Policy makers in Latin America and the Caribbean (LAC) often complain that poor fiscal performance in their countries is a result of a high degree of spending rigidity.
... See More + Despite being a common complaint, the issue has remained largely ignored by the literature because of the lack of adequate measures of rigidity that allow cross-country and time series comparability. This report helps close this gap by introducing a new measure of spending rigidities that can be easily applied to multiple countries. It focuses on the categories of spending that are naturally inflexible—wages, pensions, transfers to subnational governments, and debt service—and separates them into two components: structural and nonstructural. The structural component is determined by economic, demographic, and institutional fundamentals. The nonstructural component is determined by short-run transitory factors associated with business and political cycles. The degree of rigidity of spending is then proxied by the ratio of structural spending to total spending, with a higher value indicating that spending is driven mostly by factors out of the policy makers' control. This concept of rigidity was applied to 120 countries for the years 2000–17. The report concludes by discussing several policies to contain the sources of rigidity in the long term, ranging from the importance of deepening the pension reform process to the need of establishing strong fiscal institutions promoting medium-term fiscal planning.
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This paper analyzes the procyclicality of fiscal policy on the tax and spending sides in a sample of 116 developing countries between 2000 and 2016.
... See More + About 20 percent of the countries in the sample switched from procyclical to countercyclical policy stance. In Sub-Saharan Africa, 30 of 39 countries remained caught in the procyclicality trap and the region has the highest degree of procyclicality. The Middle East and North Africa region switched from a countercyclical policy stance to a procyclical one over time. The Europe and Central Asia and Latin America and the Caribbean regions significantly reduced the degree of procyclicality. The main economic variables that affect procyclicality are financial depth, tax base variability, and natural resource dependence. In line with the political economy literature, the perception of corruption, social fragmentation, and inequality in resource distribution are positively associated with procyclicality. The findings also show that the quality of fiscal institutions is associated with procyclicality; countries with fiscal rules have smaller procyclical bias, but the effect is not homogeneous; and higher degrees of expenditure rigidity are associated with lower procyclical bias. The study finds asymmetric policy stances along the business cycle, with procyclicality being more pronounced during recessions. Similarly, the political cycle affects procyclicality, as procyclical bias increases in electoral years. From the tax management perspective, procyclical bias is still present, but there are significant changes: most of the political economy variables lose significance; the resource-dependence variable is not significant; external credit availability reduces procyclicality; tax base variability increases procyclical bias; and expenditure rigidity is no longer significant, but fiscal space becomes determinant of procyclical bias.
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Policy Research Working Paper WPS8963 AUG 06, 2019
This paper explores the determinants of public employment across the world and finds that it is negatively associated with country size (by population) and positively associated with the income level.
... See More + The findings show that a country's openness to trade is positively associated with public employment in low- and middle-income countries, but inversely related in high-income countries. The estimated models are used to predict the expected public employment for a country given its income, population, and openness to trade, and to compare the actual levels with the predicted ones. In general, public employment in Latin American countries is below the predicted levels, except for Argentina, Brazil, Ecuador, Mexico, Suriname, Trinidad and Tobago, and the República Bolivariana de Venezuela. Public employment in the Middle East and North Africa is above the predicted levels, particularly in the Arab Republic of Egypt and the Islamic Republic of Iran. East Asian and Pacific countries' public employment is significantly below the predicted levels, particularly in Hong Kong SAR, China; Japan; the Republic of Korea; and Mongolia. Countries in Europe and Central Asia show higher than predicted public employment, mostly in Romania, Denmark, Sweden, Armenia, and Belorussia. Public employment in Sub-Saharan Africa appears to be below the predicted levels, with the notable exceptions of Botswana and South Africa. The deviations from predicted levels are positively correlated with the union density rate, which is negatively associated with private employment rates. Finally, the study finds no statistical association between public and private employment, suggesting the absence of crowding-out in the employment levels.
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Policy Research Working Paper WPS8961 AUG 06, 2019
Governments of developing countries typically spend between 20 and 30 percent of gross domestic product. Hence, small changes in the efficiency of public spending could have a major impact on aggregate productivity growth and gross domestic product levels.
