Showing papers in "The World Bank Economic Review in 1992"

Measuring the Independence of Central Banks and Its Effect on Policy Outcomes

Abstract: Making the central bank an agency with the mandate and reputation for maintaining price stability is a means by which a government can choose the strength of its commitment to price stability. This article develops four measures of central bank independence and explores their relation with inflation outcomes. An aggregate legal index is developed for four decades in 72 countries. Three indicators of actual independence are developed: the rate of turnover of central bank governors, an index based on a questionnaire answered by specialists in 23 countries, and an aggregation of the legal index and the rate of turnover. Legal independence is inversely related to inflation in industrial, but not in developing, countries. In developing countries the actual frequency of change of the chief executive officer of the bank is a better proxy for central bank independence. An inflation-based index of overall central bank independence contributes significantly to explaining cross-country variations in the rate of inflation.

Two Strategies for Economic Development: Using Ideas and Producing Ideas

Abstract: The central claim of this paper is that the difference between the economics of ideas and the economics of objects is important for our understanding of growth and development. A subsidiary claim is that academic and policy discussions in these areas might be more fruitful if we spent less time working out solutions to systems of equations and more time defining precisely what the words we use mean. The notion that ideas are different from objects is both familiar and obvious. In the economic analysis of patents, for example, there is a long tradition of recognizing the unique characteristics of ideas as economic goods. The content of the claim lies in the assertion that these differences are more subtle than some presentations suggest and that they matter for aggregate-level policy analysis.

On the transmission of world agricultural prices

Abstract: Two questions are asked about the relationship between domestic prices and world prices of agricultural commodities: are variations in world prices transmitted to domestic prices? Domestic prices are regressed on world prices in various forms, taking into account the possible effects of exchange rates and inflation. The empirical analysis is based on data from the Food and Agriculture Organization of the United Nations for 58 countries from 1968-78 and for the countries of the European Community from 1961-85. The results show that most of the variations in world prices are transmitted and that they constitute the dominant component in the variations of domestic prices.

The Economics of Farm Fragmentation: Evidence from Ghana and Rwanda

Abstract: Farm fragmentation, in which a household operates more than one separate parcel of land, is a common phenomenon in sub-Saharan Africa. Concerned by the perceived costs of fragmented as opposed to consolidated holdings, several countries have implemented land consolidation programs. But these interventions overlook the benefits that land fragmentation can offer farmers in managing risk, in overcoming seasonal labor bottlenecks, and in better matching soil types with necessary food crops. This article uses household data from Ghana and Rwanda to discuss the incidence and causes of fragmentation. It then formally tests the relation between fragmentation and land productivity and risk reduction. The conclusion is that consolidation programs are unlikely to lead to significant increases in land productivity and may actually make farmers worse off. Policymakers should focus instead on reducing the root causes of fragmentation: inefficiencies in land, labor, credit, and food markets.

Linking trade and productivity : new research directions

Abstract: It is a mistake to think of productivity growth as an orderly shift in the production function of the representative plant. Gradual processes of technological diffusion or the displacement of inefficient plants with efficient ones are what matter. Trade orientation may affect these processes through many channels. Exposure to increased foreign competition is found to be associated with improvements in the average level of technical efficiency, reductions in the cross-plant dispersion in technical efficiency, and reductions in plant size. However, preliminary work suggests no clear link between trade policies and patterns of entry and exit.

Household saving in developing countries : first cross-country evidence

Abstract: Although most studies have relied on domestic or private sector saving data, this article uses household data available from the U.N. System of National Accounts for a sample of 10 countries. Household saving functions are estimated using combined time-series and cross-country observations in order to test households' responses to income and growth, rates of return, monetary wealth, foreign saving, and demographic variables. The results show that income and wealth variables affect saving strongly and in ways consistent with standard theories. Inflation and the interest rate do not show clear effects on saving, which is also consistent with their theoretical ambiguity. Foreign saving and monetary assets have strong negative effects on household saving, which suggests the importance of liquidity constraints and monetary wealth in developing countries.

