ReearchA . echn i/cab A ssz'stan1ce rA FILE COPY Report No.:11577 Type: (MIS) Title: RESEARCH, POLICY ANALYSIS, TEC Author: CEC Ext.: 0 Room: Dept.: Annual Report July 1991-June 19.92 FLEC01 Contents Foreword 1v9 Country Economics Department: Past and Future HHighlights of iscal 1992 4 Research and Policy Analysis 5 Privatization 5 Adjustment programs 5 Poverty and public spending 6 Financial reform 6 Other resech and policy work 8 Technical Assistance 9 States of the former Soviet Union 9 Trade Expansion Program 9 Conferences 11 New dimensions in regional integration 11 The macroeconomic situation in Easten Europe 12 The capital account and policies 13 Public expenditure and the poor: incidence and targeting 14 Impact of financial reform 14 Welfare consequences of selling public enterprises 15 Integrating Ukraine into the world economy 16 India's agricultural policies 17 Training 18 Work Program and Themes by Division 19 Macroeconomics and Growth Division 20 Financial Policy and Systems Division 22 Public Economics Division 24 Trade Policy Division 26 Public Sector Management and Private Sector Development Division 28 Socialist Economies Reform Unit 30 Publications 32 Highlights 32 Other publications 42 Staff 51 Country Economics Department: Past and Future This annual report highlights work in the were also taken for a program of work on Country Economics Department (CEC) labor issues. for fiscal 1992. Although these highlights * RegailyP aed dmWod . Several capture only a partial view of the year's regionally focused initiatives were begun in work and work in progress, they indicate close coordination with the regional chief the range and depth of the department's economists. Two of these initiatives will research, policy, operational support, and culminate in major reports: one on struc- mination activities. tual adjustment in Sub-Saharan Africa (to be completed in fiscal 1994) and one on CEC's mission lessons of the East Asian experience (due in fiscal 1993). The Country Economics Department is * Dissuiadon. The department responsible for: launched CEC Outsc, a monthly note designed to communicate aspects of the * Conducting research and analysis of Bank's research to operations staff and key development questions. innovative approaches from the Bank's * Translating analytical and research operational work to Bank staff across all findings into practical policy options and regions. recommendations. * OpeaionalWappod. To meet the * Providing operational review, advice, greatly stepped-up demand for operational Sad support to the Bank's regional depart- support for Eastern Europe and the states ments. of the former Soviet Union, the depart- * Providing technical assistance to the ment provided considerably more staff Bank's borrowers. resources to operational support and * Disseminating major research and technical assistance than planned. policy outputs to the Bank and to external audiences. Looking ahead Looking back As part of the Bank's recent reorganiza- tion, the department has received an For the past several years the department expanded research mandate. Responsibil- has been concerned with analysing country ity for sectoral research, which was previ- policies in the areas of finance and the ously carried out by departments of the financial sector, macroeconomic adjust- former Sector and Operations Policy Vice ment and growth, public fnance, the Presidency (OSP), has been shifted to the development of public and private sector Chief Economist and Vice President, institutions, trade policy, and reform in Development Economics (DEC). CEC economies in transition from socialism to will assume responsibility for both market systems. macroeconomic and sectoral research. During fiscal 1992, the department This shift in responsibility is reflected in moved beyond its traditional areas of several changes in the department's concem in several new directions: organization (see chart on next page). * Pover" endleer isxes. Work began Three divisions in charge of macro- on a major report on old age security, to be oriented research will remain in place: the completed in fiscal 1994. The initial steps Transition and Macro-Adjustment Divi- 臓栃’. 粉響 -. . . . TY! 0 +5 - -- 0441... of Fiscal 1992 Durh¥ fiscal 1M the degm~A wo* pr~ m$ carrled 02 by fin ä~ ud om =ä: ------nomksand~D~on (CEMG) " Fåmxial Pök wJ System D~ (CECM " PuWic E=omics D~ (CECR) " Trade Pöficy D~ (CECTP) " PåWk Sector l~ent and Prwate Sector Development DivWon (CECPS) " So~ Emiomics, Reform Um (CECSF.) This section ~ts ~ta of the work prqPm Ilie Mowing section destäm the major themes of the work progtsm, for each d~m * Adjustment in the public sector has costs and benefits of various antipoverty been substantial, but misallocation of programs ant targeting mechanisms, as resources is still a problem. well as who benefits from them. Among the findings highlighted in papers Fiscal 1992 also saw the completion of a and discussion research project on adWa&m, income * Targeting is a policy instrument, not a disu*dx, andposery, undertaken Jointly goal, so its usefulness depends on the by the Trade Policy Division and the specific context and policy environment. Deve!opment Center of the Organization * The behavioral responses of partici. for Economic Cooperation and Develop- pants and others involved can strongly ment. The project, directed by Jaime de influence the effectiveness of targeted Melo (CECTP), Francois Bourguignon, programs in reducing poverty. and Christian Morrisson, studied the * Broad targeting, or the universal effects of adjustment policies on income provision of basic social services, has been a distribution in six countries and provided key part of suczessful strategies in countries an analytical interpretation of how each such as Indonesia and Malaysi. Expanding economy had fared. With simulation such services often benefits the poor more exercises, the country studies explored how than others. poverty and income distribution would * Narrowly limited programs that have fared under alternative adjustment discriminate among beneficiaries can packages-or none at all. provide a crucial fallback for individuals in The exercises show considerable diver- temporary crisis, as folowing a drought or sity in the evolution of income distribution other disaster, and for people chronically during adjustment. They also expose the unable to provide adequately for them. fatal flaws of narrowly designed programs. selves, such as the elderly and infirm. Adjustment programs, whether focused on Much still remains unknown about the efficiency or welfare, will fail if they do not true costs and benefits of narrowly targeted recognize the interdependence of the three programs. A cautious approach is probably criteris of efficiency, welfare, and poliWal wise. A careful weighing of costs and feasibility. Adjustment programs must also benefits of specific programs would include be carefully packaged to fit the circum. consideration of several interrelated stances of each