... See More + Therefore, measuring efficiency and comparing input-output combinations of different decision-making units becomes a central challenge. This paper gauges efficiency as the distance between observed input-output combinations and an efficiency frontier estimated by means of the Free Disposal Hull and Data Envelopment Analysis techniques. Input-inefficiency (excess input consumption to achieve a level of output) and output-inefficiency (output shortfall for a given level of inputs) are scored in a sample of 175 countries using data from 2006-16 on education, health, and infrastructure. The paper verifies empirical regularities of the cross-country variation in efficiency, showing a negative association between efficiency and spending levels and the ratio of public-to-private financing of the service provision. Other variables, such as inequality, urbanization, and aid dependency, show mixed results. The efficiency of capital spending is correlated with the quality of governance indicators, especially regulatory quality (positively) and perception of corruption (negatively). Although no causality may be inferred from this exercise, it points at different factors to understand why some countries might need more resources than others to achieve similar education, health, and infrastructure outcomes.
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This paper examines the determinants of the productivity of Nigerian firms, using three waves of Enterprise Surveys from 2007, 2009, and 2014 and 7,670 firms.
... See More + The paper uses three alternative measures of productivity, which are found to be highly correlated: labor productivity, value added per worker, and total factor productivity. The more notable trends in the data show: a rise in productivity, with the output of exporting firms decreasing; increasing concentration of production, reflected in the rise of the Herfindahl-Hirschman index by a factor of three; increasing costs of crime, power outages, lack of security, and bribery; significant heterogeneity of these costs along several dimensions, such as firm size, age, location, and the exporting or domestic nature of the market it serves. These costs are inversely related with investment. Regardless of the measure of productivity, its main determinants are the education of the worker, size of the firm, availability of credit, and business climate variables. When labor productivity is used, the stock of capital is also a major determinant of productivity. Within the investment climate variables, power outages and the corruption index are the more significant ones. Power outages are negatively associated with productivity. Bribery is positively related, supporting the "greasing the wheels" hypothesis of bribery as a factor that reduces transaction costs. The impact is nonlinear, as it decreases with firm size. The results also show a positive association between productivity and exporting, but the causality is reversed when the analysis controls for endogeneity: productivity is a weak determinant of the likelihood of a firm becoming an exporter.
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Policy Research Working Paper WPS8145 JUL 12, 2017
Like many other countries in Sub-Saharan Africa, this sub-group of West and Central African countries has experienced relatively fast drops in mortality but persistently high levels of fertility, which implies continued high rates of population growth, which represent an important challenge to development prospects.
... See More + At the micro level, families will face challenges to ensure that their children are well educated, nourished and healthy. At the macro level, governments will face enormous pressures to keep pace with additional cohorts of schoolchildren to educate, new entrants into the labor market, and a general rise in demand for health and social services that will outstrip the capacity of fragile systems in these countries. The authorities in thesecountries have an important window of opportunity for addressing demographic issues systematically as part of their broader economic development plans and long-term vision documents.
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Like many other countries in Sub-Saharan Africa, this sub-group of West and Central African countries has experienced relatively fast drops in mortality but persistently high levels of fertility, which implies continued high rates of population growth, which represent an important challenge to development prospects.
... See More + At the micro level, families will face challenges to ensure that their children are well educated, nourished and healthy. At the macro level, governments will face enormous pressures to keep pace with additional cohorts of schoolchildren to educate, new entrants into the labor market, and a general rise in demand for health and social services that will outstrip the capacity of fragile systems in these countries. The authorities in thesecountries have an important window of opportunity for addressing demographic issues systematically as part of their broader economic development plans and long-term vision documents.
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Ghana's economic growth picked up in the early 2000s and has been exceptionally strong over the past few years, with price booms of its main commodity exports, gold and cocoa, and the initiation of commercial oil production in 2011.
... See More + This paper examines recent econometric evidence on Ghana's long-term growth and evaluates its sustainability. The empirical evidence surveyed finds that Ghana's main growth drivers were investment, oil, and mineral rents, while government consumption acted as a growth retardant. Based on various scenarios for its determinants, per capita GDP growth rates are predicted to be between 3.5 and 4.5 percent for 2014-34. Nevertheless, the predictions are subject to considerable uncertainty associated with the expected trends and volatility of the drivers of growth, particularly to sustaining investment levels and external factors such as commodity prices and international capital flows. A growth decomposition exercise shows that Ghana's past growth was led by capital accumulation, which will be difficult to sustain given the high current account deficits and the volatility of capital flows. Hence, a switch toward a productivity-based growth strategy, instead of the investment-led growth strategy of the past, is the only viable alternative to sustain the recent high growth rates. For that, Ghana needs focus on policies that enhance government effectiveness and public spending efficiency. To mitigate the risk of falling into the so-called growth traps like many other countries, Ghana must resolve its macroeconomic imbalances and resume the institutional reform to enhance the quality of institutions and make growth more inclusive.
