Showing papers by "World Institute for Development Economics Research published in 2006"

FDI and Growth: What Causes What?

Abstract: This paper examines the causal relationship between FDI and economic growth by using an innovative econometric methodology to study the direction of causality between the two variables. We apply our methodology, based on the Toda-Yamamoto test for causality, to time-series data covering the period 1969–2000 for three developing countries, namely Chile, Malaysia and Thailand, all of them major recipients of FDI with a different history of macroeconomic episodes, policy regimes and growth patterns. Our empirical findings clearly suggest that it is GDP that causes FDI in the case of Chile and not vice versa, while for both Malaysia and Thailand, there is a strong evidence of a bi-directional causality between the two variables. The robustness of the above findings is confirmed by the use of a bootstrap test employed to test the validity of our results.

Controversies over the impact of development aid: it works; it doesn't; it can, but that depends …

Abstract: This paper surveys five decades of empirical research on the macroeconomic impact of aid, looking mainly at studies examining the link between aid and growth. It argues that studies dating until the late 1990s produced either contradictory or inconclusive results. Aid either worked, or it didn't, according to this research. The paper then highlights a major shift in the literature that coincided with the release of the World Bank's Assessing Aid: What Works, What Doesn't and Why. Practically, all research published since that report agrees with its general finding that aid works to the extent that in its absence, growth would be lower. One controversy may therefore have been settled. Yet, as shown in this paper, the report has set-off an intense debate over the context in which aid works. That debate centres on whether the effectiveness of these inflows depends on the policy regime of recipient countries. Some possible avenues through which the heat might be taken out of this debate are considered. Copyright © 2006 John Wiley & Sons, Ltd.

How successful is the dual income tax? : evidence from the Finnish tax reform of 1993

Abstract: Dual income tax systems have become increasingly popular; yet, relatively little is known about the consequences of implementing such tax systems. This paper uses a representative panel of taxpayers from the 1993 Finnish tax reform to measure how overall taxable income and the relative shares of capital income and labour income reacted to the reform. The Finnish tax re- form appears to be particularly suitable for analysing the effect of separating labour and capital income tax bases. The reform radically reduced the marginal tax rates on capital income to some, but not all, taxpayers, while the taxation of labour income was not reformed at the same time. We find that the reform led to a small positive impact on overall taxable income, but part of the positive response was probably offset by income shifting among the self-employed.

Aid Disaggregation and the Public Sector in Aid-Recipient Economies: Some Evidence from Cote D’Ivoire

Abstract: The present paper examines the impact of different aid types, namely project aid, program aid, technical assistance, and food aid on the fiscal sector of the aid-recipient economy by using time-series data for Cote d’Ivoire over the period 1975–99. Our empirical results show that when a single value (or aggregated) for aid is used, foreign aid is fully consumed in the case of Cote d’Ivoire. However, results obtained under the assumption of aid heterogeneity clearly suggest that the government responds differently according to the nature of the aid inflows. Our approach tries to illuminate the response of the aid-recipient government to different categories of foreign aid inflows and the empirical findings clearly demonstrate the importance of the aid disaggregation approach for delving deeper into aid effectiveness issues.

Exchange Rates and Competition for FDI in Asia

Abstract: This paper argues that relative exchange rates between the host countries of foreign direct investment affect their competition for FDI. Specifically, if the host country currency appreciates against the source country's currency more than that of its rival, FDI inflows of the host country will decrease, while FDI inflows increase in the rival country. Using the data of Japanese FDI in nine Asian manufacturing sectors from 1981 to 2002, the paper examines the hypothesis in the context of the competition between China and ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand). Empirical results show that the relative exchange rate is a statistically significant factor that determines the relative inflows of Japanese FDI for manufacturing as a whole, and for such sub-sectors as textiles, food, electronics, transportation equipment, and others. Exchange rate policies of China and ASEAN-4 played a critical role in dynamically reshaping the geographic distribution of Japanese FDI in Asia.

Private Investment and Financial Development in a Globalized World

Abstract: Using recently developed panel data techniques on data for 43 developing countries over the period 1970-98, this paper provides an exhaustive analysis of casuality between aggregate private investment and financial development. GMM estimation on averaged data, and a common factor approach on annual data allowing for cross country error dependence and heterogeneity across countries, suggest positive causal effects going in both directions. The findings have rich implications for the development of financial markets and the conduct of macroeconomic policies in developing countries in an integrated global economy.