country, taking political as concemrs: net benefits received by the poor, well as economic conditions into account, administrative costs and requirements, The country studies and an overview piece behavioral responses of beneficiaries and were published in an issue of Todd other participants, and political support Dwopmea that was devoted entirely to and sustainability. Additional research on the study. targeting and on who benefts, and more support for broad targeting appear to be Poverty and public spending activities with potentially large payoffs. Responding to an urgent need for more Financial reform efficient antipoverty programs in a period of tight budgets almost everywhere, the Intensive research and fieldwork on Public Economics Division sponsored a financial reform by the Financial Policy and conference on Pubic Epedimer and Ae Systems Division culminated in the Poo. Inidexce and Targeing. Organized by completion of four products of major Dominique van de Walle, Shankar Acharya, relevance to Bank lending and operations. and Kimberly Nead, the conference was The findings of a research project on attended by some 250 researchers, policy- financial reform, managed by Gerard makers, and others involved in designing Caprio, were presented at a conference and implementing antipoverty programs in held at the Bank in April 1992. A book on developing countries. Papers explored the the study is also being prepared (The Other research and policy work The study, led by Anwar Shah (CECPE), recommends that the first step in an In addition to the work mentioned above, effective investment promotion strategy be other major studies completed by CEC to develop a climate of business confidence staff during fiscal 1992 include: and eliminate tax and other disincentives. * Modeling the behavior of holdings of Well-targeted tax policy interventions money and public debt, private consump- could follow. Findings were presented in don and investment the trade balance, and two books published by the Bank. the rral exchange rate for a sample of ten * The effectiveness of Bank-supported developing countries to show bowfinsncial admmeprowms in Sub-Sabawn AfMica. ate, privae spending and tbe eternal Using adjustment lending as a proxy fPr sector rea tofiscal pocies. The study adjustment, the study directed by Ibrahim found that the virtuous circle of growth ElMadawi (CECMG) found that adjust- and good fiscal management is one of the ment lending contributed to significant strongest arguments for a policy of low and improvements in export performance- stable fiscal deficits. An article by Villiam increases in export competitiveness and the Easterly and Klaus Schmidt-Hebbel efficiency of investment--but that the (CECMG) detailing some of the findings improvements were not sufficient to will be published in a forthcoming issue of counteract a decline in investment, a the Wadd Bank Research Observer. finding considered a useful point of * The deign and implementation of1tnf departure for future research. mrms. Directed by Arvind Panagariya and * Identification of innovati e and Ramon Lopez (CECTP), the study found succesu cdl senice management prete that conventional advice advocating in industrial countries that might serve as uniform tariffs is right (for political reasons models for reform in developing countries. and as a reasonable rule of thumb), but not The study, managed by Barbara Nunberg necessarily for the reasons usually given (CECPS), found that traditional, central. (that uniform tariffs minimize distor- ized civil service management models tions-they don't always). Articles on the provide the best starting point, that certain study have appeared in Ameican Economic management functions such as recruitment Revie , Journal of International Econmics, should receive higher priority than others, and Economic Lear. and that the establishment of some form of * The inflaon pocess dwingpice senior executive service has important li6uiraios in Eastern European coun- payoffs. tries. The study, directed by Fabrizio * Development of the RMSM.XX Coricelli (CECMG), found that price (Revised Minimum Standard Model) liberalization has, in many cases, been masoeconomic simulon model d followed not only by an initial jump in cunsry applicadon through the prepare- prices, as expected, but by persistent tion of behavioral macroeconomic models inilation, due in large measure to weak for a few countries. The four RMSM-XX market forces and undefined property models developed so far (for Chile, Co- rights. Findings have been reported in a lombia, Philippines, and Zimbabwe) under symposium volume, an article in the Wodd the direction of Klaus Schmidt.Hebbel and Bank Economic Review, and the EDI Luis Serven (CECMG) have proved to be Seminar Series. successful tools for sensible macroeco- * Reformw offscal incentves in many nomic analysis involving the interaction of developing countries, designed to foster prices, asset returns, and quantiies. industrial and technological development. tadonwere prepured for Guatemde. imues as eport development and mareet- Madagascar, Mai, Morocco, Poland, ing organiadons, the move fh=rm eantita. Ugand,and Urguay. In &ecal 1992 the tve import control to tarif, and medha. program, managed byJéhn Nash nisms for stabilizing export commodity (CECP),provided technicaluuistanc to prices. Costa Rica, Cechoslovakia, Kenya, and Ie program vas an important comple- Peru. Å monitorig component has bee ment to research by the Bank aimed at added to the program in Phse I, to slow distiling the lessons of trade reforms for more formal folow-up ofrecommenda- acoss countries and sunmmaried in a tions fram the country repors. volume by Vmod Thomas and John Nash, The program so sponsors the prepara- &s Pmrticer n Trde Policy. The book is do of ocaiond papers The papern draw frequently used by operations staff in the on themory and the experience of nany design of trade reforms as part of adjust. cuntries to give practical advice on such ment lending operations. 