pressed for rea- can and some African countries. ports and savings. sons, they said that what impressed them Argentina, Mexico, and Venezuela - the most about the actions was the incon- If a country's macroeconomic policies are which experienced the massive flight of venience associated with them, the bur- generally sound and microeconomic dis- private capital while they were stepping den of preparing explanations and re- tortions minimal, sporadic episodes of up external borrowing - courted trouble ports for the Polish authorities, and the overborrowing or inadequate attention to with debt servicing, because much of the international aspect of the activities, the terms, maturity, and currency compo- borrowed money was not invested in high. Perhaps the most striking finding of sition of external debt will generally not return projects. That flight capital has the study is what it tells us about the make a difference in its debt picture. begun to return to Mexico and Venezuela, business ethics implicit in antidumping But acts of indiscretion in external both of which embarked on successful regulation. This ethic stresses collective debt management tend to be magnified economic reform in 1987. behavior and the resolution of economic when those basic policies are inadequate. This paper - a product of the Debt questions through political negotiation The recent upturn in Latin American and International Finance Division, In- and compromise. The business behavior economies-particularlyin Chile, Mexico, ternational Economics Department - is the antidumping rules attempt to impose and Venezuela, which are now success- part of a larger effort in PRE to under- on is in direct conflict with the fullypursuingmacroeconomic adjustment stand the relationship between macro- antimonopoly laws - a basic part of the - supports the validity of these findings. economic policies and external indebted- business ethics of a market system - but How did the Asian countries avoid ness of developing countries. Copies are it fits well into the business ethics of a the debt crisis? Husain answers thatques- available free from the World Bank, 1818 nonmarket economy. As an interface be- tion partly by contrasting their behavior H Street NW, Washington DC 20433. Policy Research Working Paper Series 187 PleasecontactSheilahKing-Watson,room A significant domestic counterpart of mentation and, after initial acceptance, S8-040, extension 31047 (26 pages). Octo- Morocco's vigorous external adjustment sudden reversals in public reaction. In ber 1991. in the eighties was a decline in fixed recent years, many attribute these delays capital formation, of which the private andreversals toreform dynamics because sector bore a sizable share. reform, particularly whencomprehensive, 786. Fiscal Policy for Managing Schmidt-Hebbel and Muller focus on rarely takes place all at once. In designing Indonesia's Environment the causes of declining private invest- reform, it is important to determine what ment and on the policies required to re- the best sequence of reform would be, Sadiq Ahmed verse this trend. Using an eclectic frame- under what conditions that sequence is work, they econometrically determine the feasible, and how expectations will affect Successful implementation ofan environ- main determinants of private investment the success of alternative reform strate- mental management strategy that bal- in Morocco. gies. ances regulatory and fiscal instruments They conclude that the main causes In the literature on second-best re- will require strong political support and of the decline of private investment in form strategies, misperceptions about the stronger institutions. Morocco in the eighties were great uncer- prospective costs and benefits of reform tainty about policy (proxied by foreign add another intertemporal distortion to Indonesia has made substantial progress debt), a rapid rise in the cost of capital, a the many already identified. developing soundenvironmentalmanage- more stringent credit policy, and reduced Bold moves - such as preannounced mentpolicies,buthasconcentratedlargely public capital. institutional changes - are often sug- on regulatory instruments, making lim- They further conclude thatfiscal sta- gested as a way to signal the beginning of ited use of fiscal policy. bilization, aconsistentforeign debt policy, a new policy regime. Daveri advocates a Ahmed contends that fiscal policy more investmentin public infrastructure, more cautious approach when a govern- can and should play a major role in im- and a reform of investment codes would ment has been discredited by a history of proving the quality of Indonesia's envi- increase private investment and growth policy failures. ronment. But a comprehensive environ- in Morocco. This paper - a product of the Macro- mental management strategy must be Moreover, reform of the financial sec- economic Adjustment and Growth Divi- based on a balance between regulatory tor - even if it would not necessarily sion, Country Economics Department - and fiscal instruments. increase total resources available for in- is part of a larger effort in PRE to under- Successful implementation of this vestment - could significally improve stand the transition in reforming econo- strategy will require strong political