Major resource discoveries have transformed growth prospects for many low-income countries. However, the sharp downturn in commodity prices in recent years is affecting resource investment in these countries, and may delay the development of recent discoveries into production.
... See More + This study investigates lead times from discovery to production for a unique data set of gold and copper discoveries worldwide during 1950-2014. The study employs standard parametric and nonparametric duration analysis. The results suggest an important role for copper prices; for instance, an upswing at the time of discovery can hasten the development of the mine by two to three years in low-income countries. There appears to be a similarly beneficial impact on lead times of sounder macroeconomic policies and quality of governance.
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Policy Research Working Paper WPS7823 SEP 15, 2016
This report's focus is making global value chains (GVCs) more inclusive. To achieve inclusiveness is by overcoming participation constraints for Small and Medium Enterprises (SMEs) and facilitation access for Low Income Developing Countries (LIDCs).
... See More + The underlying assumption is that most firms in LIDCs are SMEs. Even larger firms in LIDCs are likely to face similar challenges to SMEs, including a less supportive domestic operating environment and weaker institutions that lead to higher fixed costs and challenges to compete on the international markets. The two major points of this report are (1) participation in GVCs is heterogeneous and uneven, across and within countries, and (2) available data and survey-based evidence suggest that SMEs’ participation in GVCs is mostly taking place through indirect contribution to exports, rather than through exporting directly. The report makes the case that policy action, at the national and multilateral level, can make a difference in achieving more inclusive GVCs through: a holistic approach to reform spanning trade, investment, and domestic policies countries and investments in expanding the statistical base and analysis of GVCs and in sharing knowledge on best practices on enabling policies and programs. The report elaborates on three broad areas of recommendations: (1) establishing a trade and investment action plan for inclusiveness defining clear and achievable objectives on trade and investment policy and identifying the necessary complementary domestic policy actions; (2) complementing trade, investment, and domestic policy actions by providing the needed political leadership and support to enhance collaboration across the sectors, and establishing global platforms for sharing best practices; and (3) providing political support for the establishment of a multi-year plan to expand and upgrade the statistical foundation necessary to increase the capacity of all countries to identify and implement policies that can contribute to stronger, more inclusive and sustainable growth and development, globally.
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The World Bank Group (WBG) endorsement of the Country Partnership Strategy (CPS) in June2013 coincided with Croatia’s membership as the 28th country to join the European Union.
... See More + (EU). Theprogram supported Croatia’s efforts to maximize the benefits of EU accession, including access to European Structural and Investment Funds and opportunities to strengthen institutions. The FY14-17 CPS focused squarely on the most pressing challenges to improving the country’s growth prospects: the need for fiscal adjustment and to enhance competitiveness. At the time of the CPS, the challenges facing the Croatian economy required a strong structural reform agenda and ownership, including to meet EU Country Specific Recommendations (CSR), which proved to be increasingly difficult in the lead up to the political transition. The WBG program supported government efforts first with the ERDPL2, and also through analytical work. Croatia’s economic fundamentals have improved since the approval of the CPS and economic growth returned in 2015 for the first time since the 2008 crisis. The expectation is that growth will continue at a gradual pace, however advances on structural reforms will depend on political developments, including the results of upcoming snap elections, called for by the Croatian Parliament. The WBG program articulated in the CPS is on track to deliver results by the end of the FY14-17 period. The Performance Learning Review (PLR) introduces some modest adjustments to define expected outcomes with greater precision. Given a thorough understanding of development challenges and constraints could help Croatia unleash its full growth potential, the WBG will focus efforts during theremaining year of implementation on the preparation of the Systemic Country Diagnostic (SCD). The SCD will provide an input for informing national policies, lay the foundation for the future Country Partnership Framework (CPF), and allow for a tighter alignment of the WBG program with the Twin Goals.
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Country Assistance Strategy Document 106507 AUG 10, 2016
Against the background of continued growth disappointments, depressed inflation expectations, and declining real equilibrium interest rates, a number of central banks have implemented negative interest rate policies (NIRP) to provide additional monetary policy stimulus over the past few years.
... See More + This paper studies the sources and implications of NIRP. It reports four main results. First, monetary transmission channels under NIRP are conceptually analogous to those under conventional monetary policy but NIRP present complications that could limit policy effectiveness. Second, since the introduction of NIRP, many of the key financial variables have evolved broadly as implied by the standard transmission channels. Third, NIRP could pose risks to financial stability, particularly if policy rates are substantially below zero or if NIRP are employed for a protracted period of time. Potential adverse consequences include the erosion of profitability of banks and other financial intermediaries, and excessive risk taking. However, there has so far been no significant evidence that financial stability has been compromised because of NIRP. Fourth, spillover implications of NIRP for emerging market and developing economies are mostly similar to those of other unconventional monetary policy measures. In sum, NIRP have a place in a policy maker’s toolkit but, given their domestic and global implications, these policies need to be handled with care to secure their benefits while mitigating risks.