12 iWii hl19 The macroeconomic situation in between 5 percent (measured from the Eastern Europe demand side) and 9 percent (from the supply side), compared with official estimates June 4-3, 1992, 1arSgto, D.C of 12 percent. These estimates did not go Official statistics show a precipitous fall in unchallenged, but there seemed general output across Central and Eastern Europe agreement that measurement enror ac- in the last few years. Special factors have counted for up to one-third of the decline. been responsible for the biggest declines- * Trade shocks were another factor. in Albania, eastern Germany, much of the Trade in the Council for Mutual Economic former Yugoslavia-but output has fallen Assistance (CMEA) has contracted by over 20 percent in other countries. The abruptly since 1989, mainly because 85 to steepness of this fall and its persistence 90 percent of trade with the former USSR were not anticipated. disappeared. The shift to world prices also What caused the decline? How much imposed large terms of trade losses, influence did macroeconomic policies averaging 4 percent of GDP for Czechoslo. have, as opposed to structural and external vakia, Poland, and Hungary. Estimates shocks? What are the bottlenecks to presented at the conference suggest that sustained recovery? A two.day conference trade shocks reduced output by something cosponsored by the World Bank and the like 8 percent of GDP for Czechoslovakla International Monetary Fund and orga- and Hungary and 4 percent for Poland- nized by Mario Blejer (CECMG) and Alan even more if a Keynesian multiplier higher Gelb (CECSE) was held in June 1992 to than unity is assumed. Areasonable address these topics. Approximately 70 conclusion is that the trade shock was people participated, including scholars, responsible for at leas one-third of the fall officials from Eastern European countries, in regional output. and IMF and World Bank staff. * Macroeconomic policies also contrib- The most worrisome aspect of the uted to the output decline. The question is output decline was not its magnitude- whether the big bang policies were too trade shocks and statistical mismeasure- restrictive, in that hyperinflation could ment played a role here-but rather that have been avoided at a low cost in very little real restructuring accompanied forgone output. Presentations suggested the contraction, implying pessimistic that this might have been the case for prospects for its duration. The immaturity Poland and that macroeconomic imbal. of financial markets-and their passivity in ances in Caechoslovakia may have been initiating bankruptcy proceedings-was exaggerated when the stabilization pro- singled out as a major impediment to rapid gram was planned. In any case, it is clear restructuring and recovery. Unresolved that growth in real credit volumes did not issues of ownership and control of state signal recovery (except in Hungary, which enterprises are another serious bottleneck. followed a more gradual strategy) but Labor markets seem to be adjusting more rather a growth of arrears, and so no . rapidly than financial markets: as industrial lessening of the credit squeeze on promis- output fell at the end of 1991 to about 65 ing firms. The blame lies with undardevel- percent of 1989 levels in Czechoslovakia, oped financial markets and unsatisfactory Hungary, and Poland, the industrial labor resolution of ownership issues. force shrank by a quarter. * Some of the output decline was also Pour causes of the output decline were attributed to perverse behavior of enter- identified: prises in response to macroeconomic Official statistics overstated the policies. Some microeconomic aspects of decline by faling to adequately capture the the adjustment were encouraging, such as growing private sector and because of the employment response to falling indus- index number complexities. Estimates for trial output and the realignment of tra& Poland in 1990 put the actual decline at away from the CMEA. Less encouraging 14 iWjIIo&qF&d)M Public expenditure and the poor: administrative costs and relying on self. incidence and targeting selection rather than means-testing and other administratively demanding methods Jn 17-19, 1992, eshixpx, D.C of reaching the poor. For example, rural Public expenditures are a key instrument relief work programs typically reach prima- for reducing poverty. th budgets being rily the poor by paying low wages. squeezed ever tighter, it becomes especially * The effectiveness of targeted programs important that public programs to reduce also depends on the behavioral responsab poverty be effective and well directed. A of participants and others. For example, in World Bank conference in June 1992, the Philippines, where private transfers . organized by Dominique van de Walle, from the better-off ;e poor relatives are Shankar Acharya, and Kimberly Nead common, research suggests that much of (CECPE), took stock of what we know the benefit from introducing unemploy- about who benefits from public spending in ment insurance and other public transfers developing countries, as well as the scope for the poor could go to richer households, for better targeting of public programs. who would cut back their transfers to poor Participants included researchers, policy. relatives. makers, and practitioners involved in the. While narrowly targeted programs can design and implementation of antipoverty be effective in reducing poverty, assess- programs. About 300 people attended the ments need to consider whether programs conference. actually reach the poor and not those who Among the points brought out in the are better off, the administrative costs, the discussion: behavioral responses of beneficiaries and * It is important to be clear about the others, and the politicalsustanability of the objective of poverty-reduction programs. program. These are the faors that deter- Low income is not the only poverty indica- mine the economic and social viability of tor. Being deprived of basic nutrition, targeted antipoverty programs. health, education, shelter, and dignity are other aspects of poverty. A clearer focus on Impact of financial reform objectives makes it more likely that pro- grams will be targeted effectively. Apil 2-3, 1992, Waabigjn. D.C * Experience shows that often the most Many countries have undertaken financial effective way to benefit the poor is not reform in recent years, often with World through narrowly targeted programs (which Bank support. A conference was held at the try to distinguish individuals who are poor Bank in April 1992 to examine the results from those who are not) but through a of financial reform in developing market strong program of basic social services for economies and to find out what has worked all. Expanding such programs usually best. benefits the poor more than others, and The principal conclusions of operational these programs are also easier to sustain relevance: because they have broad social and political * Financial reform is a process, not an support. Such broad targeting of public event. Building up institutions and skills is spending has played a key role in reducing central. There is generally a case for poverty in countries such as Malaysia and deliberate but gradual reform stretching Indonesia. over a period of years. The countries where * In many situations narrowly targeted success has been most evident, such as antipoverty programs provide vital safety Korea and Malaysia, moved gradually, first nets. For example, rural workfare schemes reducing taxation of the financial sector in India and Africa have provided effective and intervention in credit and interest rate insurance for the poor in times of drought decisions before deregulating interest rates and other disasters. completely. * The cost-effectiveness of targeted * The management and speed of the programs has usually hinged on containing reform process should depend on th. expand, and a safeguard against exploits. the Baltic states, Hungary, Moldova, don