Showing papers in "Handbook of Development Economics in 2010"

Governance and Development

Abstract: In this chapter, we discuss whether or not “governance” is an important source of variation in development experiences We draw four main conclusions First, governance is best thought of a subset of “institutions” and as such emphasis on governance is consistent with much recent academic work Nevertheless, governance is a quite vague rubric which is difficult to unbundle Second, the governance of a society is the outcome of a political process and as such is closely related to the literature on the political economy of development Third, improving governance necessitates understanding the nature of the entire political equilibrium Finally, an important research frontier is understanding the forces that create or impeded endogenous changes in governance

Access to finance

Abstract: Expanding access to financial services holds the promise to help reduce poverty and spur economic development. But, as a practical matter, commercial banks have faced challenges expanding access to poor and low-income households in developing economies, and nonprofits have had limited reach. We review recent innovations that are improving the quantity and quality of financial access. They are taking possibilities well beyond early models centered on providing “microcredit” for small business investment. We focus on new credit mechanisms and devices that help households manage cash flows, save, and cope with risk. Our eye is on contract designs, product innovations, regulatory policy, and ultimately economic and social impacts. We relate the innovations and empirical evidence to theoretical ideas, drawing links in particular to new work in behavioral economics and to randomized evaluation methods.

Trade, Foreign Investment, and Industrial Policy for Developing Countries*

Abstract: In this chapter we explore the popular but controversial idea that developing countries benefit from abandoning policy neutrality vis-a-vis trade, FDI and resource allocation across industries. Are developing countries justified in imposing tariffs, subsidies, and tax breaks that imply distortions beyond the ones associated with optimal taxes or revenue constraints? We refer to this set of government interventions as “industrial policy.” We explore the theoretical foundation for industrial policy and then review the related empirical literature. We follow this with a broader look at the empirical work on the relationship between trade and FDI and growth. In this review we find no support for “hard” interventions that distort prices to deal with Marshallian externalities, learning by exporting, and knowledge spillovers from FDI. Nevertheless, we still envision an important role for what we refer to as “soft” industrial policy. The goal is to develop a process whereby government, industry and cluster-level private organizations can collaborate on interventions to increase productivity. We suggest programs and grants to help particular clusters by improving the formation of skilled workers, technology adoption, regulation and infrastructure.

Property rights and economic development

Abstract: This chapter develops a unified analytical framework, drawing on and extending the existing literature on the subject, for studying the role of property rights in economic development. It addresses two fundamental and related questions concerning the relationship between property rights and economic activity. (i) What are the mechanisms through which property rights affect economic activity? (ii) What are the determinants of property rights? In answering these, it surveys some of the main empirical and theoretical ideas from the extensive literature on the topic.

Aid and Conditionality

Abstract: This chapter examines the conditions under which foreign aid will be effective in raising growth, reducing poverty, and meeting basic needs in areas such as education and health. The primary aim is not to draw policy conclusions, but to highlight the main questions that arise, the contributions of the academic literature in addressing them, and the areas where much remains unknown. After describing some key concepts and trends in aid, the chapter examines the circumstances under which aid might transform productivity, and when it can achieve things that private capital flows cannot. The chapter reviews the relevant theory and evidence. Next, it turns to some of the other considerations that might form part of a structural model linking outcomes to aid. These include Dutch Disease effects, the fiscal response to aid, and the important connections between aid and governance, both positive and negative. The second half of the chapter examines when donors should attach conditions to aid. It reviews the debates on traditional policy conditionality, and potential alternatives, including the ideas underpinning the new “partnership” model. This model gives greater emphasis to a combination of autonomy and accountability, for countries where governance is strong. In other cases, donors may seek to attach conditions based on governance reform, and introduce new versions of traditional policy conditionality. The chapter also discusses controversies over the appropriate role of country ownership of aid programs. It goes on to discuss some donor failings, the future roles of randomized trials and evaluation, and the scope for aid to meet basic needs. The chapter ends with a discussion of some of the most innovative ideas for the reform of aid, and a summary of the main conclusions.

Financial globalization and economic policies

Abstract: We review the large literature on various economic policies that could help developing economies effectively manage the process of financial globalization. Our central findings indicate that policies promoting financial sector development, institutional quality, and trade openness appear to help developing countries derive the benefits of globalization. Similarly, sound macroeconomic policies are an important prerequisite for ensuring that financial integration is beneficial. However, our analysis also suggests that the relationship between financial integration and economic policies is a complex one and that there are unavoidable inherent tensions in evaluating the risks and benefits associated with financial globalization. In the light of these tensions, structural and macroeconomic policies often need to be tailored to take into account country-specific circumstances to improve the risk-benefit tradeoffs of financial integration. Ultimately, it is essential to see financial integration not just as an isolated policy goal but also as part of a broader package of reforms and supportive macroeconomic policies.

International Migration and the Developing World

Abstract: In this chapter, I discuss the recent academic research on international migration, focusing on the causes and consequences of emigration from developing countries and the motivations behind the restrictions imposed by the developed countries on immigration. My aim is to identify facts about international migration relevant to those concerned about why labor moves between countries, how these movements affect the countries that send these laborers, and why the receiving countries are so selective about the immigrants that they admit.