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Policy Research Working Paper WPS7791 AUG 10, 2016
South Africa is under threat of a downgrade to its sovereign credit rating since Standard and Poors(S&P) lowered its foreign-currency long-term credit rating from BBB to BBB- in June 2014, with Fitch following suit in December 2015.
... See More + Moody’s,the third major global rating agency, maintained South Africa’s credit rating one notch above S&P and Fitch, or two notches above sub-IG. With economic growth continuing to slow and perceptions of high policy uncertainty, some observers expected S&P or Fitch to remove South Africa’s high-prized investment grade credit rating during the rating review that ended in June 2016. Instead, both raters (including Moody’s) confirmed their previous assessments. While the ghost of a down grade has been banished for now it will continue to haunt South Africa until the next rating decision of S&P and Fitch in December 2016. This Note explores what would likely have happened if South Africa had been downgraded to sub-IG by S&P or Fitch (or both) in June 2016,focusing on short-term government borrowing costs. To this end it applies the findings of the authors’ recent analysis of rating downgrades in a country panel to the specific case of South Africa. This application comes with a number of important caveats. First, there have in fact only been relatively few events of sovereign downgrades to sub-IG and many of themoccurred in the recent past. The analysis appliedin this Note thus builds on insights from a relatively limited number of countries, resulting inpotentially large margins of error. Second, SouthAfrican public debt is predominantly denominated in local currency (88 percent) and the effects of a downgrade of the foreign-currency rating may be less pronounced in this case than in the other countries that the analysis derives its estimates from (South Africa’s local currency credit rating by S&P remains two notches above the foreigncurrency one).Third, data coverage restricted the country panel to interest maturities of less than one year: Treasury-bills (or T-bills). Risk premia are more pronounced in longer-maturity debt instruments,so the study is likely to underestimate the effects of rating downgrades to the extent that agovernment relies on longer-term bonds to finance its obligations. In South Africa’s 2016 Budget, T-bills only account for 16 percent of the government’s borrowing requirements for the fiscal year 2016/17. Given these caveats, the results presented in this Note should be considered with caution: there remains considerable uncertainty as to what would happen if South Africa was downgraded to sub-IG.
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The World Bank Monthly Operational Summary (MOS) reports on the status of projects in the World Bank’s pipeline from the time the operation is identi-fied to the signing of the Loan, Credit, or Grant Agreement.
... See More + It is a detailed accountings of the pro-jects included in the country lending programs that are actively being prepared for implementation. The lending programs reflect the Bank’s strategy for each member country as set out in the Country Partnership Framework (CPF) presented to the Board of Executive Directors of the World Bank. On average, it takes about 13 months for the Bank to process a pro-ject from concept to approval. After a financing agreement is signed or a project is dropped from the program, the project entry is deleted from this sum-mary. Each issue of the summary contains a list of projects reported for the first time and the list of pro-jects deleted from the current issue. Program. Familiarity with the Bank’s project cycle, summarized in the following paragraphs, can help potential bidders identify business opportunities with Bank borrowers. Each entry in the MOS indicates at what point the operation is in the project cycle.
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The World Bank Monthly Operational Summary (MOS) reports on the status of projects in the World Bank’s pipeline from the time the operation is identi-fied to the signing of the Loan, Credit, or Grant Agreement.
... See More + It is a detailed accountings of the pro-jects included in the country lending programs that are actively being prepared for implementation. The lending programs reflect the Bank’s strategy for each member country as set out in the Country Partnership Framework (CPF) presented to the Board of Executive Directors of the World Bank. On average, it takes about 13 months for the Bank to process a pro-ject from concept to approval. After a financing agreement is signed or a project is dropped from the program, the project entry is deleted from this sum-mary. Each issue of the summary contains a list of projects reported for the first time and the list of pro-jects deleted from the current issue. Program. Familiarity with the Bank’s project cycle, summarized in the following paragraphs, can help potential bidders identify business opportunities with Bank borrowers. Each entry in the MOS indicates at what point the operation is in the project cycle.
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This paper builds on recent research examining the impact of finance on growth, looking at the effect of the financial system on volatility in gross domestic product per capita and consumption per capita growth.
