Posted by Ignacio on
Fri, 30/06/2006
From Raj Nallari and Breda Griffith's lecture notes.
Deficits/ borrowing
If a government’s expenditure is greater than its various forms of revenue and grants, the government is said to be running a budget deficit. The standard theory of fiscal deficits states that if a government cuts taxes and runs a budget deficit, then the private sector including households respond to the increase in disposable income partly with higher desired private savings and partly with higher consumer demand, depending upon each household’s marginal propensity to consume. Since desired private savings rise by only a fraction of the budget deficit, desired national savings (private and public savings) would decline. National savings must equal domestic investment in a closed economy without inflow of foreign savings. As such, a decline in national savings would lower national savings, increase real interest rates and reduce investment demand, and raise desired private saving. This is the crowding out of investment in the short term.
An accumulation of budget deficits leads to the build-up of public debt. Unless the government’s budget deficit is covered by private savings minus investment, there will be a current account deficit with the rest of the world in an open economy context. The country will be forced to increase its net foreign debts to cover the amount of the deficit. If government cannot finance the deficit by borrowing, there will be pressure on the currency to finance the deficit through depreciation. This leads to inflation thus reducing purchasing power which can have serious political consequences. Depreciation also increases the burden of foreign debt.
Financing public deficits
While several options for financing public deficits exist, some may not be available or appropriate in a particular context.
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Issuing or selling debt titles or securing domestic bank loans – This essentially means that government is borrowing from the local public; it is appealing since costs are being deferred into the future while the government ensures its autonomy from abroad. In addition, there is no inflation risk in the short run. However, selling debt titles competes for private savings at home since bonds present an alternative method of savings to the more traditional ones employed. Furthermore money is channeled away from investment and raises interest rates.
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Borrowing from abroad – In most low income countries, development banks such as the World Bank, the Asian Development Bank and the African Development Bank, and bilateral donors are the only available lenders since the country does not enjoy the credit rating required to borrow on the open international capital markets. While this method defers costs into the future without crowding out domestic investment or causing inflation, risks are heightened if repayment is in foreign currency. This approach also makes the country dependent on foreign lenders allowing them to set conditionalities for access to any money borrowed.
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Printing Money – While this method has short term benefits, being the availability of ready cash, the pernicious consequences last much longer making this a last resort for most governments. Printing money leads to less money or credit being available to the private sector, which increases interest rates and subsequently reduces investment. Alternatively, more money may be available overall, but this is a harbinger for inflation, which distorts prices leading to a loss in the value of nest egg savings.
Next week: Fiscal Policy and its Impacts
Posted by Ignacio on
Thu, 29/06/2006
The ESRC Global Poverty Research Group (GPRG) is a multi-disciplinary collaboration between social scientists at the Institute for Development Policy and Management (IDPM) at the University of Manchester and economists at the Centre for the Study of African Economies at the University of Oxford. Manchester University has now consolidated its position as a leading institution for the interdisciplinary study of poverty through the establishment of the Brooks World Poverty Institute (BWPI).
GPRG and BWPI are convening a major conference in Manchester, U.K. on July 2-4, 2007, to address these issues on the theme of "Poverty and Capital". The conference will present key findings from the GPRG research programme and explore the interface between economic models of development, theories of markets and the empirical consequences of capitalist development. The conference is organised around three main themes Finance and Economics, Capitalist Development, and The Politics and Institutionalisation of Capital. The aim is to provide an interdisciplinary space for the cross fertilisation of ideas between academics, policy makers and practitioners, and between different disciplinary takes on core processes of social transformation and economy.
The organisers welcome abstracts for papers and panels around the three themes which are set out in more detail below. Submissions for panels and papers which support cross cutting themes are also welcome. Abstracts of 250 words should be sent to Debra Whitehead debra.whitehead [@] manchester.ac.uk by 20 December 2006. Decisions on papers and panels will be sent out by email by 1 February 2007. Final versions of accepted papers need to be returned to Debra Whitehead by 1 June 2007. These will be available on the conference website from 16 June 2007 onwards. For further information about conference themes please contact the conference organisers, Dr Maia Green maia.green [@] manchester.ac.uk and Professor David Hulme david.hulme [@] manchester.ac.uk.