An Empirical Analysis of Household Vulnerability in Rural China

Abstract: Based on a set of household survey data, this paper is among the first to analyze vulnerability in rural China. In particular, cohort analysis is introduced to explore the relationship between vulnerability and diversification and the education–vulnerability nexus. Empirical results indicate that, contrary to earlier findings, diversification into non-agriculture activities is found to exert little effects on vulnerability, and that education is an important determinant of vulnerability in rural China.

Will Political Liberalization Bring About Financial Development

Abstract: This paper studies the effect of political liberalisation on financial development in two steps. First, the paper examines whether political liberalisation in terms of institutional improvement promotes financial development, using a panel dataset of 90 developed and developing countries over 1960-99. The empirical evidence reveals a positive effect on financial development at least in the short-run, particularly for lower-income countries, ethnically divided countries and French legal origin countries. In the second part of the paper, a before-after event study approach is used to explore the impact of democratic transitions on financial development. It indicates that a democratic transformation is typically followed by an increase in financial development.

Fuzzy Well-being Achievement in Pacific Asia

Abstract: This paper develops a framework that uses fuzzy-set theory to measure human well-being. Fuzzy sets allow for gradual transition from one state to another while also allowing one to incorporate rules and goals, and hence are more appropriate for measuring outcomes that are ambiguous. Such ambiguity is an inherent characteristic of cross-country achieved well-being assessments. This framework is used to provide a fuzzy representation of the well-known Human Development Index (HDI) and its three components. Fuzzy HDI estimates for 14 Pacific Asian countries are provided and compared with non-fuzzy estimates. Quite large differences in rankings emerge. The paper concludes by suggesting that fuzzy measures should be used more widely to measure achieved well-being outcomes.

Trade liberalisation and trade performance in the Dominican Republic

Abstract: During the 1990s the Dominican Republic managed its transition to a more open trade regime by eliminating non-tariff barriers, simplifying the tariff structure and reducting the rates of duties. Using this information the study examines trade liberalisation's impact on the Dominican Republic's trade dynamics. It finds that import and export growth increased as a result of liberalisation, even though exports' response is somewhat higher. Moreover, the paper estimates a one percentage point improvement in the trade balance to GDP ratio following liberalisation. Copyright © 2006 John Wiley & Sons, Ltd.

Economic Reform, Skill Formation and Foreign Capital

Abstract: Does trade liberalisation promote skill formation and positively influence the inflow of foreign capital in an economy? How do incentives offered to foreign capital affect skill formation and skilled-unskilled wage inequality? Is liberalisation of agricultural exports counterproductive to skill formation and foreign capital inflow in the economy? We try to capture these relationships between foreign capital and skill formation in a small open economy facing various exogenous shocks. Among other results, we show that import liberalisation increases skill formation and the inflow of foreign capital in the country. We explore the evolving state of the skilled-unskilled wage gap in a regime of greater skill formation.

Foreign Capital, Skill Formation, and Migration of Skilled Workers

Abstract: We study the interaction between foreign capital inflow and international migration of skilled labor when a small open economy is subject to exogenous shocks. The presence of a skill formation sector is central to our analysis, such that import liberalization and increased foreign capital inflow may lead to increased skill emigration both in absolute terms and as percentage of gross skill formation. Furthermore, a positive product price shock for the sector that uses foreign capital may turn out to be immiserizing. Finally, growth in the agricultural sector can lower the rate of skill formation as well as skill emigration.

HIV/AIDS, Human Capital, and Economic Growth Prospects for Mozambique

Abstract: This paper examines the implications of AIDS deaths for economic growth prospects for Mozambique. Human capital accumulation through education receives particular attention. Education and human capital transition matrices are estimated using a minimum cross entropy approach. Consistent with evidence from Tanzania and elsewhere, HIV/AIDS is assumed to slow the rate of human capital accumulation. Using a dynamic computable general equilibrium approach, reduced rates of human and physical capital accumulation are shown to interact strongly with technical change that is biased towards physical and human capital. The results point to the education sector as a major and policy sensitive channel of impact.