sup- the efficiency of financial intermediation mies. It was funded by a research project port and continuous efforts to improve the and therefore the quality ofinvestment in on "Managing the Transition in Adjust- country's institutional framework. Morocco. ment Programs" (RPO 675-70). Copies This paper - a product of the Coun- This paper - a product of the Macro- are available free from the World Bank, try OperationsDivision, Country Depart- economic Adjustment and Growth Divi- 1818H StreetNW, Washington DC 20433. ment V, Asia Regional Office - is part of sion, Country Economics Department - Please contact Susheela Jonnakuty, room a larger effort in the World Bank to study is part of a larger effort in PRE to under- N11-039, extension 39074 (46 pages). appropriate policies to improve environ- stand the behavior of private investment October 1991. mental management in developing coun- in developing countries. Copies are avail- tries. Copies are available free from the able free from the World Bank, 1818 H World Bank, 1818 H Street NW, Wash- StreetNW,WashingtonDC20433. Please 789. Intrahousehold Inequality ington DC 20433. Please contact Boonsri contact Susheela Jonnakuty, room NIl- and the Theory of Targeting Prasertwaree, room A10-047, extension 039, extension 39074 (40 pages). October 82477 (34 pages). October 1991. 1991. Lawrence Haddad and Ravi Kanbur Here is a start at linking the literatures on 787. Private Investment Under 788. How Expectations Affect targetingandon intrahousehold inequal- dMacroeconomic Adjustment Reform Dynamics in Developing ity which have developed rapidly but in Morocco Countries largely independent of each other. Klaus Schmidt-Hebbel and Tobias Muller Francesco Daveri The two literatures on targeting and on intrahouseholdinequality have developed Fiscal stabilization, a consistent foreign Bold moves were effective in trade reform rapidly over the past 15 years, but largely debt policy, more investment in public in Chile, Turkey, and Venezuela. But dis- independent of each other. infrastructure, and a reform ofinvestment credited governments, in countries with a The literature on targeting concerns codes would increase private investment history of policy failure, are probably bet- itself with the design of tax and transfer and growth in Morocco. And reform ofthe ter off sending no signals of policy reform programs for poverty alleviation in the financial sector, by making financial in- and approaching it in small, cautious presence of limited information on who termediation more efficient, could improve steps. the poor are. the quality of investment. The literature on intrahousehold in- Reform is often flawed by delayed imple- equalityaroseoutofadissatisfaction with 188 Policy Research Working Paper Series "unitary" models of the household, espe- sion of labor and the specialization that tions are intended to reduce the risk that ciallyinexplaininginequalityinconsump- characterize the road transport business wholesale disposal ofhaulage enterprises tion and achievements of different house- in market economies. Voldn, the main of doubtful viability will later generate hold members, even after allowing for national transport organization, combines strong pressures for protective regulation relevant differences among them. subsidized passenger transport with ev- and bail-outs. They suggest: Haddad and Kanbur begin to forge ery type of public road haulage. Other * Basically restructuring the Volin the link between the two literatures, so large enterprises specialize in interna- group by separating passenger transport they can address issues policymakers face tional haulage or serve the transport needs completely from freight haulage. around the world. After a brief reprise of of specific branches of the economy. Also, * Adopting a program of staged pri- the key features of the two literatures, state enterprises in industry and trade vatization, starting with the outright dis- they indicate how the presence of have their own trucks and use them for posal of a target number of entities with intrahousehold inequality and allocation work that overlaps with the operations of fair prospects of commercial survival. mechanisms could affect the standard the public haulage organizations. But * Helping commercialize all state- analysis of targeting theory. They con- outside the public sector there now exists owned entities under the control ofa sepa- clude with a list of policy questions for a substantial sector of small-scale private rate office (preferably a private specialist further research, including the following: trucking businesses. The private truck- consultancy) combining trustee functions * How are conventional rules for in- ers work for but also compete with the with technical, accounting, and legal guid- dicator targeting modified by different large state-owned transport organiza- ance, and subjecting the entities to the household allocation mechanisms? tions. Competition, intensified by the discipline of financial targets. * How far wrong can one go in tar- decline of the economy, has given rise to * Actively promoting the sale ofhaul- geting by simply assuming that insistent demands for regulatory control age assets from the state-owned entities intrahousehold inequality does not exist, of market