More information about the conference and the call for papers at IDPM's website.
From World Bank PovertyNet newsletter
Posted by Ignacio on
Tue, 27/06/2006
It can be done, according to the report Economic Growth in South Asia, recently published by the World Bank. If growth accelerates to 10%, poverty could go down by two thirds and reach single-digit rates by 2015.
In the words of Shantayanan Devarajan, World Bank Chief Economist for the region and co-author of the report:
South Asia's decade-long economic expansion has raised the possibility that the sub-continent could eliminate poverty in our lifetime. But to realize this dream, South Asians must create the conditions and incentives necessary to sustain and accelerate growth that benefits all. The economic well-being of several hundred millions of people depends on it.
Poverty reduction has already been significant in the past decade, thanks to sustained economic growth. Ijaz Nabi, the report’s co-author:
Across the board, poverty has come down by six, seven, eight percentage points, as a result of this decade long growth rate. The one country in the region that did not experience a reduction in poverty was Pakistan, because Pakistan’s growth rate virtually stalled in that decade. But there too, growth has now picked up and the most recent data from Pakistan show a substantial reduction in poverty.
Of course, to fulfill this optimistic forecast, big challenges need to be addressed:
A closer look at the evidence suggests that much remains to be done to achieve these accelerated growth rates. First, economic growth in the past decade has resulted in growing income inequality which may act as a constraint to higher growth. Second, while conflict, corruption and high fiscal deficits may not have constrained growth in the past, their persistence may become binding in the future. Third, a comparison with East Asia--a region that has sustained 7-10 percent growth rates--shows that South Asia's export-orientation, inflows of foreign direct investment, workers’ skill levels, infrastructure and ease of doing business are also substantially less advanced than East Asia's. South Asia’s savings, investment and productivity are also lower. These challenges suggest a set of policy choices for South Asian countries aimed at increasing investment and productivity, and the quality of labor, while addressing the problem of lagging regions and poor service delivery. Finally, the least integrated region in the world, South Asia can benefit from regional cooperation in trade, water and energy, among other things.
Related:
Much more available at the report's website, including interviews with the authors and abundant data.
Posted by Ignacio on
Mon, 26/06/2006
Using the Russian case as an example, this OECD paper by Rudiger Ahrend looks at concepts such as the "Dutch Disease" or rich natural resource endowments "curses", and argues that the right economic policies can overcome or mitigate institutional pathologies traditionally associated with abundance of natural resources.
Read the full paper.
Related: read a previous post in this blog with theory and evidence of the "Dutch Disease"
Via Development Gateway.
Posted by Ignacio on
Fri, 23/06/2006
From Raj Nallari and Breda Griffith's lecture notes.
Public expenditure
Public expenditure is a measure of the value of goods and services bought by the State. Public expenditure is capable of playing four main roles: it contributes to current effective demand; it can be used for stabilization purposes; it increases the public endowment of goods and can be used for redistributive purposes; and it can give rise to positive externalities to the economy and society, especially through its capital component.
Public expenditure can be classified in terms of the kind of goods and services bought, (capital goods; consumption goods; and personnel expenditure), in terms of the official body from which budget it is financed (the central state and its ministries; and regional and local authorities), and according to the macro-function at which it is directed (justice and public order; education; and health).
There is no single desirable level of government spending. However, the aggregate level of spending must be consistent with the macroeconomic framework. If not, high or rising budget deficits, depending upon how they are financed, will result in various forms of macroeconomic imbalances. For instance, as we discuss later, excessive budgets can give rise to inflation and crowding out of private investment.
Taxation
The government finances its expenditures through taxation, borrowing, grants and the creation of new money. In developed countries, the bulk of government revenues are raised through taxation. In some developing countries however, the taxation system is not well developed, therefore non-tax revenue may be the primary source of government finance. Non-tax revenue comprises fees levied by government (e.g., customs and excise duties) as well as profits and dividends from state owned enterprises.
Taxes are commonly divided into:
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Income tax which are levied on income of households and businesses.
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Corporate income tax may be levied on a corporation’s profits.
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Sales and excise taxes are levied on commodities; they are considered pernicious since they do not differentiate between different income levels in application.