A Role for the International Finance Corporation in Intergrating Environmental and Human Rights Standards into Core Project Covenants: Case Study of the Baku-Tbilisi-Ceyhan Oil Pipeline Project

Abstract: The purpose of this paper is to argue that the International Finance Corporation (the member of the World Bank Group responsible for financing private-sector projects) can and should require inclusion of commitments regarding sustainable development and human rights in the legal covenants that often govern large private-sector investments. The Baku-Tbilisi-Ceyhan Pipeline Project illustrates both the risk of States being pressured by foreign investors wishing to obtain government guarantees that insulate their investment from risk, and the potential role multilateral lending institutions might play in limiting the detrimental effects of such imbalance in bargaining power. In this paper I explore the relationship (or lack thereof) between the legal framework underlying the Baku-Tbilisi-Ceyhan (BTC) oil pipeline project and the International Finance Corporation, and argue that the IFC would more effectively further its purported mission of promoting environmentally and socially sustainable development by requiring this legal framework to be compatible with the effective enforcement of evolving international environmental and human rights norms.

On the Political Economy of Financial Reform

Abstract: This paper studies what induces governments to undertake reforms aimed at financial development. Its starting point is Abiad and Mody (AER 95(1), 2005). Rather than their ordered logit technique, it uses a within groups approach allowing for error dependence across countries and over time. This paper finds that policy change in a country is negatively rather positively associated with its liberalization level, while the regional liberalization gap does not appear relevant. On the effects of shocks and crises, it argues that some of the Abiad and Mody (2005) findings are robust, but others are fragile. Furthermore, it claims that the extent of democracy is important for this analysis, and identifies a negative effect of the extent of democracy on policy reform.

Measuring non-economic well-being achievement

Abstract: It is common to treat human well-being as a multidimensional concept, enveloping diverse, separable or behaviourally distinct components, domains or dimensions (Finnis 1980; Nussbaum 1988; Sen 1990, 1993; UNDP 1990–2003; Doyal and Gough 1993; Galtung 1994; Cummins 1996; Qizilbash 1996; Stewart 1996; Narayan 2000; Alkire 2002, among many other studies).1 It is in particular thought to be a much richer or vital concept than economic well-being: much of the literature is justifiably emphatic about this point. Accordingly, there is a long history of efforts both to refocus attention away from the established, although invariably far less than perfect, monetary measures of national economic well-being achievement and to capture better non-economic well-being achievement. A plethora of indicators of national well-being achievement has been proposed for these purposes. Indicators of health and educational status are most widely-used in inter-country ordinal and cardinal assessments of national well-being achievement, and are now available for diverse samples of 160 or more countries (see UNDP 2003). Multidimensional indicators are also available for similar samples, based either solely or predominantly on these indicators, and include the Physical Quality of Life Index (PQLI) and the very well-known Human Development Index (HDI).

The Impacts of Growth and Inequality on Poverty Dynamics in China

Abstract: This paper analyzes the evolution of poverty in China from the late 1980s to the late 1990s, employing a version of Shapley decomposition tailored to unit-record household survey data. The changes in poverty trends are attributed to two proximate causes-income growth and shifts in relative income distribution. Different datasets, alternative poverty lines, poverty measures and equivalence scales are used to examine the robustness of the results. Despite some ambiguities in the results, it is consistently found that reduction in rural poverty occurred in the early 1990s, owing to both income growth and improved distribution. However, in the second half of 1990s, poverty reduction slowed down and even reversed occasionally, and adverse distributional changes are the main cause.

Political Constraints and Economic Reform: Empirical Evidence from the Post-Communist Transition in the 1990s

Abstract: Using data from transition economies, this paper examines linkages between political constraints and economic reforms. Estimation results suggest that progress in reform is positively associated with public support for reforms, which is affected by income inequality and expected individual performance during future reforms. These findings support influential theories that both ex post and ex ante political constraints are instrumental in determining the extent of progress in welfare-enhancing reforms. We also find evidence to support reform sequencing starting with a reform that is both popular and stimulatory to other reforms.

