Showing papers in "The World Bank Economic Review in 1989"

Saving in Developing Countries: Theory and Review

Abstract: In the literature on economic development, much of the interest in saving has been focused on the relation between saving and growth. But saving is not only about accumulation. It is about smoothing consumption in the face of volatile and unpredictable income, and helping to ensure the living standards of poor people whose lives are difficult and uncertain. This paper develops a model of households which cannot borrow but which accumulate assets as a buffer stock to protect consumption when incomes are low. Such households dissave as often as they save, do not accumulate assets over the long term, and have on average very small asset holdings. But their consumption is markedly smoother than their income. Much of the evidence is as consistent with this view of saving as it is incosistent with standard views of smoothing over the life-cycle, and with explanations of the link between saving and growth in terms of life-cycle saving behavior. Consumption smoothing is also a useful way of thinking about government policy, where volatility in the world prices of taxed commodities can generate sharp fluctuations in government revenues as well as reallocations of revenue between the private and public sectors. Many important policy issues in developing countries hinge on issues of consumption and smoothing, and research on these issues is currently likely to be more productive than work on the relation between saving and growth.

Looking for Boy-Girl Discrimination in Household Expenditure Data

Abstract: The ability to test for discrimination in the allocation of goods between boys and girls is hampered by a lack of data on intrahousehold distribution. The analysis presented here allows inferences about intrahousehold allocation to be made from householdlevel expenditure data. For a given level of income, families with children will spend less on adult goods in order to purchase children's goods. If household purchasing favors boys over girls, smaller expenditures on adult goods would be made by families with boys as compared with those with girls. A method for determining "adult" goods is described, and the procedure for detecting gender bias is applied to data from C6te d'lvoire and Thailand. The data show no evidence of discriminatio n between boys and girls in C6te d'lvoire, and a small and statistically insignificant bias in favor of boys in Thailand. How commodities are allocated among the members of a household has recently occasioned a good deal of interest. Assessments of poverty and income distribution based on household incomes or expenditures will be misleading if allocation within the household is unequal. The position of women and girls has been of particular concern, and there is a considerable amount of empirical evidence, much of it from the Indian subcontinent, that documents discrimination against females (see in particular Bhagwati 1973; Sen 1984; Sen and Sengupta 1983; Miller 1981; Bardhan 1982; and Kynch and Sen 1983; as well as survey papers by Behrman 1987 and Harriss 1987). Much of the evidence is concerned with measurements of nutritional outcomes, mortality, and health status rather than with the direct allocation of goods by gender. The difficulty in trying to determine the intrahousehold allocation of goods is that household budget surveys, the obvious source of data, record consumption not of individuals but of households. And while attempts can be made to The author is a professor of public affairs and of economics and international affairs at Princeton University and is a consultant to the Population and Human Resources Department of the World Bank. The author thanks Dwayne Benjamin who provided for excellent research assistance. He is grateful to him and to members of the Economic Growth Center at Yale University for helpful comments. This is a revised and shortened version of Living Standards Measurement Study Working Paper 39, "The Allocation of Goods within the Household: Adults, Children, and Gender," June 1987. The results from Thailand were not included in the working paper. © 1989 The International Bank for Reconstruction and Development / THE WORLD BANK.

Three decades of industrialization

Abstract: This article reviews the experience of growth and industrialization in the postwar period in more than 100 economies, drawing on time-series data over a three decade period. Economies are classified according to their population size, the share of primary or manufactured goods in their exports, and the weight of exports in gross domestic product (GDP). The authors examine the composition of demand, trade, output, manufacturing type, and factor use overall and between sectors as they relate to income growth. Higher income growth and more marked transformation are found among the groups with large populations, a predominance of manufactures in exports, and a larger role of exports. The authors also found that the patterns suggested by cross-country analysis are robust when tested using the time series data now available. Although development experiences may vary over time and across countries, there is sufficient uniformity within them for the main features of structural transformation to emerge as clear and consistent patterns of modern economic growth.

The Effect of Real Exchange Rate Uncertainty on Exports: Empirical Evidence

Abstract: Unless very specific assumptions are made, theory alone cannot determine the sign of the relation between real exchange rate uncertainty and exports. On the one hand, convexity of the profit function with respect to prices implies that an increase in price uncertainty raises the expected returns in the export sector. On the other, potential asymmetries in the cost of adjusting factors of production (for example, investment irreversibility) and risk aversion tend to make the uncertainty-exports relation negative. This article examines these issues using a simple risk-aversion model. Export equations allowing for uncertainty are then estimated for six developing countries. Contrary to the ambiguity of the theory, the empirical relation is strongly negative. Estimates indicate that a 5 percent increase in the annual standard deviation of the real exchange rate can reduce exports by 2 to 30 percent in the short run. These effects are substantially magnified in the long run.