It is important to maintain a balance between different types of taxes. Direct taxes are generally a better tool to improve income distribution: those who earn more, pay more. By contrast, although indirect taxes, such as sales taxes or VAT tend to generate revenues more easily and are conducive to macroeconomic stability they are not necessarily progressive since all population groups pay the same (unless basic goods are zero rated). The same is also true for other indirect taxes, such as international trade duties, which tend to be easier to collect but at the same time regressive.
Government revenue may also come in the form of foreign grants. Grants may be either transfers of cash, or the provision of goods or services from bilateral or multilateral donors without any corresponding exchange of payment. Grants have obvious benefits: they do not detract from private sector incomes in the recipient country, nor do they generally impact interest rates and inflation. However, the costs can sometimes be high: grants tend to create a dependency on international aid which may undermine development efforts thereby hurting the domestic market. In addition, they often have conditionalities attached, which compromise the autonomy of a government.
The desired features of an effective tax system are least cost for administration, simplicity in structure for compliance, broad based in application, and tax neutrality to avoid production, consumption or trade distortions. The tax system should provide for a stable and assured source of revenue, understood by both taxpayer and administrator, should be easy to administer and flexible, and should distribute the tax burden in a manner that is perceived to be fair and equitable.
The Five Desirable Characteristics of any Tax System
1. Economic efficiency: the tax system should not interfere with the efficient allocation of resources.
2. Administrative simplicity: the tax system ought to be easy and relatively inexpensive to administer.
3. Flexibility: the tax system ought to be able to respond easily (in some cases automatically) to changed economic circumstances.
4. Political responsibility: the tax system should be designed so that individuals can ascertain what they are paying for so that the political system can more accurately reflect the preferences of individuals.
5. Fairness: the tax system ought to be fair in its relative treatment of different individuals.
Source: Stiglitz (1988)
In line with these desirable features, raising revenues from a few taxes with simple rate structures would help contain administrative and compliance costs and avoid the perception of excessive taxation. Broadening the tax base with limited exemptions also enables revenues to be raised with lower rates and makes the revenue stream more predictable. For example, a value added tax or a single-stage sales tax when levied at a low and uniform rate on a broad base is efficient and avoids “cascading” or cumulative taxation of goods as they move along successive stages of production. By contrast, fiscal incentives for investment in the form of preferential tax rates and so on have usually been found to be ineffective in most developing countries.
Efficient tax collection not only depends on an efficient tax system, it also relies on an efficient tax administration, something that is often missing in developing economies. Perhaps for this reason, recent studies have shown that tax revenue, measured as a percentage of GDP, correlates positively to per capita income.
Tax revenue as a percentage of GDP
Posted by Ignacio on
Thu, 22/06/2006
Posted by Ignacio on
Thu, 22/06/2006
From Raj Nallari's lecture notes on Gender and Macroeconomics.
Macroeconomics deals with aggregates, for example, the set of aggregate accounts reporting the value and breakdown of all income and all output of an economy is one starting point. Many of the services performed, as well as goods produced, by women are not included in the UN System of National Accounts (SNA), which is the standard system used by almost all countries. Four areas of work are missing or poorly accounted for in national accounts -- domestic work, volunteer work, subsistence production, and the informal sector. Both men and women are involved in all of these sectors, but the methodological issues inherent in their measurement have been most intractable in the first two, which are largely performed by women.
Read the full text.
Posted by Ignacio on
Wed, 21/06/2006
That was Harvard President Lawrence Summers’ recommendation at a recent conference at the Center for Global Development (CGD) in Washington.
According to CGD’s site, Summers suggested that developing countries with unusually high levels of reserves shift part of their holdings from U.S. government debt to a diversified international stock and bond portfolio. This move would generate higher returns that those countries could use to improve the lives of their people.
Read the full transcript.
Paul from Truck and Barter blogged about it and included some related links.
Posted by Ignacio on
Tue, 20/06/2006
Mozambique’s poverty reduction programs aim at reducing absolute poverty by 30 percent by 2010, which can only be achieved with a GDP growth of 8 percent per year or more over the next ten years.
