Showing papers in "World Bank Research Observer in 2000"

Social capital: implications for development theory, research, and policy

Abstract: In the 1990s the concept of social capital defined here as the norms and networks that enable people to act collectively enjoyed a remarkable rise to prominence across all the social science disciplines. The authors trace the evolution of social capital research as it pertains to economic development and identify four distinct approaches the research has taken : communitarian, networks, institutional, and synergy. The evidence suggests that of the four, the synergy view, with its emphasis on incorporating different levels and dimensions of social capital and its recognition of the positive and negative outcomes that social capital can generate, has the greatest empirical support and lends itself best to comprehensive and coherent policy prescriptions. The authors argue that a significant virtue of the idea of and discourse on social capital is that it helps to bridge orthodox divides among scholars, practitioners, and policymakers.

Growth and Institutions: A Review of the Evidence

Abstract: Africa’s disappointing economic performance, the East Asian financial crisis, and the weak record of the former Soviet Union have focused attention on the role of institutions in determining a country’s economic growth. This article critically reviews the literature that tries to link quantitative measures of institutions, such as civil liberties and property rights, with growth of gross domestic product across countries and over time. An important distinction is made between indicators that measure the performance or quality of institutions and those that measure political and social characteristics and political instability. The evidence suggests a link between the quality of institutions and investment and growth, but the evidence is by no means robust.

Contagion: Understanding How It Spreads

Abstract: Much of the current debate on reforming the international financial architecture is aimed at reducing the risks of contagion best defined as a significant increase in cross market linkages after a shock to an individual country (or group of countries). This definition highlights the importance of other links through which shocks are normally transmitted including trade and finance. During times of crisis, the ways in which shocks are transmitted do seem to differ, and these differences appear to be important. Empirical work has helped to identify the types of links and other macroeconomic conditions that can make a country vulnerable to contagion during crisis considerations periods, although less is known about the importance of microeconomic and institutional factors in propagating shocks. Empirical research has helped to identify those countries that are at risk of contagion as well as some, albeit quite general, policy interventions that can reduce risks.

What should the world bank think about the Washington consensus

Abstract: The phrase ' Washington Consensus ' has become a familiar term in development policy circles in recent years, but it is now used in several different senses, causing a great deal of confusion. In this article the author distinguishes between his original meaning as a summary of the lowest common denominator of policy advice addressed by the Washing based institutions and subsequent use of the term to signify neoliberal or market-fundamentalist policies. He argues that the latter policies could not be expected to provide an effective framework for combating poverty but that the original advice is still broadly valid the article discusses alternative ways of addressing the confusion. It argues that any policy manifesto designed to eliminate poverty needs to go beyond the original version but concludes by cautioning that no consensus on a wider agenda currently exists.

Weak links in the chain: A diagnosis of health policy in poor countries

Abstract: Recent empirical and theoretical literature sheds light on the disappointing experience with implementation of primary health care programs in developing countries. This article focuses on the evidence showing two weak links in the chain between government spending for services to improve health and actual improvements in health status. First, institutional capacity is a vital ingredient in providing effective services. When this capacity is inadequate, health spending, even on the right services, may lead to little actual provision of services. Second, the net effect of government health services depends on the severity of market failures-the more severe the market failures, the greater the potential for government services to have an impact. Evidence suggests that market failures are the least severe for relatively inexpensive curative services, which often absorb the bulk of primary health care budgets. A companion paper, available from the authors, offers a perspective on how government funds can best be used to improve health and wellbeing in developing countries. It gives an alternative view of appropriate public health policy, one that focuses on mitigating the characteristic market failures of the sector and tailoring public health activities to the government's ability to deliver various services.

Corporate Performance in the East Asian Financial Crisis

Abstract: The sharp decline in the once stellar performance of East Asian corporations following the 1997 financial crisis has sparked an intense debate. Some observers argue that external shocks, including a drop in aggregate demand and a shortage of working capital, explain the corporate sector's poor performance. Others assert that the difficulties were apparent well before the crisis and that the risky financial policies pursued by these firms left them vulnerable. A survey of the literature shows little microeconomic evidence to support either view. This article compares the growth and financing patterns of East Asian corporations in the years before the crisis with those in other countries. It finds little microeconomic evidence that corporate growth was weakening but some support for the argument that many firms had a weak financial structure that left them vulnerable to an economic downturn. Based on a sample of more than 850 publicly listed firms in the four crisis countries: Indonesia, Malaysia, the Republic of Korea, and Thailand and two comparators, Hong Kong (China) and Singapore, it appears that firm-specific weaknesses already in existence before the crisis were important factors in the deteriorating performance of the corporate sector.

Industrial Policy: Growth Elixir or Poison?