Inflation and the Financing of Government Expenditure: an Introductory Analysis with an Application to Turkey

Abstract: This article presents a simple framework to assess the consistency of appropriately defined fiscal deficits with other macroeconomic targets, such as inflation. It also considers the relation of fiscal deficits to output growth, real exchange rate developments, and management of internal and external debt. Finally, it considers the implications of relying on interest-bearing government debt to postpone the adjustment necessary to restore consistency with inflation targets. It demonstrates how the intertemporal budget constraint of the government creates a tradeoff between current and future adjustment. Real interest rates and output growth rates are shown to determine the terms at which this tradeoff takes place. The usefulness of this framework is demonstrated through an analysis of fiscal policy options in Turkey in 1985.

Household Survey Data and Pricing Policies in Developing Countries

Abstract: In recent years, household survey data from developing countries have increasingly become available and have been increasingly used to cast light on important questions of policy. The reform of prices, whether agricultural prices, consumer taxes, subsidies, or tariffs, has consequences for individual welfare and for government revenues, and these can be investigated empirically with household survey data. The gainers and losers from price changes can be identified, and the magnitudes of their gains and losses measured. Nonparametric estimation techniques provide a straightforward and convenient way of displaying this information. The procedure is illustrated for the effects of rice pricing in Thailand using data from more than five thousand rural households. Estimates of the revenue effects of price reforms are harder to obtain, because they require estimates of supply and demand elasticities, estimates that are not easily obtained for many developing countries. A procedure is presented for estimating price elasticities of demand from spatial price variation as recorded in household survey data. The main innovations lie in the appropriate treatment of quality variations and measurement error. Applications of the procedure in Cote d'Ivoire, Indonesia, and Morocco are reviewed.

Imports under a Foreign Exchange Constraint

Abstract: The traditional model of import behavior -- which looks only at the gross domestic product (GDP) and real import prices as explanatory variables -- failed to predict or explain the developing countries' import slumps in the early 1980's. This paper expands on a more useful model, the Hemphill, which incorporates the traditional variables (relative prices and domestic income) with the variables introduced by Hemphill (foreign exchange receipts and international reserves). Section 2 of this paper discusses the theoretical models in the present study. The traditional model, used here as a benchmark, is presented first, and is later extended to include foreign exchange constraints. Section 3 presents the empirical estimates of the general import models that include foreign constraints, and two special cases, the Hemphill and benchmark models, using pooled, cross-section time series. Section 4 concludes that policy makers must look at the policies that affect GDP and prices and the availability of foreign exchange when trying to estimate import behavior in developing countries.

The role of institutions in development

Abstract: Economists interpret "institutions" in at least two ways. Institutions can be the "rules of the game" (which provide the context-such as markets-in which actors make decisions), or they can be organizations (typically, systems of nonmarket relations). What is the role of public policy in influencing the rules of the game, and what is its role in public sector economic organizations? Informal conventions and informal rules of the game make institutions function differently than their formal structure might lead us to expect. Governments can intervene and influence the rules of the game, but their interventions should be based on an adequate perception of existing formal and informal arrangements and on processes of adaptation that were under way before intervention was initiated. The literature does not adequately explore the normative arguments for public economic organizations, nor has there been enough rigorous analysis of the causes of public sector failure. Many institutions are dysfunctional in terms of development, however, not because they are inefficient but because their intended purposes conflict with the requirements of economic growth. Diagnosing the causes of good or bad performance by public organizations could provide the basis for exploring a rational public sector organizational strategy.

External Debt, Inflation, and the Public Sector: Toward Fiscal Policy for Sustainable Growth

Abstract: Which tradeoffs are involved in formulating an external debt strategy? Should expenditure be cut to improve the current account, or will this reduce future output growth, thus undermining the benefits of any debt reduction? Are there alternatives that allow satisfactory output growth without jeopardizing creditworthiness? How can the necessary surplus of savings over investment be brought about at levels of investment high enough to sustain output growth? Should the government contribute to the internal adjustment by reducing its deficit? Macroeconomic targets for inflation and growth, and creditworthiness constraints on debt issue, impose restrictions on the extent to which deficits can be financed. Can the government cover the deficit within these targets and constraints? The absence of such consistency forebodes future policy change and so undermines the credibility of the adjustment program. The author uses empirical work on Turkey to illustrate the interactions between fiscal deficits and the macroeconomic variables upon which fiscal consistency hinges.