Globalization and Regional Income Inequality: Empirical Evidence from Within China

Abstract: China's recent accession to the WTO is expected to accelerate its integration into the world economy, which aggravates concerns over the impact of globalization on the already rising inter-regional income inequality in China. This paper discusses China's globalization process and estimates an income generating function, incorporating trade and FDI variables. It then applies the newly developed Shapley value decomposition technique to quantify the contributions of globalization, along with other variables, to regional inequality.

Values Under Siege: NAFTA, GATS, and the Propertization of Resources

Abstract: ‘Propertization’ is the process of increasing the legally protected ownership rights of private economic actors. Private property and freedom of contract are the legal underpinnings of a market economy, so it is no surprise that free trade agreements, adopted with the goal of expanding free market capitalism, implicitly ‘propertize’ resources. Each distinct arena of social space has its own regulative principles that govern social interactions and determine what is important within that field; the sphere of the family, the church, and the market/production economy are examples of different fields. The regulative principles within each field and the boundaries between fields are founded upon collectively shared doxa - the substratum of presuppositions that structure our cognitive maps. This article examines the constitutive mechanisms through which free trade agreements, specifically Chapter 11 of the North American Free Trade Agreement (NAFTA) and the General Agreement on Trade in Services (GATS), propertize resources. These legal agreements help constitute how resources are understood by (1) establishing the right of market alienability in relation to services which were not previously conceived of as market commodities, (2) including expected future profits in the “denominator” of protected property interests, and (3) privileging private property rights over competing norms.

China's Regional Inequality in Innovation Capability: 1995-2004

Abstract: Relying on a recently developed decomposition framework, this paper explores spatial distribution of innovation capability in China. It is found that at the regional level, China inequality in innovation capability increased from 1995 to 2004. At the prov

Well-being Achievement in Pacific Asia

Abstract: The world has undergone rapid and tremendous change in recent decades. While many nations have achieved ever-higher per capita incomes, and higher well-being according to traditional measures, they have also experienced profound internal change. This change has lead to widespread concerns regarding social exclusion, human security, levels of personal satisfaction and happiness. Other countries have faired much less well, as according to many well-being measures they are worse off than they were 10 or 20 years ago. Life expectancies, for example, have fallen dramatically in many countries and are likely to fall substantially in others. The incidence of income poverty is higher today in many countries than it was ten years ago. Worldwide, more than a billion people currently live on less than one dollar per day. Social science research on living standards, human well-being and quality of life has come a long way over recent years, altering in response to changing global conditions, new research priorities, new conceptualisations and improved data resources. Twenty five years ago, national well-being achievement comparisons relied very heavily, and in some circles exclusively, on measures of income per capita. The same exercise would today be based a range of indicators, including summary measures of human well-being such as the well-known Human Development Index (UNDP, 2005). This is consistent with the commonly accepted view that human well-being is best treated as a multidimensional concept along the lines advocated by Sen (1985, 1993), Stewart (1985), Doyal & Gough (1991), Ramsay (1992), Cummins (1996), Narayan et al. (2000) or Nussbaum (2000) and others, as summarised in Alkire (2002). This view tends not to reject the relevance of income based or economic measures per se, simply positing that there is more to well-being achievement than simply increasing incomes. The widespread acceptance that well-being is multidimensional has more recently been accompanied by another important recognition. This relates not so much to current levels of well-being, but to the likelihood of declines in future levels. This recognition has spawned a rapidly growing literature on what is now termed as ‘vulnerability’. The vulnerability literature has primarily been concerned with the likelihood of individuals falling below the poverty line, be it defined in terms of income, consumption or health. Among the influential early vulnerability studies are Ravallion (1998), Jalan & Ravallion (1998) and Dercon & Krishnan (1999), each of which distinguished between transient and chronic poverty.

Non-economic Well-being Achievement in Pacific Asia

Abstract: It is well known that income per capita and most widely reported non-economic well-being achievement measures are highly correlated among countries. Yet many countries exhibit higher achievement in the latter than predicted by the former. The reverse is true for many other countries. This paper commences by extracting the inter-country variation in a composite of three widely reported educational and health status indicators not accounted for by variations in income per capita. This extraction is interpreted inter alia as a measure of non-economic well-being. Using data for a sample of Pacific Asian countries, the paper then looks at correlations between this extraction and a number of new or less widely-used well-being measures, in an attempt to find the measure that best captures these achievements.