of consumers. Poland, and Ukraine. * The divestiture of even efficient firms Presentations on best practices high- can be advantageous to the econom, and lighted issues of sequencing, other sectoral partial divestiture can result in more than and regulatory polices, coordination of cosmetic changs. trade liberalization and stabilization * Successes, defined as economic gains measures, the need for comprehensive to society as a whole, were greatest where reform pac. 4es, and attention to the real enterprises had been relatively inefficient exchange rate. Overall, the presentations before divestiture, where the regulatory emphasized that good trade policy matters. framework was well conceived and imple. Transitional trade and payments arrange- mented, and where lack of public resources ments for the states of the former Soviet was a constraint to new investment and Union also received special attention. expansion of services. Among the key findings here: * Gains stemmed primarily from higher * There seems little doubt that states of inv atment, higher productivity, and higher the former Soviet Union must turn their outp-t prices. trade toward Western Europe over the long * i6enefits were widely distributed: run. What must be avoided is too rapid a consumers often won, but not always; transition and the collapse of interstate workers did not lose, and sometimes won; trade in the short run. The search is for foreigners did well, and so did nationals; solutions that will encourage redirection and buyers did well, and so did govem- over the long term while avoiding excessive ments. contraction in the short run. Among the policy lessons: adopt appro- * The shift in terms of trade to the priate regulations before selling natural advantage of states exporting raw materials monopolies, divest some ownership if full and energy products is unavoidable in the divestiture cannot be pursued at once, and long run. Confrontational efforts to prevent give no concessions to sweeten the deal, *he shift, say by charging short-run mo- The conference, which was preceded by nopoly prices for services such as transpor- a press conference, was reported on in The tation, should be avoided since they will Ecouomis, Baminess We, the Jowmi of have counterproductive effects in the long Commee, and several European and Latin run. American journals. * Extensive controls on exports to convertible currency areas are counterpro- Integrating Ukraine into the ductive. Only export -xes for goods world economy subject to price controls should be used, and the number of goods under price June 9-11, 1992, Kiev controls should be very limited. With cofinancing from the Bank the Trade * List trading-a holdover from the Expansion Program organized a two-day trade model of the Council for Mutual seminar, under the direction ofJaime de Economic Assistance-retains too mucL Melo. John Nash, and David Tarr importance in interstate trade. This (CECTP), on trade integration for Ukraine overregulation tends to preserve central and other states of the former Soviet Union planning, which is undesirable. Only and Eastern Europe. The seminar was products still under price controls should attended by about fifty participants, be subject to list trading. Despite their including invitees from the Baltic States, reluctance, non-Russian states should be Russia, Hungary, Poland, and Romania. willing to accept rubles for their exports, Presentations covered best practices since they will be running ruble deficits in derived from experience with trade liberal- interstate trade; otherwise, other states ization outside the former Soviet Union (including Russia) may retaliate with export and first-hand experience with reforms in controls of their own. Training CEC divisons orgnized and conducted * Christine Wallich (CECPE) contrib- several training courses, seminars, and uted to another EDI seminar in Viet Nam wodshops for Bank staff, most of them on 'Urban Finance and Management." arranged through the Bank training divi. * Ahmed Galal (CECPS) participated in alon. Among them an EDI seminar on privatization, held in * Three three.day courses on "Macro. Washington, D.C. economic Adjustment and Growth,* * Brian Levy (CECPS) helped EDI prepar,d by CECMG to help upgrade the design a regulatory reform seminar to skills of Bank economists in this area. examine the problems of regulatory failure * Seven hands-on clinics, also sponsored where institutions are weak and politics by CECMG, to teach staff how to use the intrusive. ISMS-X modeL * Diana NcNaughton (CECFP) was the * A three-day course on "Public Expen. lead speaker at an EDI training seminar for diture Analysi, conducted by CECPE. bankers held in Moscow in February 1992. * A training workshop on Trade Policy * Christine Wallich was a speaker at an Reform and Related Industrial Sector EDI seminar on "Intergovernmental Fiscal Tssues, sponsored by CECTP. Relations in Russia. * Seminars on "Bank Analysis, "Capital * Mario Blejer (CECMG), Fabrizio Flows,* "Securiti. s Markets Develop. Coricelli (CECMG), and Alan Gelb ment, and "Financial Sector,* sponsored (CECSE) presented courses at the by CECFP. Moscow summer school for training * Training on "Anagement of Public economists. Expenditures,3 "Employee Ownership," * Dan Mozes (CECFP) was codirector and *Private Sector Delivery of Social of an EDI seminar on "Enterprises in Services* and courses directly related to Transition: Enterprise Management in the Bank operational issues to promote the Ex-Socialist Economies,* held in Poland. exchange of best practices across regions * Eai Matin (CECTP) participated in a (how to do private sector assessments, civil joint UNITA/EDI seminar on "Interns- service reform, privatisation, and the like), tional Development Issues" in New York offered by CECPS. in June 1992. In addition, CEC staff also participated * With the logistical and administrative m several training courses and seminars assistance of EDI and in conjunction with sponsored and organized by the Economic the Federal Reserve Board, CECFP staff Development Institute (EDI): conducted two seminars on bank supervi- * Inderjit Singh (CECSE), Michael sion for senior bank supervisors of central Finger (CECTP), and Gerard Caprio banks, one held in Mexico, led byJoaquin (CECFP) participated in an EDI seminar Gutierres (CECFP), and one in Washing- for senior officials in Viet Nam on "Reform ton, D.C., led by Andrew Sheng and David in Transitional Socialist Economies." Scott (CECFP). Work Program and Themes by ivision M&VMMeaM&d OGOM4 Midom 21 merger toward the end of fiscal 1992 of the only determinant of central bank indepen- division and the Socialist Economies dence. This study takes numerous other Reform Unit. The merger should factors into consideration, such as the strengthen links between top-down method of appointment and length of macroeconomic research and bottom-up tenure of central bank executives. Drawing microeconomic research. on information for more than seventy Carry-over research