entry and access. to middle-class and typically small-scale when in fact it does? In the first sweep of postcommunist entrepreneurs. * What sort of intrahousehold infor- reform, the main public sector road trans- * Getting the government commit- mation should be collected to best aid port organizations were broken down into ted to a liberal system of road haulage targeting? their constituentprovincial branches. The regulation (operator licensing) and to * How do the "bargaining" versus successor entities were to operate hence- maintaining open, competitive access to the "common preference" views of the forth as autonomous firms. But the cru- operations in international haulage. household influence our evaluation of al- cial ownership relation remained obscure This paper - a product of the Trans- ternative transfer programs? and ambiguous. No clearly defined owner port Division, Infrastructure and Urban This paper - a product of the Re- came to determine the firms' objectives. Development Department - is part of a search Advisory Staff, Office of the Vice The managerial objective was therefore larger effortin PRE to analyze the options President, Development Economics - is to protect the position of manager and for restructuring and privatizing state- part of a larger effort in PRE to under- staff by maintaining the status quo for owned enterprises in the countries of Cen- stand the design of poverty alleviation each enterprise. The incentive torestruc- tral and Eastern Europe. Copies are policies. Copies are available free from ture the entities to maximize their net available free from the World Bank, 1818 the WorldBank, 1818 H StreetNW, Wash- worth was therefore lacking. Butrestruc- H Street NW, Washington, DC 20433. ington DC 20433. Please contact Jane turing of many of the units seems essen- Please contact Barbara Gregory, room Sweeney, room S3-026, extension 31021 tial if they are to function viably in a S10-049, extension 33744 (28 pages). (13 pages). October 1991. competitive market economy. The sepa- October 1991. rate units are unusually large by the standards of Europe's market economies, 790. Reforming and Privatizing are encumbered with functions and as- 791. Measuring Real Exchange Hungary's Road Haulage sets or properties that are irrelevant to Rate Instability in Developing normal trucking activity, and are Countries: Empirical Evidence Esra Bennathan, Jeffrey Gutman, uneconomically diversified in their work. and implications and Louis Thompson Bennathan, Gutman, and Thompson explore the options for reforming this in- Lant Pritchett Options for restructuring the Voldn group dustry, which is peculiarly suitable for - the current provider ofHungary'spub- small and medium scale entrepreneur- The historical evolution of the real ex- lic passenger and freight transport ser- ship but also peculiarly subject to strin- change rate in most LDCs, with periods of vices and the largest enterprise in gent regulation. The first element in any gradual appreciation followed by massive Hungary's road transport industry. reform has to be the establishment of depreciations, implies that the standard unambiguous ownership and the asser- variability measures are not validforcom- Hungary's road transport industry tion of control by or for the owner. That is paring real exchange rate uncertainty emerges from decades of socialist organi- a precondition for privatization and for across countries. zation with a few large public sector en- adapting state-owned entities to market terprises, highly integrated in terms of requirements. Questions about the pace Exchangeratepolicyhasreceivedrenewed spatial coverage and range of operations, ofprivatizationin different forms are more attention because of its prominent role in and thus singularly lacking in the divi- controversial. The authors'recommenda- adjustment programs. Several analysts Policy Research Working Paper Series 189 have examined the impact of real ex- is usually the largest component of the larger effort in PRE to analyze issues change rate uncertainty on the perfor- public budget. relating to enterprise reform. Thisispart mance of such economic variables as GDP Svejnar and Terrell focus on what of a research project on "Labor Redun- growth, exports, and investment. determines labor redundancy in selected dancyin the Transportation Sector"(RPO Pritchett uses data on the real ex- modesoftransport(rails,ports,andbuses) 675-21), funded by the World Bank's Re- change rate for 56 developing countries in six countries: Brazil, Chile, Ghana, search Support Budget and by the Trans- with managed exchange rates to make Mauritius, Sri Lanka, and Yugoslavia. port Division, Infrastructure and Urban three points: They also analyze different approaches Development Department. Copies are * The distribution of annual for solving the problem. available free from the World Bank, 1818 changes in real exchange rates is highly They conclude that analysis of the H Street NW, Washington DC 20433. non-normal -both skewness and excess laborredundancy problem in public trans- Please contact Barbara Gregory, room kurtosis (increased probability of tail portation enterprises has been neglected S10-053, extension 33744 (47 pages). 