Bruce R. Bolnick from the Center for International Development at Harvard University argues that this very ambitious target is feasible. In his paper “Economic Growth as an Instrument for Poverty Reduction in Mozambique: Framework for a Growth Strategy" he studies the relationship between Growth and Poverty Reduction and applies it to the specific case of Mozambique.
He mentions six fundamental ideas to take into account when choosing a strategy to reduce poverty:
First, that rapid, broad-based and sustainable growth is an essential and powerful instrument for poverty reduction. Prosperity for the people will remain out of reach unless there is a tremendous expansion in productive capacity, and a corresponding increase in the resource base for financing public-sector programs.
Second, that high rates of saving and investment, and rising productivity are the foundation for rapid and sustainable growth. These three basic factors should therefore figure prominently in the development of a successful growth strategy. At the same time, the distribution of investment and productivity gains has to be broad based, to ensure that growth benefits the poor.
Third, that human development plays an essential role in fostering growth. Growth and human development are mutually reinforcing: growth promotes human development, and human development promotes growth. An effective program to foster growth and human development creates a "virtuous circle" of accelerated progress in poverty reduction. Effective policies for human development are therefore a vital component of the growth strategy.
Fourth, that rapid, sustained and broad-based growth is achievable. Fifty years ago no one dreamed that a poor country could sustain per capita income growth above 5% per year. Yet this outcome has been realized by a handful of countries. Mozambique is well placed to match or surpass this standard, but success depends on maintaining a high rate of investment and steady gains in productivity.
Fifth, that government policies, programs and institutions are critical determinants of investment, productivity, and hence growth. While the private sector is the main engine of growth, government is the catalyst. Rapid, sustained and broad-based growth requires an environment of well-conceived and consistent policies, efficient administration of public programs, and effective public-sector institutions that facilitate private initiative.
Finally, that the people are the central players in the growth process, not passive "target groups" for actions taken by government. The growth strategy must address the needs, capabilities, potentialities, aspirations and vulnerabilities of poor households, as essential participants in a successful development process. It must also facilitate the development of domestic entrepreneurs, while taking full advantage of growth opportunities afforded by foreign investment.
Via Eldis.
Posted by Ignacio on
Mon, 19/06/2006
"Youthink - about ending poverty".
This was the acceptance speech (mandatory five words) from our World Bank colleagues at Youthink, who last week received the Webby Award for Activism. Congratulations to the whole team.
Webs and blogs on development issues are becoming more and more widespread, offering great opportunities for research, networking and knowledge sharing. Our own experience with this blog is very positive after only three months in the blogosphere.
Our colleagues from the PSD Blog maintain an excellent blogroll of development blogs and web sites.
Posted by Ignacio on
Fri, 16/06/2006
From Raj Nallari and Breda Griffith's lecture notes.
Today's posting discusses the role of government in the economy and the rationale for government, before turning to a consideration of fiscal policy and its impact on economic growth and on the poor during the next few weeks.
Introduction
Under ideal circumstances, markets will allocate resources efficiently. Markets are not perfect, however, suggesting a role for government. For example, the government can tax or regulate negative externalities (e.g. pollution), produce public goods (e.g. defense), redistribute income, and define and enforce property rights. It can also be argued that the government may have a role to play in stabilizing the economy using monetary and fiscal policies. Fiscal policy deals with the various uses of taxes and public expenditures.
Role of Government in the Economy
Government can provide the legal framework and services needed for the effective operation of a market economy. To do this, government has five primary functions in economic development:
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Providing a legal and social framework
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Providing public goods
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Government regulation
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Reallocating resources
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Stabilizing the economy
The existence of a problem in the market (or “market failure”) does not automatically mean that government intervention can allocate resources more efficiently. A substantial amount of information is required to find the optimal allocation of resources, meaning that “government failure” may end up being worse than the original market failure it was meant to address.
Another issue is that at times there will be conflicts among the government’s many goals. If the government pursues redistributive goals, for example, by transferring income from one group of people to another through higher taxes, this may reduce the efficiency of resource allocation. Thus, there can be an explicit trade-off between efficiency and equity. Also, even where enough information exists to solve a problem in the market, the government might not act efficiently. Interest groups will always become involved in public policy issues that affect them directly, and their interests are not necessarily the interests of the general public.