Social Security and Private Transfers in Developing Countries: The Case of Peru

Abstract: Do social security systems "crowd out" private transfers from younger to older generations? This question has generated much theoretical discussion, but little empirical work exists to confirm or refute this crowding-out hypothesis. We investigate the connection between social security and private transfers in Peru, using the Peruvian Living Standards Survey, and find that private transfers from young to old would have been nearly 20 percent higher without social security benefits. This indicates that the Peruvian social security system is less effective at delivering benefits to the elderly than a simple assignment of government expenditures would suggest. Social security's displacement of private transfers, while significant, is less than that predicted by models with widespread altruistic transfers.

How Small Enterprises in Ghana Have Responded to Adjustment

Abstract: Ghana is often cited as an African country that has undertaken major macroeconomic reforms with generally positive results for economic growth. Within Ghana's industrial sector, the effects of structural adjustment policies have differed among subsectors and firms. Little is known, however, about the impact of adjustment on smaller firms. A survey of small-scale enterprises (SSEs) was carried out in November 1989 to learn more about the impact of the adjustment program on their operations, to evaluate their potential contribution to dynamic industrial recovery, and to identify appropriate measures that would accelerate the growth of SSEs in numbers, size and productivity. Specific objectives of the survey were to : 1) learn more about the characteristics of small firms and their owners; 2) analyze how policy changes have affected small firms, highlighting entrepreneurs' strategies for adapting to their new environments; and 3) identify constraints to the future growth of small firms. Results show that adjustment policies have forced the SSEs to become more competitive to survive and that significant structural changes are taking place across subsectors and within firms. The overall business environment has generally improved during the adjustment program, although shortcomings remain. Uncertainty about political and economic stability and lack of finance appear to be the most immediate restraints on investment.

Stagflationary Effects of Stabilization Programs in Reforming Socialist Countries: Enterprise-Side and Household-Side Factors

Abstract: Dismantling subsidies could give rise to serious macroeconomic difficulties in the short run. This article explores a view based on the enterprise sector as a central source and main channel of the stagflation phenomenon, using as an example the stagflation that followed the 1990 stabilization program in Poland. The stagflation phenomenon is linked to features of the financial market that are somewhat peculiar to reforming socialist economies: the weak credit links between households and enterprises, and the existence of large interenterprise debt. The policy implications of the enterprise-side view include more explicit consideration of initial conditions in the credit market, implementation of privatization schemes, and the development of a domestic banking

The Willingness to Pay for Education for Daughters in Contrast to Sons: Evidence from Rural Peru

Abstract: In most of the developing world the education of women lags behind that of men. This could come about from a lack of parental desire for educated daughters or from a perception by the parents that there is a lower net return to education for girls. The relation between gender and education in rural Peru is explored using data from the 1985-86 Peru Living Standards Survey. A model of educational choice is developed. The estimated demand functions are used to assess the impact of user fees on demand and revenues. The empirical evidence indicates that parents are more willing to pay for reduced travel time to secondary school for boys than for girls. However, parents are willing to pay increased fees for girls' schooling sufficient to generate teachers' salaries. Copyright 1992 by Oxford University Press.

Lessons from Experiences with High Inflation

Abstract: In economies where price control has been the rule, the most serious concern may be recognition of the inflation problem. Beyond the initial correction of subsidies there is the broader issue of the risk of a serious inflation. This article looks at the problem of high inflation in developing countries in Europe and Latin America and draws lessons from historical experience. It analyzes the dynamics of the interaction among deficit finance, institutional innovation in financial markets, dollarization, and the s'hortening of wage contracts in high-inflation situations. When stabilization is undertaken, there is neither immediate, spontaneous resumption of longer adjustment periods for wages and prices nor instant increase of real money demand to noninflationary levels. Incomes policy-freezing exchange rates, wages, and prices-is advocated as an effective supplement to the inevitable budget cut to make up for institutional inertia and facilitate the start of the stabilization process.