'events). because conceptually it is not a simple, October 1991. * This asymmetric non-normality easily identifiable phenomenon and be- implies that the common practice of using cause its treatment is often politically the standard deviation (or coefficient of controversial, as it affects social welfare. 793. Decollectivization and the variation) to compare real exchange rate Governments tend to approach the prob- Agricultural Transition in Eastern uncertainty across countries is not justi- lem only when circumstances are extreme and Central Europe fled. (budget stress or near-complete break- Empirically, the higher order mo- down of the transport system). Solutions Karen M. Bmoks ments (skewness andkurtosis) are atleast are then hammered out in a tense envi- as important as the standard deviation in ronment, with no longer-term vision of An agricultural transition when demand explaining cross-country performance. the optimal employment and pay prac- is constrained is more difficult to manage This paper - a product of the Trade tices. than when thefruits ofinstitutionalchange Policy Division, Country Economics De- The first step in designing a scheme and productivity growth find ready out- partment - is part of a larger effort in to reduce redundancy is to be clear about lets. Any progress on the demand side - PRE to examine the implications of ex- what the optimal pay and employment by increasing domestic demand or im- change rate policy for economic perfor- policies are in a given system and envi- proving performance in export markets - mance. Copies are available free from the ronment. Svejnar and Terrell discuss will give a major impetus to the institu- World Bank, 1818 H Street NW, Wash- some of these policies and the tradeoffs tional changes needed on the supply side. ington, DC 20433. Please contact Karla involved. Cabana, room N10-037, extension 37947 They also present a framework for The agricultural transition in Eastern (26 pages). October 1991. identifying labor redundancy within dif- and Central Europe is about a year and a ferent countries whose social welfare func- half old, if we date its start from the Polish tions vary in the relative weight given to big bang of January 1990. Like many a 792. Reducing Labor Redundancy efficiency and equity. They give a rule of recalcitrant toddler, it refuses to behave in State-Owned Enterprises thumb for identifying labor redundancy as expected. where the government's main goal is The agricultural transition is an es- Jan Svejnar and Katherine Terrell maximizing GNP. They show that the sential part of stabilization and adjust- private and social assessments of labor ment in Eastern and Central Europe be- The severity oflabor redundancy has been redundancy can differ substantially and cause agricultural sectors are large and underestimated because of difficulties in that the private assessment is not always food is important. But the transition is conceptualizing the issue and finding po- the appropriate measure. not the storybook variety. Agricultural . litically acceptable solutions. Schemes to They show that redundancy-reduc- producers cannot spin collectivized straw reduce labor redundancy can decrease the tion schemes can have a high rate of intomarket-oriented gold and deliver itin wage bill significantly and allow fairly return and still be socially acceptable. the morning to the minister of finance. high compensation to the employees laid Long-term savings on the wage bill can be The supply response that many within off yet still allow the government to recoup high enough that compensation to em- and outside the region expected to emerge its costs in a relatively short time. ployees laid off can be set fairly high and early and expeditiously is complicated by still allow the government to recoup its the removal of consumer subsidies and The growing effort to reduce large public costs in a relatively short time. constrained export demand. deficits and to increase welfare by im- But cash flow problems may necessi- In an atmosphere of acute economic proving the efficiency of resource alloca- tate the assistance ofinternational donor uncertainty and declining farm incomes, tion is leading many governments to con- agencies. Attention must be paid to how the distribution of agricultural land is centrate on the problem of sizable, costly this compensation is administered, as it proceeding. Brooks traces the liberaliza- labor redundancy in the public sector. can make a difference to the workers' tion of food prices and the distribution of The existence of such redundancy has welfare. agricultural land to date. A detailed expo- been acknowledged but its severity has This paper - a product of the Trans- sition of the general framework for the been underestimated. And its effect on port Division, Infrastructure and Urban agricultural transition describes the con- the budget is significant, as the wage bill Development Department - is part of a text in which price liberalization and the 190 Policy Research Working Paper Series distribution of land can be understood. 