projects of the countries, the research explores the corre- division include studies of currency substi lation of inflation, or central bank accom- * tution (dollarization), foreign exchange modation to inflation, and institutional auctions in Africa, and books on private autonomy of action. investment and advanced macroeconomic The division also has several ongoing models. Ongoing research projects are collaborative research projects. One, a joint examining: effort with the Europe and Central Asia * The msacroeconmics ofpublc sector Country Department II, is examining deficita. Early results have been described business and consumer services as a in Policy Research Working Papers, and a growth-promoting sector in the former book manuscript is under review. Large Soviet Union. Rapid growth in such fiscal deficits were found to be a drag on services could generate much-needed growth, whatever the method of deficit employment and improvements in social financing. Fiscal deficits tend to be strongly welfare. A paper is expected in fiscal 1993. associated with external deficits and with Another collaborative research project, currency overvaluation. jointly conducted with the Economic * The eec s of nationalpolicier on long- Development Institute, is on the labor tem groth. The study is quantifying the market in transitional socialist economies. effects of macroeconomic and financial The study focuses on labor markets in policies, direct foreign investment, educa. Bulgaria, Czechoslovakia, Hungary, and tion level, and other phenomena on growth Poland. The aim is to identify the effect of in per capita output. Several distinguished national incomes policies and labor market consulting economists are associated with regulations on employment and real wage this project, and final papers are expected rates during the transition to free market for a conference in February 1993. capitalism. * The sacroeconmiks offoiigs exchange Among several conferences convened by makets developing counties. Based on the division to disseminate its research eight country studies, this research can- findings was one on the "Macroeconomic firms that macroeconomic variables such as Situation in Eastern Europe," organized the fiscal deficit and rate of monetary jointly with the Socialist Economies expansion determine the long-run real Reform Unit and the International Mon- exchange rate. The spread between a etary Fund and dealing with severe output parallel market rate and an official rate can declines in Albania, eastern Germany, and be viewed as a measure of macroeconomic the former Yugoslavia. A conference . imbalance. A book manuscript is being volume will be produced in fiscal 1993. A prepared. conference on "The Capital Account and * The politicalwecosonsy ofsomctral Macroeconomic Policiese focused on the adjustxent in new democraces. The study, recent resurgence of private capital flows to be completed in fiscal 1993, is examin- to Latin America and considered ing eight countries that have undertaken macroeconomic policies to cope with them. political liberalization as well as structural Fiscal 1993 will yield substantial out- adjustment. Fiscal, trade, and exchange puts-articles, books, conferences-from rate reforms are scrutinized and related to earlier and ongoing work in the division. political changes. With solid products in hand, the newly * The policaland institutionalfornda- configured division will be well set to dons and economic effects of central bank disseminate its findings with an eye to independence. Legal structure is not the maximizing policy impact. FiMMdd PdXad SMer wDin 23 * A study examining financial sector strengthening of management and institu. developments in successful East Asian tions. The books have been translated into economnies to develop models of best several languages, including a Russian practices for possible application else- translation being prepared by the State where. Finance Academy. Other work on building * A major research study on the effec. sound banks includes a paper on measur- tiveness of credit policies in East Asia, ing bank efficiency. A major project is also jointly funded by CEC and the Japanese under way on the scope, benefits, and government, examining the theoretical mechanics of bank privatization and the framework for targeted credit programs. role of banks in private sector develop- The study is assessing whether Japan's ment. experience can be replicated in developing countries. Case studies of targeted credit Impact on operational work programs in selected countries will com- pare and contrast experiences. The division's research has had a sub- Restrmawuingfmancil systems i distress. stantial impact on the Bank's operations. Restructuring insolvent banks is one of the Research outputs of the division were most pressing challenges facing financial major inputs to Worl Deeopment Repot reformers in developing countries. A major 1989 on financial systems and development project on bank restructuring examined the and to the deliberations leading to the experience of countries facing financial "Report of the Task Force on Financial distress in the 1980s. A book is being Sector Operations* (the Levy Report) and completed on the project, detailing the "Operational Directive on Financial Sector mechanisms the countries employed in Operations* (OD 8.30). "Financial Sector restructuring their banks and the lessons Adjustment Lending* A Preliminary learned. The division has also taken a leading Assessment" was particularly well received role in improving supervisory standards for in operations. The seminar and book on banks and laying the foundations for strong Monetary Policy Instrmens for Deveoping and efficient financial institutions. Countwies and the research paper on Building sound and efficient banks. A two- "Financial Policy and Private Investment" volume study, Banking InstituWio in met the demand for better information Developing Markes, responds to the need about how financial policy can encourage to appraise, build, and manage banking private investment and support Bank institutions in developing countries. The operations and policy discussions with books constitute the main reference client countries. Research outputs on material for Bank staff training courses and banking institutions in developing coun- seminars in borrowing countries. The two tries, contractual savings, and securities , volumes cover financial analysis and markets are already being used extensively institutional diagnosis as well as the for operational and training purposes. the influence of the composition of public Special features of the work expenditure on economic growth and program efficiency. The goal is to provide guidance about where countries should prune their 11 division's work program emphasizes overall expenditure programs at least cost close cooperation with other units of the to efficiency. Bank Cooperation with other divisions of Two initiatives were launched in the area CEC in fiscal 1992 