Settling defaults in the era of bond finance

Abstract: Comparisons of the debt crises of the 1930s and 1980s emphasize the greater incidence of default and the greater ease of restructuring half a century ago. The difficulty developing country debtors have had in putting the current crisis behind them, it is argued, is due to the more sytematic involvement of creditor country governments and intergovernment agencies. This article reviews the negotiating strategies of the debtors and creditors of the 1930s, the terms of settlement, and the realized rates of return on U.S. and U.K. foreign bonds. It shows that rather than being sharp and complete, default in the 1930s was often partial and intermittent. Uncertainty about debt, trade, and export credit limits lingered on. Often many years passed before final settlements were achieved. Creditor country governments were intimately involved in the settlement process, although their influence was not always to the benefit of the bondholders.

Wage Differentials and Moonlighting by Civil Servants: Evidence from Cote d'Ivoire and Peru

Abstract: As part of their efforts to reduce fiscal deficits, many governments have allowed public sector salaries to erode, often on the assumption that government workers are overpaid vis-a-vis those in the private sector. That assumption is tested by analyzing public - private pay differentials in Cote d'Ivoire and Peru. Switching regressions models are estimated using full information maximum likelihood (FIML), and the results are compared to those obtained using ordinary least squares (OLS) techniques. The OLS yields seriously biased estimates of the pay structure, suggesting that public wages are higher than private wages; the FIML estimates show the opposite. Our probit analysis also shows that the wage disadvantage of civil servants is a determinant of the greater prevalence of moonlighting among public than private employees. The evidence suggests that reductions in employment rather than pay, while being less palatable in the short term, will be more effective in the long run.

Determinants of consumption and savings behavior in developing countries

Abstract: The determinants of savings generally and the specific effects of government policies on savings and consumption are pivotal forces in investment and economic growth. The Hall hypothesis states that consumption is a function of lifetime ("permanent") income, rather than income in each period independently. Changes in interest and tax rates, money supply, or government expenditure will affect permanent income and hence consumption and savings only if they are unexpected and thus not already incorporated in the estimation of permanent income. We are unable to reject the Hall hypothesis in tests for developing countries when we allow for varying interest rates. We do find evidence of a negative effect of inflation on consumption, and a positive relationship between the real interest rate and consumption. The evidence for the Hall hypothesis also suggests that Ricardian equivalence may be valid-this is Barro's hypothesis that the effect on savings is the same whether government deficits are financed through taxation or debt. Our preliminary testing, however, does not support Ricardian equivalence. Savings is the part of one's current income that is not spent on current consumption, and it constitutes a large part of a nation's aggregate savings and investment and thus is a major determinant of the growth of future income and consumption. Households balance the tradeoffs between current and future consumption possibilities when making their individual consumption decisions. Understanding the determinants of households' consumption behavior has been central to macroeconomics. The three main theoretical approaches to this issue are Keynesian consumption theory, the life-cycle-permanent-income hypothesis under rational expectations, and the theory of the infinitely lived agent or altruistically linked consumers. The theories differ in the extent to which they explain the observed consumer behavior, and in their predictions regarding the effects of government policies on individual savings behavior. For instance, increased taxes, higher nominal interest rates, or an increase in the money

Wage Rigidity: Micro and Macro Evidence on Labor Market Adjustment in the Modern Sector

Abstract: Aggregate data on wages and employment may provide misleading indicators of labor market conditions. They may suggest inappropriate wage policies in the face of rising unemployment experienced in many developing countries during the 1980s. Such increases in unemployment are often attributed to wage rigidities. A cursory review of aggregate data for the modern sector in Cote d'Ivoire would support this view, suggesting that employment declined during the 1979 - 84 recession due to an increase in real wages. Examination of disaggregated data from two labor force censuses of the modern sector, however, shows that real wages declined for specified classes of labor. The work force was characterized by greater education, training, and experience; workers with a given level of attributes received a lower real wage by the end of the recession than before it. Despite this drop in real wages, employment in the modern sector declined.

Food aid : a cause of development failure or an instrument for success?