794. How Do National Policies influences - explain the stagnation of Changes in land tenure and use in East- Affect Long-Run Growth? many countries in Africa, Latin America, ern and Central Europe in 1991 cannot be A Research Agenda and Asia in the 1980s? They discuss five properly understood out of context. The national policies: essence of the agricultural transition is William Easterly, Robert King, Ross Levine, * Fiscal policy. What are the growth the state's withdrawal from its traditional and Sergio Rebelo effects of different types of taxes and pub- role as residual claimant of (positive and lic spending (for example, how do those negative) rents for the use of agricultural Which policies strongly affect long-run that affect consumption compare with resources. This role will pass in stages to growth?Dopolicies explain why some poor those that affect investment)? Does fiscal owners of land. A discussion of the new countries have stagnated and others have mismanagement create uncertainty that land laws and distribution of land would advanced? Do policies explain successive reduces growth? be incomprehensible without attention to periods ofrapidgrowth and stagnation in * Monetary policy. Do countries with conditions that shape the value of land the same country? To what extent do na- high inflation tend to grow more slowly?. and the income that owners can earn from tional policies - rather than external in- Does the variance of monetary growth it. fluences-explain thestagnation ofmany and inflation matter for growth? The countries of Eastern and Central countries in Africa, Latin America, and * Trade intervention. Do. Europe operated under a common ideol- Asia in the 1980s? distortionary interventions (tariffs and ogy in the past, but within bounds set by quotas) in foreign trade affect growth or that ideology they exhibited significant The broad forces behind economic growth do they have only one-time level effects? differences in agricultural policyandfarm -accumulation of produced factors, spe- Does instability in trade and exchange organization. To draw lessons that tran- cialization, economies of scale, and exter- rate policy affect growth? scend those particularities, Brooks cre- nalities - were sketched out by the clas- * Financial policies. Do penalties on ates a stylized country with the general sical economists long ago. These same domestic financial intermediation affect features of each and the uniqueness of forces have been used in the development growth? How strong are the effects on none. She takes that stylized country literature to study various aspects of eco- growth through lower investment and though an agricultural transition, indi- nomic growth. By buildingon the insights those through inefficient allocation of in- catinghowthe initial conditions affectthe of growth and development economists, vestment? path of transition. the"new" theoretical literature ongrowth * Openness to foreign capital. How She concludes that an agricultural is also contributing models that identify do restrictions on direct foreign invest- transition when demand is constrained is specific channels through which national ment affect growth? more difficultto manage than onein which policies may affectlong-run growth rates. Their analytical framework is based the fruits of institutional change and pro- But the empirical work on linking na- on the simple idea that all factors of pro- ductivitygrowth findready outlets. More- tional policies to growth is still evolving, duction can be increased by investing in over, although price movements are not and many basic issues about the long-run human or physical capital. Economic yet clear, it appears that removing subsi- relationship between policy and growth growth will be related to policies that dies on feed, credit, fertilizer, machinery, remain unresolved. Among these issues: affect the incentive to invest and the effi- and energy will move the terms of trade the effects on growth of government size, cient use of capital and intermediate in- against agriculture-particularly against trade policy, international capital flows, puts. Such a framework can be used to the large livestock sector. The need to the allocation of public spending, and the consider which policies affect the long- increase productivity will thus be even financing of public spending. run growth rate rather than affecting greater than in the past. Easterly, King, Levine, and Rebelo simply the level ofincome once and for all. Productivity growth will be difficult suggest that there are important oppor- This paper - a product of the Macro- to achieve if demand is constrained. Any tunities to empirically evaluate the theo- economic Adjustment and Growth Divi- progress on the demand side - by in- retically predicted channels from policy sion, Country Economics Department -_ creasing domestic demand or improving to growth. They contend that researchers is part of a larger effort in PRE to assess performance in export markets - will should improve the design of cross-coun- the effect of national policies on long-run thus give a major impetus to the institu- try studies of growth and should conduct growth. This research was funded by the tional changes needed on the supply side. more detailed longitudinal case studies. World Bank's Research Support Budget& This paper - a product of the Agri- Easterly, King, Levine, and Rebelo under research project "Do National Poli- cultural PoliciesDivision, Agriculture and propose a research agenda based on the cies Affect Long-Run Growth?"