... See More + It also examines the impact of credit on the composition of growth. The findings show that financial development smooths growth in gross domestic product and consumption per capita, but only up to a point. At high levels of credit, further credit is positively associated with volatility even after controlling for the quality of institutions and periods of financial crises. In large financial systems, finance may not help individuals smooth consumption volatility. The threshold at which finance's effect may be volatility enhancing may be lower than previously thought. In terms of the impact on growth, total credit (and credit to firms) has a nonlinear relationship, with rising credit supporting higher growth up to a point, beyond which the additional impact of finance on growth is negative. This can be explained by finance flowing into less productive activities (or drawing other resources into less productive activities). In addition, household credit is negatively related to manufacturing sector growth, although credit to firms has a positive relationship to manufacturing growth. This may be explained by the fact that much of household credit is used to finance the consumption (including imports) of goods and services broadly (not just manufacturing sector goods) or investment in housing.
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Policy Research Working Paper WPS7723 JUN 21, 2016
Deepening real and financial integration of developing countries into the world economy has prompted renewed interest in the contribution of external shocks to their macroeconomic fluctuations.
... See More + This paper revisits the issue using four decades of annual data for a large sample of developing countries. The paper implements a conditionally-homogeneous panel vector autoregression with exogenous variables to model GDP fluctuations in these countries. It uses sign restrictions to identify four external structural shocks -– demand, supply, monetary, and commodity shocks -– and analyzes how their impact on growth is shaped by countries' policy and structural framework. External shocks are found to account for a small share of the forecast error variance of GDP, especially at short horizons. However, their contribution has been on the rise in recent decades. Further, global monetary shocks have become the leading external source of GDP volatility in developing countries. The paper presents a quantitative assessment of the effects of real and financial opening up, as well as those of commodity specialization, on the impact of external shocks on GDP. The results suggest that increasing openness can account for the increasing trend in the volatility attributable to external shocks, as well as the changing roles of different shocks. Moreover, commodity-intensive developing countries are found to be more vulnerable than the rest to all types of external shocks, not just commodity shocks.
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Policy Research Working Paper WPS7711 JUN 20, 2016
Linkages between the real and financial sectors in an economy can lead to a buildup of balance sheet mismatches of key entities—corporates, financial institutions, households, and the public sector.
... See More + Once such imbalances have built up, they can make the economy vulnerable to macroeconomic shocks, whether external or domestic in origin. This paper discusses the key mismatches that can make entities vulnerable to shocks and how such vulnerability can build up during the business cycle. Against this backdrop, the paper then discusses a framework and potential indicators that may be useful to monitor such developments. These indicators are being developed as part of the MFM macro-financial monitoring effort. The paper is organized as follows. Section two provides a brief discussion of the risks associated with these different balance sheet mismatches. Section three discusses how positive shocks in the real sector—such as an upturn in domestic business cycles (which in turn are often instigated or accompanied by external developments such as capital inflows)—can interact with the financial sector and lead to a build-up of balance sheet mismatches. Section four then describes how, once such vulnerability has been built up, a negative shock can lead to a downward spiral of credit contraction and economic downturns. Finally, section five discusses a possible set of indicators for measuring the buildup of vulnerability.
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Brazilian labor markets have performed very strongly for most of the last 15 years, with dramatic increases in the employment rate of unskilled workers and significant declines in the overall unemployment rate.
... See More + However, the economic and political developments and fiscal crisis of the last sixteen months in Brazil have resulted in a substantial decline in the rate of economic activity , a dramatic slowdown in the rate of new job creation a devaluation of the domestic currency and increasing concerns about the sustainability of the gains in poverty reduction and inequality accomplished during the years of the commodity boom. The decline in economic activity has raised concerns again about increasing unemployment rates, and the extent to which these developments will have an adverse impact on specific age and gender groups. Efforts to maintain or increase the proportion of the population employed in the aggregate or within any specific demographic group must take into consideration how the unemployment rate and the labor force participation rate of the group vary with changes in the level of economic activity. The sensitivity of the proportion of the population employed to changes in the level of aggregate demand is a key parameter informing the design of an appropriate and effective labor market policy. Specifically, teenagers and young women between 20-34 years of age comprise only 25 percent of the adult population, but they account for more than 50 percent of the cyclical variation in employment. In contrast, adult men between 26 and 64 years of age, who comprise 32.6 per cent of the population in the US account for only 23.6 percent of the change in the cyclical variation in employment. Estimates of the sensitivity of the proportion of the population employed to changes in the level of aggregate demand based on data from recent years that reflect the prevailing structural relationships between labor demand and employment and labor supply, labor force participation and unemployment are more useful for predicting how labor force participation is likely to react to the downturn in economic activity since the end of the commodity boom and the onset of the economic crisis in Brazil. The purpose of this paper is to examine two inter-related questions about the behavior of the labor market in Brazil. The first question is about the direction and sensitivity of the labor force participation rate, and the employment rate to changes in the level of aggregate demand. The second question relates to the differences in the cyclical sensitivity of these key variables across age and gender groups.The next section of the paper discusses the recent macroeconomic context, and some of the limitations associated with using Pesquisa Nacional por Amostra de Domicílios (PNAD) data to predict changes in the on the labor force participation rate of different age gender and skill groups during the crisis. Section 3 discusses the data and the model used
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Do countries more exposed to macroeconomic volatility grow less than more stable nations? Are profligate governments more likely to exacerbate volatility?