included work on of military expenditure. As pan of a search public expenditure for the third report on * for rough norms in this contentious field, a adjustment lending, in cooperation with small exploratoystudy is using cross-country the Macroeconomics and Growth Division, data to test hypotheses about the determi- and participation in the old age security nants of military expenditure. Another study, with the Public Sector Management study was begun in late fiscal 1992 to look and Private Sector Development Division. at transitions from civil war to peace in The research project on the environment contemporary Africa, to shed some light on and fiscal policy instruments and the recent economic management issues, especially conference on public expenditure, benefits, fiscal policy, in such contexts. and targeting reflect joint work with sector Fisaldec ntrlia. The division led a and operations policy units. The division major study of infergovemmental fiscal also made significant contributions to relations in Russia as part of the Russia Wrl Demlopsent Repor 1992. Technical Cooperation program. For a Another notable feature of the fiscal number of other countries, including 1992 work program was the sharp expan- Hungary and Romania, issues of expendi- sion in operational support-from 111 ture and tax assignment among different staff-weeks in fiscal 1991 to about 162 in levels of government and the design of fiscal 1992, not counting 18 staff-weeks of intergovernmental transfers were also work under the Russia Technical Coopera- examined as part of operational support tion agreement. Most of the operational and technical assistance activities. Opera. support was closely tied to the division's tionally oriented studies of fiscal decen- research clusters, with much of it directed tralization are planned for Indonesia and toward new and newly activated membrs, Pakistan in fscal 1993, leading to a more such as the new states of the former Soviet research-oriented volume on the subject Union, South Africa, Cambodia, and Viet the following year. Nam. Trade Poiy D"iow 27 looking at the common property rights Uganda received technical assistance under system to see whether it results in Phase I of the Trade Expansion Program, overexploitation of the natural biomass and Mauritius was one of the first coun- stock and excessive land clearing. Data tries to receive assistance under Phase II. from household surveys and satellite Also under the auspices of the Trade remote-sensing techniques have been Expansion Program the division is re- merged to address the empirical impor- searching the question of whether, as is tance of these effects. A pilot study found widely believed, Sub-Saharan Africa has that a shrinking biomass stock explains a trailed the rest of the world in reforming large part of the fall in agricultural produc- trade policy, and if so, what can be done tivity and that too much land is cultivated about it. In related work, the division is because farmers internalize less than 30 initiating research addressing critical percent of the social cost of using the connections between trade policy and biomass. Less cultivation would raise human development issues. villagers' social income. Advice on policy reform is commonly Socialist economies in transidon. The country specific-ustally an appropriate division has responded in a number of and adequate approach. But there are ways to needs for assistance on issues of exceptions. Trade policy for commodity importance to socialist economies in exports such as coffee, cocoa, and tea in transition. Staff have participated in Sub-Saharan Africa and elsewhere is one. operational missions in several countries in Policy reform in one producing country Eastern Europe and the former Soviet may benefit that country but harm others. Union. The division also contributed And simultaneous reform in all producing suggestions for the design of trade and countries may lead to losses for all. Initial payments arrangements for the states of research findings indicate the possibility of the former Soviet Union, to facilitate the losses in export revenue, government transition from a single country to separate revenue, and welfare. Continuing research countries successfully integrated into the on a few commodities is seeking to identify international trading community. Policies trade policies that would maximize welfare were suggested for avoiding a costly or government revenue, taking into ac- collapse of interstate trade, without unduly count interaction between policies and impeding the transition. With the Intema- outcomes for various countries. tional Economics Department, we plan to Regional economic integraion. Foot. build an integrated set of social accounting dragging at the Uruguay Round of the matrices (SAMs) for a handful of countries GAIT has generated new interest in in the region. regional economic integration. Regional Work under the Trade Expansion arrangements involve policy issues of Program is also concentrating on socialist enormous importance to all countries and economies in transition. Country reports have the potential for dramatically chang- giving advice on trade policy reform are ing the economic map of the world. planned for Mongolia, Romania, and Viet To address these issues, the division Nam. A regional conference was recently brought together leading scholars on the held in Kiev, on integrating Ukraine with subject at a conference. Twelve papers the world economy. Another conference is were presented. The paper byJagdish tentatively planned for 1993, focusing on Bhagwati was covered by The Economist Asian socialist economies in transition. and Financial Times, and the conference was reported on in the MF Swvey. A Other concerns compilation of the conference papers will be published by Cambridge University Press Africa. The division's work program in 1993. A booklet summarizing the main incorporates a good deal of work on messages was published by the Bank and another priority region, Sub-Saharan covered in The Economist. An article is also Africa. Kenya, Madagascar, Mali, and due to appear in Finance and Development. 