1. Legal and social framework
By creating a sound legal framework, government sets the legal status of business enterprises and ensures the right and protection of private ownership, a key factor in encouraging entrepreneurship within a country’s borders. By establishing the legal rules of the game the government directs the relationships between businesses, resource suppliers and consumers, thus fostering an improvement in resource allocation, which in turn aids the poverty alleviation effort.The protection of individuals’ rights to the goods and services they exchange in a market system is almost everywhere provided by government, although private sector protection can often complement government protection. Three basic institutions are used to protect individual rights in a market economy: police protection, national defense and the courts and criminal justice system. By protecting individual rights, the government creates a system permitting individuals to interact with each other through voluntary agreement, thereby reserving the legitimate use of force to the government. Another important function of government is facilitating the enforcement of contracts, which allows citizens to operate with confidence that legal recourse is available should a colleague or a client fails to fulfill their commitments.
The protection of rights and enforcement of contracts is necessary for a functioning economy. This protection makes up a sizable fraction of the public budget. Countries with the best developed laws and regulations also enjoy a higher level of economic activity than those which provide few safeguards. The democratic model of checks and balances uses one branch of government to constrain the others, while democratic election of officials can also have the effect of constraining the power of government.
2. Provision of public goods
Public goods and externalities provide the main theoretical justifications for government production.
Public goods are those that can be enjoyed by an unlimited number of people (nonrival) without prejudice of each other and where one cannot exclude people from using them (nonexcludable) (e.g., light houses, defense; law and order; and parks). Public goods are also indivisible; they must be produced in such large units that they cannot ordinarily be sold to individual buyers. Because of these characteristics, it is unfeasible to charge for the consumption of public goods and therefore private suppliers will lack the incentive to supply them.
Externalities or spillovers occur when some of the costs or benefits of a good are passed on or spill over to parties other than the immediate seller or buyer. Some externalities have a beneficial effect on others and are referred to as positive externalities and others have a detrimental effect and are referred to as negative externalities. Pollution is an example of a negative externality while the positive spillover effects of investment in R & D, training, or education are examples of positive externalities. The market, left on its own will tend to produce too many goods and services involving negative externalities (indicating a need to tax them or impose restrictions) and too few goods and services involving positive externalities (indicating a need to subsidize them or have them provided publicly).
3. Government regulation
Regulation is applied in cases in which the private sector allocates resources inefficiently but where the imposition of rules can provide incentives for more efficient private sector production without the government having to take over production itself.
For example, the market does not provide regulations for property rights, financial markets, a judicial system for the enforcement of contracts, labor or environmental legislation, trade legislation, health and safety standards, etc. In these circumstances, the state should step in and either provide these services directly or regulate the providers of these goods and services. Given that monopolies do not have the incentives to produce efficiently and charge appropriate prices, there is a role for the state to regulate here. Government can control monopolies either by regulating prices or setting service standards under anti-monopoly laws. In cases where monopolies cannot be avoided and may have particularly detrimental effects, it may be best for the public sector to provide the good or service in question directly.
Good regulations that are well designed allow markets to operate efficiently; conversely, bad regulations interfere with market operations. Developing countries tend to have too few of the good kind of regulation (property rights, well-functioning judiciary, environmental and financial market regulation) and too many of the bad kind of regulation (many steps required to obtain a license to open a business, overregulation of trade, marketing boards, regulating prices, and so on).
The stability of regulation is also important: one of the most damaging sources of state action is uncertainty. One needs to be assured that the rules and regulations of an economy, the protection of property rights and the provision of public goods are not subject to continuous change. Only in this way can society function optimally and only in this way will it act as a magnet for investment.
4. Redistribution
At first glance, the reasons why government might engage in some redistribution of income might appear obvious, but a closer look reveals that there are a few closely related rationales for redistribution. One underlying principle is to use public policy to improve the well-being of those members of society who are least fortunate, providing a safety net for people who have fallen on hard times and ensuring that everyone has access to some minimal standard of living. Alternatively, greater equality might be desired as a social goal. Although these two goals have a similar ring to them, note that they are different goals and might imply different public policies. Helping the poor is not necessarily the same thing as promoting greater equality.