Abstract: The debate about industrial policy occasioned by the East Asian financial crisis is the latest chapter in an ongoing discussion about the effectiveness of selective government intervention in fostering rapid industrial growth. The crisis that began in the Republic of Korea in 1997 and the weak growth in Japan over much of the 1990s have prompted a reexamination of the effectiveness of the government actions in the two countries that pursued sectorial selectivity most intensively. If indeed industrial policies were important in accelerating growth, there may be lessons for other countries still in the early stages of industrialization. Conversely, if the magnitude of the contribution was small, more conventional policies should be pursued unless it is assumed that governments can improve on the efforts of Japan and Korea.

Crisis, Adjustment, and Reform in Thailand's Industrial Firms

Abstract: Crisis, adjustment, and reform in Thailand's industrial firms; by David Dollar and Mary Hallward-Driemeier. Corporate performance in the East Asian financial crisis; by Stijn Claessens, Simeon Djankov, and Lixin Colin Xu. Industrial policy : growth elixir or poison?; by Howard Pack. Financial safety nets : lessons from Chile; by Philip L. Brock. Lessons in structuring derivatives exchanges; by George Tsetsekos and Panos Varangis. Growth and institutions: a review of the evidence; by Janine Aron.

International approaches to global climate change

Abstract: This International approaches to global climate change article surveys the issues involved in slowing the climate change induced by global emissions of greenhouse gases, especially carbon dioxide. It addresses the possible social and economic impacts of global warming the elements involved in evaluating the pros and cons of steps to reduce those impacts, and the issues involved in engaging most of the world's states in a cooperative endeavor to reduce greenhouse gas emissions. It expresses doubts about the efficacy of a global approach based on national emission targets, such as those set by the 1997 kyoto protocol, and favors instead mutually agreed actions focused on a common emission tax. It also discusses issues of compliance with an international agreement to reduce emissions, actions states can take in the absence of international agreement, and contingency actions that might be considered if the problem proves to be more serious than now seems to be the case.

Growth and institutions: A review of the evidence

Abstract: Africa's disappointing economic performance, the East Asian financial crisis, and the weak record of the former Soviet Union have focused attention on the role of institutions in determining a country's economic growth This article critically reviews the literature that tries to link quantitative measures of institutions, such as civil liberties and property rights, with growth of gross domestic product across countries and over time An important distinction is made between indicators that measure the performance or quality of institutions and those that measure political and social characteristics and political instability The evidence suggests a link between the quality of institutions and investment and growth, but the evidence is by no means robust

Developing countries and a new round of WTO negotiations

Abstract: This article presents an approach to public policy in health that comes directly from the literature on public economics. It identifies two characteristic market failures in health. The first is the existence of large externalities in the control of many infectious diseases that are mostly addressed by standard public health interventions. The second is the widespread breakdown of insurance markets that leave people exposed to catastrophic financial losses. Other essential considerations in setting priorities in health are the degree to which policies address poverty and inequality and the practicality of implementing policies given limited administrative capacities. Priorities based on these criteria tend to differ substantially from those commonly prescribed by the international community.

Lessons in Structuring Derivatives Exchanges

Abstract: The global deregulation of financial markets has created new investment opportunities, which in turn require the development of new instruments to deed with the increased risks. Institutional investors who are actively engaged in industrial and emerging markets need to hedge their risks from these cross-border transactions. Agents in liberalized market economies who are exposed to volatile commodity price and interest rate changes require appropriate hedging products to deal with them. And the economic expansion in emerging economies demands that corporations find better ways to manage financial and commodity risks. The instruments that allow market participants to manage risk are known as derivatives because they represent contracts whose payoff at expiration is determined by the price of the underlying asset—a currency, an interest rate, a commodity, or a stock. Derivatives are traded in organized exchanges or over the counter by derivatives dealers. Since the mid-1980s the number of derivatives exchanges operating in both industrial and emerging-market economies has increased substantially. What benefits do these exchanges provide to investors and to the home country? Are they a good idea? Emerging markets can capture important benefits, including the ability to transfer risks, enhance public information, and lower transaction costs, but the success of a derivatives exchange depends on the soundness of the foundations on which it is built, the structure that is adopted, and the products that are traded Since the mid-1970s interest and exchange rates and prices of primary commodities have fluctuated widely. Major exchange rates—both nominal and real—have varied since the move to the floating-rate system in 1973. Commodity prices have been even more volatile, with large shirts in supply and demand for individual commodities. Unanticipated changes in exchange rates, interest rates, and commodity prices introduce risks that cannot be ignored. Financial price risk has important implications for both the private and public sectors. Price fluctuations not only affect business profits but can also affect a firm's

The Washington Consensus a Decade Later: Ideology and the Art and Science of Policy Advice

Abstract: In 1990 Williamson coined the term 'Washington consensus' to describe 'the lowest common denominator of policy advice being addressed by the Washington institutions to Latin American countries as of 1989.' More than a decade has passed since Williamson proffered the consensus package. It is tempting to announce that the policy prescriptions contained in the consensus package have been successful and are no longer contentious! Even though there is considerable evidence of the success of many elements of the package where appropriately implemented, unfortunately the top echelon of at least one of the institutions celebrated in the consensus-the World Bank-seems to be misinformed and confused about the contents of the policy package. Others doubt the appropriateness of some of the recommended policies and argue that other elements of the package never commanded a consensus. Williamson now concedes that it could be costly to liberalize interest rates before other elements of financial liberalization, such as prudential supervision of banks by capable and knowledgeable central bank authorities, are in place. Although this point is obviously valid, the scope of its applicability is arguable. For example, in many developing countries, most banks are publicly owned, and whether they would or could gamble for redemption if deposit interest rates were to be liberalized is open to question.