29 Region, and the two units are working Eastern Europe. The division is helping closely on this effort. EDI design a regulatory reform seminar to * Private deliy of core gomasa examine problems of regulatory failure sewices. We will research the effects of where institutions are weak and politics private delivery of social services on intrusive. The seminar will provide more efficiency and on the poor. realistic advice to policymakers than * Socialsecraiy. Can it be made afford- traditional approaches focusing on regula- able, equitable, and sensible? What are the tory policy alone. pros and cons of different designs, and Other dissemination activities include a what are the merits of a multi-pillared series of lectures to outside groups on the approach? division's privatization work and a planned second conference an privatization research Approach in the Latin America and Caribbean region. Research findings are also disseminated Sensitive to the risks of fuzzy thinking and through Bank staff training. The division too much prescription relative to descrip- has prepared training on topics that are tion in the institutional area, the division cutting edge (private delivery of public seeks to ground its work in the practical services, regulatory reform) as well as through substantial involvement in opera- courses directly relevant to Bank opera- tional support and best-practices analysis. tional issues that promote the exchange of Such activities allow for a more accurate best practices across regions (how to do gauging of demand and the identification private sector assessments, civil service of institutional issues tha combine opera- reform, privatization). The division's yearly tional relevance and a need for analytical symposium on public sector management rigor. The private sector surveys, analysis of in September 1992 focused on cutting- the experience of front runners in privat- edge issues and innovation. ization, and work on public sector manage- ment in states of the former Soviet Union Links with the past are all major operational support tasks with a research output. Much of the division's work builds on past The division recently completed a cycle initiatives, especially in the case of mature of best-practices and policy papers on all themes such as privatization and public three issues. Work is now focusing on expenditure management. The privatiza- pushing out the frontiers of our knowledge tion work in particular has led to a number through research and on turning policy into of follow-up research assignments, some of practice through operational support and them in other divisions (differential im- dissemination. pacts of public and private enterprises on Support to the Economic Development the environment, to name one). In private Institute (EDI) is an integral part of the sector development, past tasks focused division's dissemination program. Our especially on developing the Bank's action book on public enterprise reform and program and reporting on progress to privatization was published by EDI and has management and the Board. This reporting been translated into French, Russian, and helped the division pinpoint issues for Spanish. Division staff are participating in research and led to an operational tool- EDI seminars on privatization in most of private sector assessments-with a poten- the states of the former Soviet Union and tial research payoff. Publications ts This article analyzes the efects of public policies on national saving, drawing from GA. Calve and Fsbuialo Coriceil. estimations of consumption functions for "StA.tingia Previously Centrally thirteen developing countries. The con. Pisned Economya Poland 1990.0 sumption specification applied nests three ROleosic Pole 14 (Apri 1992)t 176. alternative explanations for consumer 226. behavior: Keynesian, permanent-income, The article examines the dynamics of the and Rcardian/direct-crowding-out hypoth. January 1990 stabilization program in eses. The evidence is based on estimations Poland, focusing on the substantial and using 1980-87 country panel data-the first sudden collapse in industrial output and use of data on consolidated operational the persistence of inflation. Three not nonfinancial public sector deficits. The mutually exclusive explanations of these article shows that a permanent cut in public phenomena are presented: excessive initial expenditure of $1 reduces private saving by inventories, an exogenous fall in household 47 to 50 cents, while a permanent tax demand, and tight credit. Calvo and increase of $1 reduces private saving by Coticelli conjecture that tight credit was at only 23 to 26 cents. Fiscal adjustment the center of the action: it magnified the policies designed to boost public saving are fall in output and helped coordinate the fall therefore the most effective policy tool for across sectors. increasing national saving levels in develop. That conjecture is based on the substan- ing countries. tial segmentation of the credit market and underdevelopment of private credit mar- Miguel A. KIguel and Nissan Liviatan. kets. The weak private credit markets may "When Do Heterodox Stabilization explain the substantial shrinkage of Programs Work? Lessons From Experi- interenterprise credit, which compounded ence." World Bank Research Obsewer 7 the initial contraction of bank credit. The (january 1992): 35.57. authors argue that credit tightness is What advantages and disadvantages does refected in firms offering wages below the the heterodox strategy offer stabilization ceiling rates of the stabilization program- programs in countries with chronic high especially considering that firms are inflation? Heterodox stabilization pro- controlled by workers councils not gener. grams, by the authors' definition, are those ally given to squeezing wages. Indeed, as that support orthodox policies-tight fiscal credit expanded during the year, wages policy and a fixed exchange rate-and the increased and even exceeded the program's initial temporary use of wage and price ceilings. The authors further argue that the controls. (With orthodox methods, inflation wage hike may be one of the reasons reduction is usually slow, and its costs in inflation persisted and credit expansion did terms of unemployment are high. Hetero- not lead to a major economic recovery. dox tactics were devised to circumvent 3 these difficulties.) Vitrio Corbo and Klaus Schmidt. This evaluation, based on several hetero- Hebbel."Pubc Policies and Saving in dox programs, successful and unsuccessful, Developing Countries."Jowal of from the 1960s and 1980s in Latin Ameri- DelopsW Econoxics 36 (July 1991): can countries and Israel, offers four princi- 89-115. pal lessons: This secion coves scal 1992 pubicadons by CEC depnmen aff and consulana on CEC-uanaged Staff (during fiscal 1992) Office of the Director S4W Nancy Brsali, Director John Page, Senior Economic Advisor Marl,ou Uy, Senior Economist Phi Anh Plesc Economist Macroeconomics and Growth Division St4f Nader Maid. Research Analyst Mario Bleer, Diviuion Chief Klaus Schidt-HebbeL Senior Econoist Fabriio Coricelli, Economist Luis Serven, Economist Rosalinda Dacumos, Economist Andres Sonimano, Economist Marth de Melo, Lead Economist Steven Webb, Senior Economist Wiliam E~stedy, Senior Economist brahim Elbadai, Economist Long4em ~sma Gaty Hyde, Principal Economist Michael Lewin Christinejones, Economist Nisan Lviatan Miguel Kiguel, Senior Economist Financial Plicy and Systems Division Staff Vince Poliatto, Senior Financial Specialist Andrew Sheng, Di~ision Chief David Scott, Senior Banking Sector Sten Bereza, Fmanial Specialist Specialist Gerd Caprio,Senior Financial Econmist Martin Slough, Financial Specialist YoonJe Cho, Senior Finan"al Eeono~ni Dim Vittas, Principal Fmancial Planning Asli DemirgOç-Kunt, Economist Specialist Joaquin Gutierrez, Financial Specialist Ros Line, Economist Las conswtantr Diana McNaughton, Head Banking Susan Hart Spe~iafi MelanieJohnson Dan Moses, Financial Spe~iati Anita Schwaz Robert Pardy, Finmncial Specialist Bo Wang 4, euel, M.