Obviously, the poor in wealthy nations tend to be better off than the poor in poorer nations, suggesting that improving the well-being of the poor can be consistent with increasing everyone’s standard of living. At the extreme, the goal of equality could be achieved by confiscating the wealth of above-average wealth holders and giving it to those below average until everyone's wealth is the same. This would destroy the incentive to be productive and would result in equality by creating a very poor society for everyone. This extreme example shows that the goals of equality and the alleviation of poverty are not necessarily the same.
Although a market economy benefits society as a whole, it does not benefit everybody. There are always winners and losers. Whatever the origin of unequal income distribution may be, each society decides how much state intervention they want to use to even it out. The features shared by the most egalitarian societies are a public education and health system, unemployment insurance and public pension systems and a well-developed welfare state.
The design of policies aimed at redistribution will depend on what goals the policies/programs are intended to accomplish. Public education is redistributive in that it provides everyone with an equal opportunity. The tax system represents another way of redistributing income. Higher taxes on upper-income individuals will further the goal of equality but might reduce the incentive for upper-income individuals to earn income, resulting in less total tax revenue. Likewise, taxation of investment income can discourage saving and investment, making the economy less productive. This will further the goal of equality, but perhaps at the cost of reducing economic growth and making those at the lower end of the income scale worse off, too. Issues like this must be considered when designing a tax system, but a different tax structure will be called for depending upon whether the goal of redistribution is to create more equality or whether it is to help those who are the least fortunate in society.
5. Stabilization
Stabilization policies are designed to address short-run fluctuations in economic activity. These fluctuations, which are caused by demand (e.g., lower demand for exports by partner countries) and/or supply side shocks (e.g., the quadrupling of oil prices in the 1970s), can be eased by using fiscal and/or monetary policy. Stabilization policies can in turn be of the automatic or active variety.
One example of an automatic stabilizer is unemployment compensation: if the economy goes into recession, unemployment compensation payments automatically increase as people become unemployed. Tax payments also typically decline as activity decreases. These forms of stabilizers provide channels through which the volatility of economic activity is automatically suppressed moving through the business cycle.
Active stabilization policies are another option. These were very popular in the post-second World War period (postwar model) because the conventional wisdom was that one of the key reasons for the great depression was the failure of the Federal Reserve and the government to react and cut interest rates and increase expenditure. However, in the 1970s, many governments found that these policies did not work if the "short" side (or limiting side of the economy to the generation of faster growth) is not the demand side but rather the supply side. If a government attempts to use expansionary policies (creating more demand through expansionary monetary or fiscal policy) in an economy with the supply side either at full employment or below full employment but without ability to expand due to some bottle neck or rigidity, it leads to inflation (thus the stagflation of the 1970s) and, if it is an open economy, to a balance of payments deficit (as imports increase). Since the 1980s there has been increasing skepticism about activist countercyclical macroeconomic policy, especially on the fiscal side, which is typically harder to activate and fine tune. And, although monetary policy is seen to have some role in helping to stabilize economic activity, it is now widely held that the primary goal of monetary policy should be low inflation.
Next week: Fiscal Policy. Public Expenditure and Finance
Posted by Ignacio on
Thu, 15/06/2006
This is the title of the new book presented today at the World Bank. Its author, Eugene Nyambal, is Senior Strategy Officer at the International Finance Corporation (IFC) and was previously Principal Advisor to the Executive Director of the IMF for African Countries and Team Leader for Private Sector Development at the World Bank.
In his book, Mr. Nyambal compares Africa's performance with that of other regions and asks himself what Africa is doing wrong. He comes to the conclusion that Africa was left behind due to a combination of institutional failure and culture matters.
In his presentation today, he made clear that in his opinion leadership is crucial to make things happen, the 10 keys to get out of poverty being:
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Promoting new social contract based on the leadership's ability to elevate the quality of life of citizens.
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Improving the effectiveness of the State, strengthen Civil Society to foster accountability.
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Setting an ambitious development vision for prosperity and benchmarking the most successful models.
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Creating an enabling environment.
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Promoting entrepreneurship, innovation and encouraging the rise of new role models for the youth.
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Reforming the education system to spread knowledge and values necessary for a successful market economy.
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Fostering regional integration to enlarge markets, attract investments and raise the cost of foreign control.