Financial safety nets: lessons from Chile

Abstract: Should governments ever override bank regulators who are attempting to close down insolvent financial institutions? An analysis of Chile's history shows that time after time from the 1850s to the 1980s, prudential banking regulations were abandoned during economic crises when attempts to impose tight solvency standards proved impossible to enforce. Chile's current stringent banking regulations may prove more durable, but mounting financial distress is equally likely to lead the government to adopt policies that prevent bank failure but undermine the authority of regulators. Bank regulators, including the central bank, are responsible for creating a financial safety net to protect depositors against loss and for enforcing the rules of prudent behavior that are required for a stable financial system. Because safety nets often additionally cover losses to bank owners and borrowers, the support they offer encourages risk taking by the private sector an action that may promote financial deepening, but at a high budgetary cost to the government. Poorly designed safety nets may have to be suspended during crises to prevent losses from mounting and to limit the government's liability.

Comment on cooper

Abstract: Richard Cooper has written an excellent survey on the economic implications of climate change, stressing the possibilities and limits of international policy. Author comment here only on one part of the analysis, Cooper's choice of discount rates. Author differ sharply with the basis of the analysis and wish to call attention to the extensive literature, dating back more than 40 years, on the choice of discount rates for public investment, which Cooper has disregarded. Cooper refers to and then dismisses abruptly what may be called the consumption viewpoint. Investment is a sacrifice of consumption, and therefore the rate of return on a new investment should be at least equal to the implicit rate of return on consumption. (In this note, as in Cooper, all rates of return are real, not nominal.) This idea is hardly new; it is Marshall's 'price of waiting'. Bohm-Bawerk famously gave three grounds for the existence of a positive interest rate. First, if consumption is growing over time, the marginal utility of consumption must be falling; therefore, a sacrifice of consumption today must be compensated for by a greater increase in consumption in the future. Second, future consumption is automatically less valuable than the same consumption today, even if their marginal utilities are equal. Third, an increased lag of production behind inputs leads to an increase in production.

A Comment on Cooper

Abstract: Richard Cooper has written an excellent survey on the economic implications of climate change, stressing the possibilities and limits of international policy. I comment here only on one part of the analysis, Cooper's choice of discount rates. I differ sharply with the basis of the analysis and wish to call attention to the extensive literature, dating back more than 40 years, on the choice of discount rates for public investment, which Cooper has disregarded. Cooper refers to and then dismisses abrupdy what may be called the consumption viewpoint. Investment is a sacrifice of consumption, and therefore the rate of return on a new investment should be at least equal to the implicit rate of return on consumption. (In this note, as in Cooper, all rates of return are real, not nominal.) This idea is hardly new; it is Marshall's "price of waiting." Bohm-Bawerk famously gave three grounds for the existence of a positive interest rate. First, if consumption is growing over time, the marginal utility of consumption must be falling; therefore, a sacrifice of consumption today must be compensated for by a greater increase in consumption in the future. Second, future consumption is automatically less valuable than the same consumption today, even if their marginal utilities are equal. Third, an increased lag of production behind inputs leads to an increase in production. The first two grounds together define the consumption rate of interest, as expressed in the formula (due, I believe, to Ragnar Frisch) r = p + Qg, where p is the pure rate of time preference (corresponding to Bohm-Bawerk's second ground), 9 is the elasticity of the marginal utility of consumption, and g is the rate of growth of consumption. The third is represented in modern language by the marginal productivity of capital, F^, where F{K) is output as a function of capital (taking labor and natural resources as given). The condition for optimal allocation over time, and the outcome of an intertemporal competitive equilibrium, is r = FK.

Oil, Macroeconomics and Forests

Abstract: This chapter deals with the last twenty-five years of Ecuadorean history, which have been characterized by the most important structural change in the economy since World War II: the rise in oil exports Not only was there a permanent change in income and trade structure, but the dynamics of deforestation also changed compared to those described in the last chapter, mainly because domestic markets and economic policy had a larger role to play This also gives an opportunity to test some hypotheses from Chapter 1: first the external macroeconomic framework is outlined, then the domestic policy response and sectoral adjustment are analysed and, finally, the alleged impacts on forests are assessed