Investment in Education—Inputs and Incentives*

Abstract: From the point of view of economic development, education is the acquisition of knowledge and skills through experiences from conception onwards over the life cycle that increase productivity broadly defined. Education can occur through, but is not limited to, formal educational activities such as preschool programs, schools, and formal training programs. The proximate determinants of education are experiences or inputs into knowledge and skills production functions. Within a dynamic forward-looking model of human capital investments, these experiences are determined sequentially by a series of family or individual decisions given past, current and expected future resources, markets, policies, and other institutions. The context in which these microinvestment demands are made, in turn, reflects decisions of suppliers of services that are explicitly related to education as well as of options that may be importantly related to education through other experiences, such as in labor markets. To understand the nature of inputs and incentives related to education in developing countries, attention must be paid to both the demand and the supply sides for investments in education, both of which are conditioned significantly by policy choices. Therefore, there are numerous important policy questions related to educational inputs and incentives. What are critical inputs into different educational processes? How important are various incentives for improving these inputs? How effective are various demand-side policies versus supply-side policies? How important are policies that have direct impact on input decisions versus policies that alter longer-run incentives to invest in current education through altering expected longer-run returns from such investments? What are the benefits relative to the resource costs of alternative policies for improving educational inputs? This chapter assesses the current state of empirical knowledge, and gaps in that knowledge, on educational incentives and inputs in developing countries as related to such questions.

Monetary and Exchange Rate Policies

Abstract: To the extent that they exert a critical influence on the macroeconomic environment, monetary and exchange rate policies (MERP) are relevant for development. However, the analytical economic literature often sees nominal variables as being irrelevant for the real economy, while the multiplicity of channels examined by the empirical literature complicates the task of deriving usable policy implications. Specifically, this chapter attempts to answer the following question: What exchange rate regime and monetary policy framework is more conducive to achieving development policy objectives in a particular country today, and why? We map the direct and indirect links from MERP to key development objectives, and discuss the main findings and how it relates with the empirical evidence to provide an up-to-date perspective of the policy debate and derive criteria for policy choices.

Preface: Development Policy and Development Economics: An Introduction*

Abstract: Publisher Summary Anyone who undertakes to produce a volume of surveys in economic development must confront the question: Does the world really need another one? The field changes over time and, one hopes, knowledge accumulates. So, one motive is the desire to cover the more recent advances. And indeed, economic development has been one of the most dynamic and innovative fields within economics in recent years. While one primary goal is to inform policy makers, it also hoped that the volume will assist scholars in designing research agendas that are informed by policy questions, in particular, by the gaps in knowledge that would speak to major policy issues. The development field has always been one in which the worlds of research and practice are in close relationship with each other and move in tandem. The large number of PhD economists who work in international organizations such as the World Bank and the influence of academia among developing-country officialdom ensure that ideas emanating from the ivory tower often find quick application. But equally important, in principle, is the reverse feedback—the need to tilt researchers' attention on the questions that are, or should be, on the policy agenda. The organization of the present volume around policy issues is designed to make a contribution toward both of these goals.

Postscript to “Financial Globalization and Economic Policies”

Abstract: Publisher Summary The global financial crisis serves as a reminder of the risks of financial globalization. After grappling with surges of capital inflows earlier in this decade, many emerging market and developing economies experienced a sharp reversal of those inflows in late 2008 as a result of the crisis. Moreover, international financial linkages clearly served as a channel transmitting the financial turmoil from advanced countries to the shores of emerging markets. These developments will re-ignite the fierce debate about the merits of financial globalization and its effects on growth and stability, especially for emerging market and developing countries. As the crisis is still unfolding, it is premature to undertake a detailed analysis of its implications for the debate on financial globalization. Nevertheless, there are two preliminary observations that are pertinent. First, the differential effects of the crisis across countries confirm that it is not just financial openness, but a country's structural features and its precrisis policy choices that have determined the crisis' overall impact on a country. Second, the crisis has not led to a resurgence of capital controls in emerging market economies. Recent research further emphasizes the important role of the composition of capital inflows in determining the extent of pain caused by the crisis on nonfinancial firms

Labor Regulations, Unions, and Social Protection in Developing Countries

Abstract: This chapter reviews what economists have learned about the impact of labor market institutions, defined broadly as government regulations and union activity on labor outcomes in developing countries It finds that:(1)Labor institutions vary greatly among developing countries but less than they vary among advanced countries Unions and collective bargaining are less important in developing than in advanced countries while government regulations are nominally as important(2)Many developing countries' compliance with minimum wage regulations produces spikes in wage distributions around the minimum in covered sectors Most studies find modest adverse effects of the minimum on employment so that the minimum raises the total income of low-paid labor(3)In many countries minimum wages spillover to the unregulated sector, producing spikes in the wage distributions there as well(4)Employment protection regulations and related laws shift output and employment to informal sectors and reduce gross labor mobility(5)Mandated benefits increase labor costs and reduce employment modestly while the costs of others is shifted largely to labor, with some variation among countries(6)Contrary to the Harris-Todaro two-sector model in which rural-urban migration adjusts to produce a positive relation between unemployment and wages across regions and sectors, wages and unemployment are inversely related by the wage curve (7)Unions affect nonwage outcomes as well as wage outcomes(8)Cross-country regressions yield inconclusive results on the impact of labor regulations on growth while studies of country adjustments to economic shocks, such as balance of payments problems, find no difference in the responses of countries by the strength of labor institutions(9)Labor institution can be critical when countries experience great change, as in China's growth spurt and Argentina's preservation of social stability and democracy after its 2001 2002 economic collapse Cooperative labor relations tend to produce better economic outcomes(10)The informal sector increased its share of the work force in the developing world in the past two decades The persistence of large informal sectors throughout the developing world, including countries with high rates of growth, puts a premium on increasing our knowledge of how informal sector labor markets work and finding institutions and policies to deliver social benefits to workers in that sector