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Promoting long-term population growth policies and building social capital.
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Utilizing resources of International Financial Institutions to move from dependency to growth and self-reliance.
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Discontinuing support to governments whose track records of corruption and poor economic management over an extended period of time have prevented improvements in the standard of living of their people.
Related: see also a recent post by Michael Standaert at Audeamus, where he wonders if there is hope for Africa. A lot of interesting links included there ...
Posted by Ignacio on
Tue, 13/06/2006
The World Bank Institute Development Studies has just published the book "Diaspora Networks and the International Migration of Skills: How Countries Can Draw on Their Talent Abroad".
As opposed to much of much of the recent literature (and recent postings here) which focus on remittances and their development impact, this study's focus is on the knowledge and policy contributions of expatriates and diaspora networks.
Expatriates do not need to be investors or make financial contributions to have an impact on their home countries. They can serve as “bridges” by providing access to markets, sources of investment, and expertise. Influential members of diasporas can shape public debate, articulate reform plans, and help implement reforms and new projects. Policy expertise and managerial and marketing knowledge are the most significant resources of diaspora networks.
The recent literature emphasizes remittances and their development impact. In contrast, we are somewhat skeptical that remittances and other financial transfers by migrants can ever have a significant development impact, although they are certainly an important tool of poverty alleviation.
The overview first chapter is available on-line. You can also buy the book on-line.
There is much more information on the diaspora of the highly skilled on WBI's Knowledge for Development website.
See our latest posting on migration issues.
Thank you to Alexey Volynets, from WBI Knowledge for Development.
Posted by Ignacio on
Mon, 12/06/2006
This paper is the first in a series on Gender and Macroeconomics compiled by Raj Nallari. We will be posting them in upcoming weeks.
In this introduction, Raj makes nine main points, when discussing how to engender Macroeconomic Policies:
First, there is the need to improve gender-statistics, beginning with the inclusion of women’s contribution to the economy. We know that official GDP figures substantially underestimate the contribution of women to economic performance because women’s efforts account for 60 to 80 percent of informal sector activity. In addition, women are engaged in unpaid work, such as child care, household maintenance, subsistence farming, and care for the sick, which goes completely unrecorded.
Second, there is a growing literature which suggests that a failure to model this "non-market" sector of the economy can result in distortions in both analysis and implementation policy conclusions. The acceleration of globalization in the 1990s also stimulated an exploration of modeling techniques to capture the structural dynamics of gender relations and their effect on growth and policy outcomes. Modeling efforts are assisted by the increasing availability and improving quality of gender-disaggregated data, though much remains to be done in this area.
Third, economic assessments of the impact of price liberalization on production may benefit from taking gender considerations into account.
Fourth, there is enough evidence to indicate that women act as ‘shock absorbers’ during economic and financial crises and during economic shocks.
Fifth, achievement of gender-related MDGs requires promoting policies that differentially favor women and girls with the aim of ensuring gender equality. In this context, the issue becomes one of how to translate PRSP’s medium-term goals into annual national budgets while ensuring the MDGs. A gender focus would influence the choice of the specific expenditure or revenue instruments used to consolidate the fiscal position.
Sixth, trade policy measures affect men and women in different ways. There is some evidence to suggest that in developing countries, greater trade openness is associated with an increased share of women in paid employment, particularly in labor intensive sectors.
Seventh, women are benefiting from access to micro-finance and access to borrowing for small and medium enterprises. Also, policies on financial services liberalization could explore how to reduce the transaction costs associated with remittances, a factor which disproportionately taxes female migrants in many countries.
Eight, gender inequality is an important factor in the spread of HIV/AIDS, which in turn has had significant macroeconomic implications in affected countries.
Ninth, women suffer from inadequate property rights (land, control over other assets…..)
Read the whole paper.
Posted by Ignacio on
Fri, 09/06/2006
From Raj Nallari and Breda Griffith's lecture notes. This week we finish the analysis of the relationship between economic growth and poverty.