(RPO 676- RuralDevelopmentDepartment-ispart endogenous growth literature, designed 66). Copies are available free from the ofalarger effortinPRE to analyze changes to address the questions: How do national World Bank, 1818 H Street NW, Wash- in Eastern and Central European agricul- policies affect long-run growth? Which ington DC 20433. Please contact Rebecca ture. Copies are available free from the policies strongly affect long-run growth? Martin, room N11-053, extension 39065 World Bank, 1818 H Street NW, Wash- Do policies explain why some poor coun- (60 pages).October 1991. ington, DC 20433. Please contact Cicely tries have stagnated and others have ad- Spooner, room N8-037, extension 30464 vanced? Do policies explain successive (40 pages). October 1991. periods of rapid growth and stagnation in the same country? To what extent do national policies - rather than external Policy Research Working Paper Series 191 795. Economic Stagnation, Fixed economic Adjustment and Growth Divi- More important is an understanding Factors, and Policy Thresholds sion, Country Economics Department - of the main underlying causes: deficient is part of a larger effort in PRE to assess information and thin money markets in William Easterly the effect of national policies on long-run banking systems of the developing world growth. This research was funded by the and rationed goods markets in the re- Economic policies, not initial conditions, World Bank's Research Support Budget forming economies. Structural reform is determine whethercountries stagnate. The under research project "Do National Poli- the appropriate response in both cases. black marketpremiumonforeign exchange cies Affect Long-Run Growth?"(RPO 676- In reforming socialist economies, the is an important factor in stagnation. 66). Copies are available free from the monetary overhang in the household sec- World Bank, 1818 H Street NW, Wash- tor may be quickly transformed into ex- Many developing countries have experi- ington DC 20433. Please contact Rebecca cess liquidity in the banking system, so enced economic stagnation. Africa had Martin, room N11-053, extension 39065 much so that relatively inexperienced negative per capita growth in the 1970s (39 pages). October1991. bankers may demand substantial collat- andl980s,andLatinAmericainthe 1980s. eral and may pull back from lending in a Per capita growth was significantly risky environment characterized by poor -greater than zero only in 41 of 87 develop- 796. Excess Liquidity information. This reaction would leave ing countries in 1950-85, but it was sig- and Monetary Overhangs the economy in a "low-lending" trap and nificantly positive in all OECD countries. could seriously impede development of Analysis of decade-long growth rates Gerard Caprio, Jr. and Patrick Honohan the private sector. in all countries shows a striking regular- A more appropriate policy might be a ity: Episodes of rapid growth are limited It may be inappropriate to tighten money prudent but not overly restrictive mon- largely toamiddle range ofinitial income; in response to excess liquidity in develop- etary policy and reservation of some part neither very poor nor very rich countries ing economies and to money overhang in of credit for the emerging private sector. experiencerapidgrowth. Episodesofnega- the constrained reforming socialist econo- This paper - a product of the Finan- tive growth are limited tolow and middle- mies. Instead, the best policy is to address cial Policy and Systems Division, Country income countries, the root causes: deficient information and Economics Department - is part of a Easterly developsa simple model that thin money markets in banking systems of larger effort in the Bank to understand sheds light on this historical experience. the developing world and rationed goods the link between monetary policy and Themodelhastwofamiliarelementsfrom markets in the reforming economies. financial sector development. Copies are the growth literature: (1) a Stone-Geary available free from the World Bank, 1818 utility function (saving is low at low in- The term "excess liquidity" may refer to H Street NW, Washington DC 20433. comes), and (2) fixed factors with the the share of liquid assets in bank portfo- Please contact Wilai Pitayatonakarn, marginal product ofcapitalbounded away lios (the result of a retrenchment in bank room N9-003, extension 37666 (21 pages). from zero. The second property is derived lending, or a "credit crunch") or to money October 1991. by assuming an elasticity of substitution holdings of the nonbank public. Excess greater than one between an exogenous liquidity may be voluntary or labor input andabroad concept of capital. nonvoluntary (the result, for example, of 797. Using Field Visits to Improve Easterly extends the model to consider credit ceilings). the Quality of Family Planning, multiple capital goods and public capital. In response to excess liquidity, poli- Health, and Nutrition Programs: He finds that stagnation because of cymakers tend to take steps to drain off A Supervisor's Manual fixed factors is consistent with an array of the excess so it won't lead to a surge in statistical evidence. Economic policies - inflation. This response is ineffective in Richard Heaver notinitial conditions -determinewhether some circumstances. countries