Abstract: The role of food aid in furthering the economic development of poor countries and in alleviating the adverse effects on the poor of structural and sectoral adjustment programs is discussed. A simple analytical framework for evaluating the incentive and welfare impact of food aid is suggested. Domestic and international markets for food historically have been subject to severe distortions, leading to ever-growing food stocks in some, mainly rich, countries while in others, largely poor, many cannot afford to consume enough food. The possible impact of distortion-free global food markets is sketched. The use of surplus food for payment of wages in rural work programs has often been proposed as a means to create productive assets while alleviating poverty. Using an applied general equilibrium model of the Indian economy, it is shown that a well-designed and efficiently implemented food-for-work program can virtually eliminate abject poverty in India at a modest cost. Experience with food aid in several other countries is also briefly discussed.

Fiscal response to a temporary trade shock : the aftermath of the Kenyan coffee boom

Abstract: The appropriate fiscal response to a temporary terms of trade windfall is difficult to determine, even in an unregulated economy. But controls, such as those in force during the 1976-79 coffee boom in Kenya, introduce special problems. For example, foreign exchange controls make the private investment of boom income inefficient by causing it to be undertaken too rapidly. In Kenya the boom induced a massive increase in public expenditure, far in excess of the increase in public revenue. The net effect on capital formation was negative because the fiscal response exacerbated the rise in the relative price of nontraded capital goods, and because resources were preempted for government consumption.

The noncompetitive theory of international trade and trade policy

Abstract: This paper reviews recent theoretical developments in the analysis of trade structure and policy. It emphasizes how understanding monopolistic (noncompetitiive) market structures and elements can help explain trade flows and the relation between trade and growth, and can be useful in evaluating tariffs, quotas, and research and development subsidies in noncompetitive markets. Noncompetitive trade theory identifies testable relations that have already received empirical support in various studies. Once their significance is recognized, it is important to take them into account in designing policy. Policies exist that raise welfare, but simple policy prescriptions do not. Theory helps to identify situations in which particular policies work, but under only slightly different circumstances opposite policies may have to be implemented. Recent studies have shown that long-run growth rates depend on an economy's structural features and the country's trading partners. So policy can affect long-run growth - but identifying useful policies requires an understanding of market structure and conduct, entry constraints, intersectoral links, and the like. More empirical studies are needed to elicit this information. Meanwhile, policy should be designed on a case-by-case basis and - because good policies improve welfare only slightly - no intervention (free trade) remains a good rule of thumb. All the more so when one takes into account the competitive pressure of a free trading world system, the probability of retaliation, and the political economy of protection.

Ending food subsidies : nutritional, welfare, and budgetary effects

Abstract: Governments faced with growing budget deficits are cutting many social expenditures including costly food subsidy programs that have provided benefits to the rich and poor alike. Since the poor spend a larger share of their income on food than do the rich, these cuts usually have negative distributional, welfare, and nutritional effects. This article discusses the methodological issues in estimating the effects of price and tax reforms in developing countries. The author applies a model that Deaton developed (1988) to estimate price elasticities from cross-section data, the only reliable and detailed data available in most developing countries. Measures of both real income and nutrition are used to evaluate the effects of changes in the Moroccan food subsidy program. The analysis suggests that subsidies on inferior foods not consumed by the wealthy would reduce the welfare costs to the poor and limit the budgetary expenditures required.

Trade Policies and the Highly Indebted Countries

Abstract: In the early 1980s, faced with a mounting debt crisis, most highly indebted developing countries increased trade barriers to save foreign exchange, but in the last three to four years, they have reversed course. Almost all of these countries have undergone real devaluations, and many have undertaken significant liberalizations, so much so that some (Bolivia, Costa Rica, Jamaica, Mexico, Morocco, and Uruguay) are less protectionist than before the debt crisis. But industrial countries have imposed new nontariff barriers against imports from highly indebted countries. Canada, Australia, the European Community, and the United States have greatly increased the use of countervailing duties and antidumping actions. This makes it more difficult for highly indebted countries to pay off their debts, and ultimately rebounds on creditor governments and banks.

Indexation and inflationary inertia : Brazil 1964-1985

Abstract: Some governments facing high rates of inflation have adopted wage and exchange rate indexation in an attempt to offset the costs to workers and exporters. But indexation based on past values of inflation is considered to be a powerful source of current and future inflation that undermines fiscal and monetary stringency designed to reduce inflation. Brazil indexed wages and the exchange rate for more than twenty years. The authors derive a transfer function and estimate time-varying parameters to allow for the changes in indexing policy over the period. The authors find that the increased frequency of wage and exchange rate adjustment amplified the effect of past inflation and made it less sensitive to monetary and fiscal policies and more vulnerable to domestic agricultural supply shocks. Indexing did not eliminate the effectiveness of monetary policy, however, which retained a significant effect throughout the indexation period.