*«E ~:bange Rte PolIcy, the Roa Pdchett, L. "Measuring R a åfengc Exchange Rate, and Inbation:Lns Rt. eitabiliyin Developing Coun- froffLatiat meic~ PS880,1992. de~. Emp a Evidence and mplica riguel K, and N. GheL "Duå and tions.CWPS791, October 1991. Muh~ipie Echange lat. SystemsIn Rujaopul,D., andA.Sha."Tax Incen Developing Coundes.- PS 881,1992. ies, Market Power, and Corporate ing, ., ad& Leine. Vnancialindica- InstmentARationalExpectations tons and Gro in a CrouW-Secton of Mode Appled to Pakistai and Tu~dsh Countes."WPS819,Januarym1992. Inares. WPS 908, May 1992. opp, . "Economic Incentives and Point Rebelo, S. "Growth in Open Economies." SoMce ~mimin. Cie of Modelg WPS 799,1991. Platfrm. WPS 920,June 1992. Rce E. Managing the Transidon: En- in, F PMancial Strucues and andCng the Efficiency e Eastern Ecomic Development." WPS 849, European Governments.OWPS 757, February 1992. September 1991. Imine., and D. Scott. "Old Debts and Schmidt-Hebbel, K, and T. Muller. New Beginnings A Policy Choice in *Pdvate Investment Under Macroeco. Tranddonl Socialist Economies. WPS nomic Ajustment in Morcco." WPS 876,1992. 787,1991. Lu, L. Enry-Exi, Larning and Produc- Schrenk AL MTe CMEA System of Trade tivity Change Evidence from Chile and Payments: The Legacy and the WPS 769, September 1991. Aftermath of Its Terminatio." WPS Long, M., and D. Vtas. Fmancial Regula- 753,1991. tio. WPS 803, 1991. Shah, A. "Perspeves on the Design of Md, K"FiscalAdinstent and dite Real Intergovemental Fica Relations.o Exchange Rt.* WPS 850, Februay WPS726,1991. 1992. Shatalov, . rivatlation in the Soviet Matin , and B. Waow. *Adjustment and Union: The Beginnings of a Transition." Private Invment in Kenya. WPS 878, PS 805,1991. March 1992. Solimano, A. "Understanding the Invest- McLur C. "A Consumpdan.Based Dhect ment Cyce in Ajustment Program : Tax for Countries in Transitin rm Evidence from Reforming Economics.' Socaim. "WPS 751,1991. WPS 91, May 1992. Olechowski,A "Chmical from Poland A Stone,A "Listening to nirms: How to Use Tempest in a Teacup. WPS 784, F*m- el Sur~eys to Assess Con- October 1991. straintson Private Sector Devetop- Panagary, A. "Unraveling the Mysteries met.*WPS 923,June 1992. , of China' Foeign Trade Regim:A Stn,AB. Levy, and R. Paredes."Public View fromJngsu Province WPS 801, Institutions and Private Transacdons:A November 1991. CompativeStudy of the Legal and Panagariya,A., and L Schiff. -Taxes Regulatory Environment for Business Versus Quota: The Case of CocMa Transacons in 3ral and Chle" WPS Expors.' WPS 756, August 1991. 891, May 199. Pardy, K Insttinal efoRms in Emerg- Ta, D. VER Under Regional Integtion: ing Secuotes M ~-ts. WPS 907, May When Trade Diversionis Unambiguouuly 1992. Enefita WPS 839 January 1992. Pardy, . "egulatory and Institutinl TyboutJ., and D. Westbrook. *Estimating Impacts of Seenddes Market Computer. Returns Scale with Large Imperfect atan.. WPS 866, February 1992. Panels. WPS 754, August 1991. PMhl, G. OEconomic Conequences of van de Wall, D. fhe Distribution of die German Rønnifican.- 12 months ~fter Benetts from Social Services in Idone- the Big Bang." WPS 816, December sia, 1978-87." WPS 871,1992. 1991. Vittas, D."fhe Impact of Regulation on Shirley, M. "Evaluating the Performance of Bradburd, R. Tvatization of Natural State-Owned Enterprises in Paldstan." Monopoly Public Enterpdses: The In R Ramamurti and R. Vernon, eds., Regulation Issue." WPS 864, 1992. P6tirdw and CoaolofState-Oumed Caprio, G."Policy Uncertainty, Informs. EWpise. EDI Development Studies. tion Asymmetries and Financial Interme. Washington, D.C.: Economic Develop- diation." WPS 853, February 1992. ment Institute, World Bank, 1991. Capdio, G., and P. Honahan. -Excess Shirley, M. "Lessons from World Bank Liquidity and Monetary Overhang. Experience." In Lenowm of Pwasidom. WPS 7%, 1991. Association of the Bar of the City of Caprio, G., and R. Levine. "Reforming New York, Proceedings of a Conference Finance in Transitional Socialist Econo- heldJune 5, 1991. mies: Avoiding the Path from Shell Tybout, J. "Industrial Performance: Some Money to Shell Games." WPS 898, April Stylized Facts." In V. Thomas, A. 1992. Chhibber, M. Dailami, andJ. de Melo, Conway, P., and S. Dhar. "The Economics eds., Reswduring Economie in Diow of Dumping and Antidumping." WPS Poliy Refom and The Wodd Bank. New 782, October 1991. York: Oxford University Press, 1991. Codcelli, F., and A. Revenge. "Wages and Unemployment in Poland: Recent CEC Oufteach note Developments and Policy Issues." WPS 821, 1992. Finger, J.M. "Should Developing Countries Coricelli, F., S. Commander, and K Introduce Antidumping? Never." Note Staehr. "Wages and Employment in the 1, May 1992. Transition to a Market Economy." WPS Eskeland, G.S. "The Objective: Reduce 736,1991. Pollution at Low CosL" Note 2, June Coricelli, F., and R. De Rezende Rocha. 1992. "Stabilization Programs in Eastern Europe: A Comparative Analysis of the Policy Research Working Papers Polish and Yugoslav Programs of 1990." WPS 732, July 1991. Aitken, B. J. "Measuring Trade Policy Csaki, C. "Transformation of Agriculture Intervention: A Cross-Country Index of in Central Eastern Europe and the Relative Price Dispersion." WPS 838, Former USSR (Major Policy Issues and 1992. Perspectives).- WPS 888, April 1992. Aron, J., and L Elbadowi. Foreign Ex- Daveri, F. "How Expectations Affect change Auction, the Parallel Rate Premia Reform Dynamics in Developing Coun. and Exchange Rate Unification: A tries." WPS 78& Macroeconomic Analysis for Zimbabwe." DemirgaiqKunt, A. "Creditor Country WPS 909, 1992. Regulations and Commercial Bank Bahl, R, and C. Wallich. "Intergovern- Lending to Developing Countries.' mental Fiscal Relations in China." WPS WPS 917, June 1992. 863, 1992. DemirgaqKunt, A. "Developing Country Bark, T. "The Korean Consumer Electron. Capital Structures and Emerging Stock ics Industry: Reaction to Antidumping Markets." WPS 933, June 1992. Actions." WPS 781,1991. Devarajan, S., and D. Rodrik. "Do the Bird, R., and C. Wallich. "Financing Local Benefits of Fixed Exchange Rates Governments in Hungary." WPS 869, Outweigh Their Costs? The Franc Zone 1992. in Africa." WPS 777, 1991. Bourguignon, F., J. de Melo, and C. Dhanji, F., and B. Milanovic. Privatias- Morrisson. "Poverty and Income Distri- tion in Eastern and Central Europe: bution During Adjustment Issues and Objectives, Constraints, and Models of Evidence from the OECD Project." Divestiture." WPS 770, 1991. WPS 810,1991. Dutz, M. "Enforcement of Canadian Bourguignon, F., C. Morrison, and A. Sye. Cambridge, Mas.: Harvard Sw. -Adjustment and the Rural University Press, 1991. Sector A Counterfactual Anulysis of Devarajan, S., andJ. de Melo. *Member. Morocco* In P. Mosley,J. Harigan, ship in the CFA Zone: Odyssean Jour- andJ.FJ. 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