stagnate. The black market pre- Caprio and Honohan examine the A manual to help supervising staff find mium on foreign exchange is particularly appropriateness of conventional policy out what is really happening in the field, helpful in explaining stagnation. instruments for tightening money in two in a way that supports health workers and Empirical results show that growth common cases: (1) when there is a volun- focuses on improving the quality ofservice first accelerates and then falls as income tary credit crunch because of a rise in to the poor. rises. Results confirm that initial income perceived risk of default, and (2) when and policy variables have a different ef- individuals rationed in the goods market Most health professionals who have fect on whether a country stagnates than in reforming socialist economies accumu- worked in rural areas have had the expe- they do on the rate ofgrowth once it starts late savings involuntarily ("money over- rience of being supervised badly: the fly- growing, as expected from the distinction hang"). ing visit by a superior who inspects the betweensteady-stateandtransitionaleffects. They conclude that neither excess records, delivers a critical speech, and These results suggest that cross-sec- liquidity in the banking systems of the disappears without ever finding out what tion growth regressions may be developing world (and in the U.S. post- is really going on in the health center misspecified because of the nonlinearity savings-and-loan crisis) nor the money area. Such visits seem designed more to inherent in the possibility of steady-state overhang of the reforming planned econo- demonstrate the supervisor's authority stagnation. mies calls for a response of restrictive than to help the field worker to serve local This paper - a product of the Macro- monetary policy. people better. 192 Policy Research Working Paper Series This manual is designed to help field ing from demand factors - especially 799. Growth in Open Economies supervisors supervise in a way that deep- Engel's Law (that the proportion of in- Sergio Rebelo ens insights into local situations, sup- come spent on food declines as incomes ports health workers, and focuses on im- rise) - rather than on such supply-side A simple modification of recent growth proving the quality of service to the poor. influences as changes in relative factor models eliminates the implausible impli- The checklist of questions is not in- endowments and differentrates oftechni- cation that growth rates should be equal- tended to be definitive or rigidly applied. cal change. ized in the presence of free international Depending on the needs of a given pro- Engel's Law is convincing at the glo- capital mobility and is consistent with gram, some areas may need to be probed bal level but it does not explain why evidence thatpoints to low rates ofsavings more deeply, and others shortened or omit- agriculture's share should decline sharply in low income countries. ted altogether. in small open economies that experience Heaver provides guidelines for plan- rapid economic growth. A small open Rebelo surveys recent growth models that ning(afirstvisit and subsequent) visits to economy that grows rapidly need not re- try to explain the diversity among coun- a program area; for visiting villages and duce agriculture's share in production. tries in rates of economic growth. talking with mothers; for visiting health Instead, it could increase its exports of He finds that these models can gener- care workers; for visiting nutrition work- agricultural products as food becomes less ate differences in growth rates only in the ers;andforusingfindingstomakechanges important in domestic consumption. absence of international capital markets. in program design or implementation, to Martin and Warr develop a simple Under these models, if there were free reorient the way supervision is done, and structural model of the transformation of international capital mobility, the growth to change worker behavior. He also pro- the Indonesian economy, applying the rate of consumption and GNP would vides a sample field visit report. Error Correction Mechanism to capture quickly be equalized all over the world. This paper is a joint product of the the dynamics resultingfrom disequilibria Rebelo describes a simple modifica- Population, Health, and Nutrition Divi- and costs of adjustment. They develop an tion of standard preferences that elimi- sion, Population and Human Resources econometric model of the economy's sup- nates this implausible equalization of Department and the Population and Hu- ply side so they can explain agriculture's growth and is consistent with the fact man Resources Division, Technical De- decline by the three theoretical factors: that the savings rate is lower in poor partment, Asia Regional Office. Copies relative price changes, technical change, countries than in rich countries. are available free from the World Bank, and factor accumulation. This paper-a product of the Macro- 1818HStreetNW,WashingtonDC20433. Based on the model's results, they economic Adjustment and Growth Divi- Please contact Otilia Nadora, room S6- conclude that the decline in the relative sion, Country Economics Department - 065, extension 31091 (20 pages). October price of