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Policy Research Working Paper WPS7115 NOV 01, 2014
The paper estimates the rates of return to investment in education in Egypt, allowing for multiple sources of heterogeneity across individuals.
... See More + The paper finds that, in the period 1998-2006, returns to education increased for workers with higher education, but fell for workers with intermediate education levels; the relative wage of illiterate workers also fell in the period. This change can be explained by supply and demand factors. On the supply side, the number of workers with intermediate education, as well as illiterate ones, outpaced the growth of other categories joining the labor force during the decade. From the labor demand side, the Egyptian economy experienced a structural transformation by which sectors demanding higher-skilled labor expanded. In Egypt, individuals are sorted into different educational tracks, creating the first source of heterogeneity. Second, the paper finds that large-firm workers earn higher returns than small-firm workers. Third, females have larger returns to education. Formal workers earn higher rates of return to education than those in the informal sector, which did not happen a decade earlier. And finally, those individuals with access to technology (as proxied by personal computer ownership) have higher returns.
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Bank credit to Egypt's private sector decreased over the last decade, despite a recapitalized banking system and high rates of economic growth.
... See More + Recent macro-economic turmoil has reinforced the trend. This paper explains the decrease based on credit supply and demand considerations by: (1) presenting stylized facts regarding the evolution of the banks' sources and fund use in 2005 to 2011, noting two different cycles of external capital flows, and (2) estimating private credit supply and demand equations using quarterly data from 1998 to 2011. The system of simultaneous equations is estimated both assuming continuous market clearing and allowing for transitory price rigidity entailing market disequilibrium. The main results are robust to the market clearing assumption. During the global financial crisis, a significant capital outflow stalled bank deposit growth, which in turn affected the private sector's credit supply. At the same time, the banking sector increased credit to the government. Both factors reduced the private sector's credit supply during the period under study. After the trough of the global crisis, capital flowed back into Egypt and deposit growth stopped being a drag on the supply side, but bank credit to the government continued to drive the decrease in the private sector's credit supply. Beginning in the final quarter of 2010, capital flows reversed in tandem with global capital markets, and in January 2011 the popular uprising that ousted President Hosni Mubarak added an Egypt-specific shock that accentuated the outflow. Lending capacity dragged again, accounting for 10 percent of the estimated fall in private credit. Credit to the government continued to drain resources, accounting for 70 - 80 percent of the estimated total decline. Reduced economic activity contributed around 15 percent of the total fall in credit. The relative importance of these factors contrasts with that of the preceding capital inflow period, when credit to the government accounted for 54 percent of the estimated fall, while demand factors accounted for a similar percentage.
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From 2008 to 2011, Egypt was hit by significant shocks, both global and country-specific. This paper assesses the impact of the resulting macroeconomic instability on the banking sector, and examines its role as a shock absorber.
... See More + The Central Bank of Egypt accommodated the shocks by supplying liquidity to the market. The paper verifies a change in the fiscal regime from one in which the primary fiscal balance was used an instrument to stabilize the public debt ratio to one in which the policy instrument stopped playing that role and affected investors' assessment of the risk of holding public debt. This pattern suggests that fiscal conditions influenced exchange rate and price expectations originating a fiscal dominance situation in which the Central Bank could not control inflation. Hence, the Central Bank lacked functional independence in spite of its de jure independence, which underscores the importance of strengthening institutions that facilitate policy coordination and allow policy to be more predictable. The government also funds itself through non-market mechanisms, in a typical financial repression scheme. The paper estimates the revenue from financial repression at about 2.5 percent of gross domestic product in 2011, which together with the revenues from seignoriage add up to close to 50 percent of the budgeted tax revenues, indicating the need for an in-depth review of the governance of the public banks and the funding of public sector activities. Finally, the paper estimates the impact of shocks to macroeconomic variables on loan portfolio quality and bank capital.
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Policy Research Working Paper WPS6314 JAN 01, 2013
This paper describes stylized facts about internal migration and the labor force in Egypt, and shows how internal migration in the country is low compared with international standards.