... See More + What about the role of the financial sector; are volatility, growth, government spending, and financial development correlated? Recent research reported confirms that an increase in volatility results in lower gross domestic product (GDP) growth and that the negative impact of volatility on growth is more pronounced in less financially developed countries and in countries where fiscal policy is more pro-cyclical. The challenges associated with macroeconomic volatility, smaller size, lack of scale economies, less diversified production structure, and tighter financial and fiscal constraints.
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This paper analyzes the business cycle characteristics of the economies of the Organization of Eastern Caribbean States using a model of a small open economy subject to interest rate and fiscal expenditure shocks and financial frictions.
... See More + The paper shows that macroeconomic aggregates in this region are quite volatile, with consumption exhibiting higher volatility than gross domestic product. The analysis also finds that in these economies real interest rates are highly volatile and strongly countercyclical with gross domestic product and other macroeconomic aggregates. Similarly, fiscal expenditures show significant volatility, but are pro-cyclical with gross domestic product. The results suggest two major directions for designing policies to help reduce the volatility experienced by the Organization of Eastern Caribbean States economies. First, Organization of Eastern Caribbean States countries should seek a greater openness to international financial markets, which could help them smooth out the effects of fundamental shocks, such as shocks to technology and terms of trade, and shocks associated with natural hazards. However, this removal of international financial barriers needs to be accompanied by improvements in domestic financial conditions, as this would reduce the vulnerability of these economies to country risk premium shocks. Second, the Organization of Eastern Caribbean States region should try harder to move toward a countercyclical fiscal policy stance, as this could help to stabilize the domestic risk premium and cushion the negative effects of interest rate shocks on economic activity, hence reducing volatility.
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Policy Research Working Paper WPS7545 JAN 27, 2016
The World Bank has used an income classification to group countries for analytical purposes for many years. Since the present income classification was first introduced 25 years ago there has been significant change in the global economic landscape.
... See More + As real incomes have risen, the number of countries in the low income group has fallen to 31, while the number of high income countries has risen to 80. As countries have transitioned to middle income status, more people are living below the World Bank's international extreme poverty line in middle income countries than in low income countries. These changes in the world economy, along with a rapid increase in the user base of World Bank data, suggest that a review of the income classification is needed. A key consideration is the views of users, and this paper finds opinions to be mixed: some critics argue the thresholds are dated and set too low; others find merit in continuing to have a fixed benchmark to assess progress over time. On balance, there is still value in the current approach, based on gross national income per capita, to classifying countries into different groups. However, the paper proposes adjustments to the methodology that is used to keep the value of the thresholds for each income group constant over time. Several proposals for changing the current thresholds are also presented, which it is hoped will inform further discussion and any decision to adopt a new approach.
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Policy Research Working Paper WPS7528 JAN 04, 2016
This paper presents estimates of the effects that terms of trade volatility has on growth of real gross domestic product per capita. Based on five-year non-overlapping panel data comprising 175 countries during 1980–2010, the paper finds that: (i) in model specifications that do not include country fixed effects, terms of trade volatility has a significant negative average effect on economic growth; (ii) once country fixed effects are included in the model, the average effect of terms of trade volatility on economic growth is not significantly different from zero; (iii) robust to the inclusion of country fixed effects, terms of trade volatility has significantly adverse effects on economic growth in countries with pro-cyclical fiscal policy; and (iv) in model specifications that do not include country fixed effects, financial development is a significant mediating factor with regard to the effect that terms of trade volatility has on economic growth, however, the significance of this effect vanishes once country fixed effects are included in the model.
... See More + The paper also explores these relationships for the Organization of Eastern Caribbean States region. A key conclusion from the research is that countercyclical fiscal policy and deeper financial markets will have particularly high payoffs in reducing the adverse growth effects of terms of trade volatility in the Organization of Eastern Caribbean States region.
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Policy Research Working Paper WPS7507 DEC 03, 2015