agricultural output contributed is part of a larger effort in the Bank to 1991. relatively little to the decline in understand why growth rates differ. This agriculture's share. Technical change research was funded by the World Bank's actually had a positive effect on Research Support Budget under a prepa- 798. Agriculture's Decline In agriculture's share, retarding the pres- ration grant for the since-approved re- Indonesia: Supply or Demand sures for a decline in its share over time, search project "How National Policies IDotened By far the most important influence ap- Affect Long-Run Growth?" (RPO 676-66). Determined? pearstohavebeentherapidaccum-ulation Copies are available free from the World of capital relative to labor over the period Bank, 1818 H Street NW, Washington DC Will Martin and Peter G. Warr studied (1960-87). 20433. Please contact Rebecca Martin, These results have important impli- roomN11-043, extension 39065(54pages). Capital accumulation and rapid techni- cations for the way economists view the November 1991. cal changein agricultureareeachfound to process of structural change under eco- contribute much more to the decline in nomic development. The emphasis has agriculture's share of GDP than do the been on demand-side factors. Supply- 800. The Legal Framework for relative price effects typically emphasized side factors may be far more important Private Sector Development in the literature on agriculture's decline. than economists have believed them to In a Transitional Economy: From the results, increased attention to be. The Case of Poland supply-side influences on the process of This paper - a product of the Inter- structural transformation appears war- national Trade Division, International Cheryl W. Gray, Rebecca J. Hanson, ranted. Economics Department - is part of a Michael A. Heller, Peter Ianachkov Ablrclire's saper ita come i i larger effort in the Bank to analyze the Daniel T. Ostas, and Youssef Djehane Agriculture's share in an economy invari- process of growth and transformation in ably declines as per capita income rises developing countries. Copies are avail- Poland is rapidly developing a reasonable and as the economy develops. This rela- able free from the World Bank, 1818 H legal framework to support its transition tive decline in growing economies is a Street NW, Washington DC 20433. Please to a market economy. Yet legal practice central feature of economic development contact Maria-Theresa Sanchez, room S7- lags behind. Precedent and expertise must andamajorinfluenceonagriculturalpoli- 075, extension 33731 (19 pages). October be built through training and experience. cies. The literature on its causes has 1991. focused on the relative price effects aris- The economies of Central and Eastern Policy Research Working Paper Series 193 Europe are in the midst of a historic Legal Department's Private Sector De- transitionfrom central planning and state velopment Advisory Group - is part of a ownership to development of a market- larger comparative study in PRE of evolv- driven private sector. This transition ing legal frameworks in Eastern Europe. requires comprehensive changesin "rules Copies are available free from the World of the game"- including the legal frame- Bank, 1818 H Street NW, Washington DC work for economic activity. 20433. November 1991. A market economy presupposes a set of property rights and a system of laws or customs that allow the exchange of those rights. The legal framework in a market .economy has at least three basic func- tions: * Defining the universe of property ,rights in the system. * Setting the rules for entry into and exit from productive activities. * Setting the rules of market exchange. These legal tasks are accomplished by such fundamental areas of law as: * Real and intangible property rights. * Company, foreign investment, and bankruptcy law. * Contract and competition law. Poland has a rich legal tradition dating from pre-socialist times. This tradition was suppressed but not eliminated dur- ing its forty years of socialism, and it is being revised as the country moves to- ward a private market economy. The current legal framework in Poland closely follows other continental jurisdictions and has a clear and reasonable internal logic. Many of the laws (including the civil code, the commercial code, and the bankruptcy law) are old, but most are flexible enough to permit a wide range of modern, mar- ket-oriented activity. Recent legislation (including the antimonopoly, securities, and foreign investment laws) appears to be well-designed for private sector devel- opment. Property law, however, remains a "jungle." Although the legal structure is gen- erally satisfactory in most areas, practice is still very uncertain. The generality of the laws leaves wide discretion for admin- istrators and courts, and there has not yet been time to build up a body of cases and practice to define further the rules of the game. The wide discretion and general lack ofprecedent create tremendous legal uncertainty that is sure to hamper pri- vate sector development. The answer is not a change in the law, but a building of precedent and expertise through training and through dissemination of informa- tion. This paper - a joint product of the Socialist Economies Reform Unit and the