... See More + Using aggregate labor force survey data, the paper shows how individuals migrate to governorates with higher wages. With a Mincerian equation, the analysis finds that migrants earn premiums with respect to non-migrants, except for those migrants with low education levels. The aggregate labor statistics reveal lower unemployment rates among migrants, a phenomenon that is verified by an employment equation. According to the econometric results, migrants are more likely to be employed, even after controlling for other observable individual characteristics. Finally, the paper estimates a Probit model for the decision to migrate, finding that more educated individuals are more likely to migrate, agricultural workers have a lower probability of migrating, and individuals from governorates in which food production for own consumption is higher are less likely to migrate. These results suggest that low educational attainment and the "food problem", which ties resources to food production to meet subsistence requirements, are at the root of low migration in Egypt.
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Policy Research Working Paper WPS6166 AUG 01, 2012
Bank credit to Egypt's private sector decreased over the last decade, despite a recapitalized banking system and high rates of economic growth.
... See More + Recent macro-economic turmoil has reinforced the trend. This paper explains the decrease based on credit supply and demand considerations by 1) presenting stylized facts regarding the evolution of the banks' sources and fund use in 2005 to 2011, noting two different cycles of external capital flows, and 2) estimating private credit supply and demand equations using quarterly data from 1998 to 2011. The system of simultaneous equations is estimated both assuming continuous market clearing and allowing for transitory price rigidity entailing market disequilibrium. The main results are robust to the market clearing assumption. During the global financial crisis, a significant capital outflow stalled bank deposit growth, which in turn affected the private sector's credit supply. At the same time, the banking sector increased credit to the government. Both factors reduced the private sector's credit supply during the period under study. After the trough of the global crisis, capital flowed back into Egypt and deposit growth stopped being a drag on the supply side, but bank credit to the government continued to drive the decrease in the private sector's credit supply. Beginning in the final quarter of 2010, capital flows reversed in tandem with global capital markets, and in January 2011 the popular uprising that ousted President Hosni Mubarak added an Egypt-specific shock that accentuated the outflow. Lending capacity dragged again, accounting for 10 percent of the estimated fall in private credit. Credit to the government continued to drain resources, accounting for 70 - 80 percent of the estimated total decline. Reduced economic activity contributed around 15 percent of the total fall in credit. The relative importance of these factors contrasts with that of the preceding capital inflow period, when credit to the government accounted for 54 percent of the estimated fall, while demand factors accounted for a similar percentage.
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Policy Research Working Paper WPS6094 JUN 01, 2012
The paper estimates the rates of return to investment in education in Egypt, allowing for multiple sources of heterogeneity across individuals.
... See More + The paper finds that, in the period 1998-2006, returns to education increased for workers with higher education, but fell for workers with intermediate education levels; the relative wage of illiterate workers also fell in the period. This change can be explained by supply and demand factors. On the supply side, the number workers with intermediate education, as well as illiterate ones, outpaced the growth of other categories joining the labor force during the decade. From the labor demand side, the Egyptian economy experienced a structural transformation by which sectors demanding higher-skilled labor, such as financial intermediation and communications, gained importance to the detriment of agriculture and construction, which demand lower-skilled workers. In Egypt, individuals are sorted into different educational tracks, creating the first source of heterogeneity: those that are sorted into the general secondary-university track have higher returns than those sorted into vocational training. Second, the paper finds that large-firm workers earn higher returns than small-firm workers. Third, females have larger returns to education. Female government workers earn similar wages as private sector female workers, while male workers in the private sector earn a premium of about 20 percent on average. This could lead to higher female reservation wages, which could explain why female unemployment rates are significantly higher than male unemployment rates. Formal workers earn higher rates of return to education than those in the informal sector, which did not happen a decade earlier. And finally, those individuals with access to technology (as proxied by personal computer ownership) have higher returns.
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Policy Research Working Paper WPS5740 JUL 01, 2011
The paper analyzes the impact of the recent global crisis in the context of the previous two decades' growth and capital flows. Growth decomposition exercises show that Egyptian growth is driven mostly by capital accumulation.
... See More + To estimate the share of labor in national income, the analysis adjusts the national accounts statistics to include the compensation of self-employed and non-paid family workers. Still, the share of labor, about 30 percent, is significantly lower than previously estimated. The authors estimate the output costs of the current crisis by comparing the output trajectory that would have prevailed without the crisis with the observed and revised gross domestic product projections for the medium term. The fall in private investment was the main driver of the output cost. Even if private investment recovers its pre-crisis levels, there is a permanent loss in gross domestic product per capita of about 2 percent with respect to the scenario without the crisis. The paper shows how the shock to investment is magnified due to the capital-intensive nature of the Egyptian economy: if the economy had the traditionally-used share of labor in income (40 percent), the output loss would have been reduced by half.