Project evaluation and uncertainty in practice : a statistical analysis of rate-of-return divergences of 1,015 World Bank projects

Abstract: This article analyzes the World Bank's experience with project evaluation for a sample of 1,015 projects by comparing estimated rates of return at appraisal with reestimated rates of return when construction works are completed, usually 5 to 10 years after appraisal. The analysis highlights the high degree of uncertainty in project analysis. A wide range of variables has been introduced to explain the observed divergence in appraisal and reestimated rates of return, but only a relatively small part of the divergence can be explained, even with the benefit of hindsight. Project analysis thus has to cope with a large degree of uncertainty, which the traditional methods of project evaluation and selection have not been able to reduce.

Maize and the free trade agreement between Mexico and the United States

Abstract: Setting the price of maize in rural Mexico above the world price is inefficient and likely to have negative distributional effects because many subsistence producers, and all landless workers, are net buyers; in fact it screens out the relatively poor rather than the relatively rich. The policy objective, therefore, should be to move toward free trade. This would yield large gains in efficiency. The Free Trade Agreement provides an ideal opportunity to pursue this objective. It will provide freer entrance into the United States for other agricultural products as well as a broad range of manufactured products. Ensuring secure and sustained access for labor-intensive agricultural and manufactured products can help ease the impact on the labor market of a transition away from subsistence maize cultivation.

Are High Interest Rates Effective for Stopping High Inflation? Some Skeptical Notes

Abstract: High interest rates are considered an effective toolfor stopping high inflation. The case for a policy of high interest rates is developed in terms of a conventional IS-LM model. However, among other things, the model ignores some central aspects of modern credit markets. In particular high interest rates may give rise to nonperforming bank loans, thus seriously jeopardizing the effectiveness of the policy. Examples are developed in which it would be optimal to aim for equilibriums of low, rather than high, interest rates. One of these examples hinges on the existence of nonindexed domestic debt. This article looks at the effectiveness and desirability of relatively high interest rates in stabilization programs. High interest rates refer to nominal interest rates that would result in unsustainable, high real interest rates-that is, real rates of interest that would cause a state of generalized bankruptcy if maintained for a few months or a year-if the program's inflation target were to be achieved. The article evolves through a series of examples, beginning with the IS-LM model described in section I. Despite its simplicity (and early vintage), the model is still important in discussions of policy. The conventional IS-LM approach, which gives strong support to a policy of high interest rates, implies that tight money is effective in reducing economic activity and, through the Phillips curve, is also effective in lowering inflation. The larger the interest rate, the sooner price stability will be achieved. Section II questions the relevance of the IS-LM result on the basis of two observations. First, we live in a world in which countries are closely linked from a financial point of view. Therefore high interest rates are likely to signal expectations of high devaluation or inflation. Second, high inflation rates make expected or ex ante real interest rates look much smaller than if the stabilization plan's inflation targets were to be fulfilled. Consequently, banks may continue lending despite high nominal rates. With the passage of timne, however, firms will find themselves in serious financial straits, which eventually may result in a state

The Optimal Currency Composition of External Debt: Theory and Applications to Mexico and Brazil

Abstract: The changes in exchange rates, interest rates, and commodity prices during the past decades have had large impacts on developing countries. Many developing countries have limited access to already incomplete international long-term hedging markets. Thus the question arises whether the currency composition of external debt can be used to minimize exposures to external price risk. Using a utility-maximizing framework, this article shows that, by choosing the optimal currency composition, a country can indeed manage its external exposure. The optimal, risk-minimizing currency composition depends on the relation between export receipts and the costs of borrowings in each currency and on the relations among the costs of borrowings in different currencies. A simple methodology can be used to derive the optimal shares of individual currencies and is applied to Mexico and Brazil. The results show that Mexico and Brazil could have lowered their external exposure to a limited degree by continuously alternating the currency composition of their debts. The low correlations between the costs of borrowings and export and import prices make the currency composition of debt a very imperfect hedging tool, and it is likely that hedging instruments directly linked to prices are preferable.