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Policy Research Working Paper WPS5451 OCT 01, 2010
This paper uses a sample of 73 developing countries to estimate the change in the cost of alleviating urban poverty brought about by the recent increase in food prices.
... See More + This cost is approximated by the change in the poverty deficit, that is, the variation in financial resources required to eliminate poverty under perfect targeting. The results show that, for most countries, the cost represents less than 0.1 percent of gross domestic product. However, in the most severely affected, it may exceed 3 percent. In all countries, the change in the poverty deficit is mostly due to the negative real income effect of those households that were poor before the price shock, while the cost attributable to new households falling into poverty is negligible. Thus, in countries where transfer mechanisms with effective targeting already exist, the most cost-effective strategy would be to scale up such programs rather than designing tools to identify the new poor.
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Policy Research Working Paper WPS4666 JUL 01, 2008
Dessus, Sebastien; Herrera, Santiago; de Hoyos, RafaelDisclosed
Recent estimates of the welfare cost of consumption volatility find that it is significant in developing nations, where it may reach an equivalent of reducing consumption by 10 percent per year.
... See More + Hence, examining the determinants of consumption volatility is of utmost relevance. Based on cross-country data for the period 1960-2005, the paper explains consumption volatility using three sets of variables: one refers to the volatility of income and the persistence of income shocks; the second set of variables refers to policy volatility, considering the volatility of public spending and the size of government; while the third set captures the ability of agents to smooth shocks, and includes the depth of the domestic financial markets as well as the degree of integration to international capital markets. To allow for potential endogenous regressors, in particular the volatility of fiscal policy and the size of government, the system is estimated using the instrumental variables method. The results indicate that, besides income volatility, the variables with the largest and most robust impact on consumption volatility are government size and the volatility of public spending. Results also show that deeper and more stable domestic financial markets reduce the volatility of consumption, and that more integrated financial markets to the international capital markets are associated with lower volatility of consumption.
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Policy Research Working Paper WPS4633 MAY 01, 2008
The recent discussion on the effect of the composition of government expenditure on growth has pointed at public spending on particular projects that remove bottlenecks for growth as a tool to spark virtuous circles of growth-debt burden reduction.
... See More + The economic rate of return of these projects will be significantly higher than that of alternative uses of public funds and the economic analysis of projects should be the device to do the screening. Going beyond the rate of return estimation for individual projects, and extending the approach to public expenditure programs can have impacts on growth through various channels. The channels through which the economic analysis of projects may affect growth are both macro and micro. At the macro level, the economic analysis of projects of the whole public investment program will lead to increased productivity of public capital. Since the contribution of capital to growth depends on its productivity, then higher productivity of capital will imply higher growth rates. Despite the alleged benefits of economic analysis, its practice in the Bank is losing ground. This short note presents some stylized facts of the evolution of the economic rate of return (ERR) of World Bank projects and proposes a work program oriented to revive the practice and enhance the quality of economic analysis in the World Bank. The note is divided in three sections. The first one presents stylized facts of the ERR across time and across sectors. The second one presents some of the main objection and possible explanations for the disuse of the method. The third one proposes the work program.
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The authors explain Latin America's growth slowdown in 1998-1999. To do so, they use two complementary methodologies. The first aims at determining how much of the slowdown can be explained by specific external factors: the terms of trade, international interest rates, spreads on external debt, capital flows, and climatological factors (El Nino).
... See More + Using quarterly GDP data for the eight largest countries in the region, the authors estimate a dynamic panel showing that 50-60 percent of the slowdown was due to these external factors. The second approach allows for effects on output by some endogeneous variables, such as domestic real interest rates, and real exchange rates. Using monthly industrial performance data, the authors estimate country-specific generalized vector auto-regressions (GVAR) for the largest countries. They find that during the sample period (1992-98) output volatility is mostly associated with shocks to domestic factors, but the slowdown in the sub-period 1998-99 is explained more than 60 percent by shocks to the external factors.
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Policy Research Working Paper WPS2333 MAY 31, 2000
Herrera, Santiago; Perry, Guillermo; Quintero, Neile