The Dynamics of Optimal Gradual Stabilizations

Abstract: Inflation inertia may be quite tenacious because of the simultaneous interaction between policy actions and inflationary expectations under imperfect credibility. This result is particularly relevant for understanding some of the failed efforts to stabilize inflation in South America. This article deals with the issue of inertia in the framework of imperfect information about the type of the policymaker and extends the existing models to an infinite horizon. Because policymakers do not have perfect control of inflation, a frivolous stabilizer may deviate from the policies of a serious stabilizer without necessarily being unmasked immediately. When the difference in the ability of strong and weak policymakers to control inflation is large, unexpected inflation may be persistently negative for quite a while, thus causing reduced economic activity and giving the indication that credibility is low. If the policymaker persists with the stabilization, this pattern gradually disappears as his reputation rises. But before this final stage the serious policymaker has to compromise his inflation objective in view of adverse expectation about this type and pay the cost of imperfect credibility.

Inflation and the Transition to a Market Economy: An Overview

Abstract: European socialist economies were commonly characterized by low or negligible open inflation, full employment, and stable relative prices and real incomes. Associated features were significant repressed or hidden inflation and disequilibria in goods markets. More recently, as economic and political reform has advanced, attention has shifted to translating repressed into open inflation. Where such reforms have proceeded against a background of a monetary overhang, the implications of that overhang for demand-side policies have figured prominently. In all instances, however, the key underlying issue has been the transmission mechanism for inflation once the initial impulse associated with price liberalization has been imparted. Although it is widely recognized that major price liberalization has to be central to any stabilization, there is considerable debate concernig the optimal pace and the dynamic effects of price reforms. The arguments for liberalization turn on the importance of achieving a rational, relative price structure that can eliminate imbalances in the goods market while enabling allocative efficiency gains. Yet, as recent experience in Eastern Europe testifies, a variety of price liberalization schemes have involved significant jumps in the price level that translate into acceleration in the rate of increase of prices. In addition, developments on the real side have been seriously adverse, with large declines in recorded output. There is further evidence of an initially slow, but accelerating, increase in the rate of open unemployment. The articles in this symposium concentrate on the problem of inflation in socialist economies in transition. Given recent experience in several reforming socialist economies with high inflation, Dornbusch draws out the main comparative lessons from other high-inflationary experiences, particularly in Latin America. Stabilizing inflation requires fiscal correction and reforms to the tax system. There is commonly a role for incomes policy in achieving a more rapid and coordinated disinflation, but only as a complement to, rather than a substitute for, budget balancing.

A Framework for Evaluating the Impact of Pricing Policies for Cocoa and Coffee in Côte d'Ivoire

Abstract: This article presents an approach to evaluating pricing policies for perennial crops. A flexible computational model is developed, which incorporates important features of perennial crop production that are not captured by other (usually static) frameworks. This framework produces sensible and plausible scenarios for pricing cocoa and coffee in Cote d'Ivoire, as well as descriptions of revenue tradeoffs. Key issues arise from considering major changes in the rules used to set domestic producer prices. An unambiguously best policy is not determined, but several policies improve substantially on the present situation. Most of these alternatives indicate the desirability of lowering the tax on coffee relative to cocoa.

The Working Behavior of Young People in Rural Cote d'Ivoire

Abstract: One of the major features of structural adjustment is an attempt to reallocate laborand hence output-through changes in relative prices. This article assesses how price changes affect the working patterns of young people in rural C6te d7voire. The analysis is based on a model of the labor supply of rural households and on the construction of composite price indexes. The data come from the C6te d'Ivoire Living Standards Survey for 1985 and 1986. The panel aspect of the data allows the work choice made in one year to depend on the individual's choice in the previous year. Results indicate that the price of agricultural output generally is a positive incentive on the decision to participate in the labor force. However, this result depends heavily on the employment and education of the individual in the previous period. Those not already working are less likely to respond to favorable movements in the prices of cash crops by entering the work force. This article reports on research on the determinants of working patterns among young people in rural C6te d'Ivoire. Because young people's decisions about working are closely related to decisions about schooling, the article also focuses on the relationship between work and school. The motivation for this study arises from an interest in the effects of structural adjustment programs on work incentives. Structural adjustment is expected to increase output by altering the incentives facing producers. The effect of improved incentives could, in principle, be measured by directly observing changes in output. The time lag between the change in incentives and the change in output can be substantial, however, especially when tree crops are involved, so that data over a long period may be

Voluntary Choices in Concerted Deals: The Menu Approach to Debt Reduction in Developing Countries

Abstract: This article examines the mechanics and attributes of concerted debt reduction agreements that offer creditors a choice between exit and relending options. The menu approach sets prices for different choices that implement a decentralized equilibrium. When banks can commit to choose from the menu and are not allowed to free ride, a menu can be designed that assures that the price paid for debt repurchased is equal to the marginal value of the debt claims. This can be achieved by taxing the gains that accrue to nonexiters witb a request for new money. The equilibrium amount of debt reduction rises when the new money request is increased. The importance of banks' heterogeneity for menus to dominate simple concerted buybacks and the case in which debt reduction can be financed by loans from international financial institutions are discussed.

Price-Wage Dynamics and Inflation in Socialist Economies: Empirical Models for Hungary and Poland

Abstract: This article analyzes the determinants of open inflation in transitional socialist economies, with reference to recent experience in Hungary and Poland. A simple inflation model is centered on the transmission process and on the short-run dynamics of inflation. Further incorporating a number of features specific to socialist economies and working with quarterly data, dynamic price, and wage equations are estimated. The estimated equations allow satisfactory exploration of the role and weight of foreign prices and domestic factors in propagating inflation. Foreign prices matter, but developments on the cost side are critical in relating exogenous, policy-driven adjustments to the price level to increases in the rate of inflation. The absence of conventional market-based, equilibrating mechanisms requires that nominal anchors, particularly wage restraints, feature prominently in any stabilization program adopted by reforming socialist economies. Copyright 1992 by Oxford University Press.

Alleviating Transitory Food Crises in Sub-Saharan Africa: International Altruism and Trade

Abstract: The donor community has responded to unexpected or transitory drops in domestic food production in many countries in Sub-Sabaran Africa. An empirical framework estimates and analyzes the correlation between this food aid and domestic production. Both emergency food aid and commercial imports are used to offset the effects of negative output shocks in Sub-Saharan African countries-the major recipients of global emergency food aid. On average every one-ton drop in cereal production is offset by the delivery of 0.8 tons of cereal and dairy products from abroad (over four years). Most food aid arrives within a year of a shock, and correlation of shocks over time along with the differences between crop years and calendar years may explain the link between aid and production. The economic and political considerations also determine the global response to the emergency food needs of countries in Africa. The international response is not contingent on the form of government or the level of political and human rights violations. Poorer countries and those with well-established nonemergency food aid programs receive larger amounts of emergency aid when needed. Food aid has long helped low-income countries to sustain domestic food supplies and cope with transitory food insecurity, and it has also been used to accelerate agricultural development and increase food production. But food aid has been heavily criticized in the past decade on several grounds. First, it has been charged that the international response to food crises is slow, meager, and inefficient. A related accusation suggests that countries granting emergency food aid disciriminate on the basis of the political and economic orientation of the recipient country. Second, food aid has been thought to discourage domestic food production, thus leading to long-term dependence on donors. Finally, it has