Economic Growth and Inequality
Is a less equal distribution of income good or bad for a country’s development? There are different opinions about the best pattern of distribution in terms of growth generation—about whether, for example, the Gini index should be closer to 25 percent (as in Sweden) or to 40 percent (as in the United States) and whether optimal distribution patterns change as income changes. An excessively equal income distribution can be bad for economic efficiency. Take, for example, the experience of communist countries, where deliberately low inequality (with no private profits and minimal differences in wages and salaries) deprived people of the incentives needed for their active participation in economic activities—for diligent work and vigorous entrepreneurship. Among the consequences of attempted equalization of incomes were poor discipline and low initiative among workers, poor quality and limited selection of goods and services, slow technical progress, and eventually, slower economic growth leading to more poverty. But moving beyond this extreme, some studies suggest that countries with more equal distribution of certain assets (public goods, land, etc) tend to grow faster (see graph below).
For instance, Deninger and Squire (1997), using a comprehensive and improved dataset, found that inequality generally tended to favor economic growth across countries. Their findings also suggest that inequality across assets has more of an impact than income inequality, although the two are closely related. Turning to policy recommendations, they indicate that redistributive policies, in particular those that improve the poor’s access to credit, can help boost growth. Government’s have, of course tried redistributive policies in the past – for example, through land redistribution, through employment programs, through subsidies, or through access to credit, to public goods, to infrastructure, to health, or to education – but with varying degrees of success. A large agenda for further, deeper research exists in this area, directly related to the impact of public spending on equality.
Countries with more equal land distributions tend to grow faster
Posted by Ignacio on
Thu, 08/06/2006
The World Bank launched recently the Africa Catalytic Growth Fund (ACGF). Its goals:
To provide rapid, targeted support to countries with credible programs to accelerate growth, poverty reduction, and attainment of the Millennium Development Goals (MDGs).
The fund is designed to complement efforts by African leaders and Africa’s international partners to respond to the diversity of experience across the continent, using an innovative approach.
The ACGF can be a key tool for scaling up aid, in a harmonized and effective way. The ACGF is highly selective, focusing on a few countries at a time where an infusion of capital can scale up the achievement of results by supporting results focused programs, catalyzing efforts by developing partners, and identifying opportunities for demonstrable impacts and spillover effects.
The fund's main targets are:
More information in their web site.
ACGF brochure.
ACGF board report.
Posted by Ignacio on
Wed, 07/06/2006
UN Secretary-General Kofi Annan presented yesterday a report on International migration and development and proposed a global forum to examine their links.
In his words, such a forum would:
Allow governments to establish a common understanding, based upon the best evidence, on the areas of migration policymaking that have the greatest potential to contribute to development.
Most of all, such a forum would maintain our focus on international migration issues, while signaling that international migration is a normal but crucial element in the development process.
More food for thought for a topic widely debated recently.
Related:
Raj Nallari's comment here on migrant remittances.
PSD today: Home Depot does remittances.
The recent New York Times article on brain drain (of nurses) and CGD's reaction.
Posted by Raj on
Tue, 06/06/2006
The essential logic is that devolution of political and administrative power as well as fiscal resources to lower levels of governments (state or provincial governments, municipalities and village administrations) would lead to improved economic efficiency in provision of public services to local residents and this in turn contributes positively to economic growth at the local and national levels (so-called Oates’ Decentralization Theory). For example, if a certain city does not provide essential services then residents are likely to move to other cities (i.e. vote with their feet).
In reality, the evidence between decentralization and economic growth is unclear and mixed. For example, Davoodi and Zou (1998) using cross-country data for the period 1970-89 found a negative correlation between fiscal decentralization (measured as a share of local government expenditure in total government expenditure) and growth leading them to interpret the results as:
(i) recurrent expenditures at local government levels do not necessarily contribute to growth;
(ii) capacity of local governments’ is usually inadequate to provide services needed for growth; and
(iii) the complementarity between political, administrative and fiscal decentralization is complex and therefore the relationship between decentralization and growth is complicated.
While other studies, such as the one on China’s twenty-one provinces during 1986-92 found a negative relationship and an insignificant contribution in the states of USA during 1948-94, Akai and Sakata (2002) and Huther and Shah (1998) found a positive correlation between fiscal decentralization and growth. Ihmi (2005) found that the benefits of fiscal decentralization depends on how much political freedom the residents enjoy and therefore, together contribute to growth.
Posted by Ignacio on
Mon, 05/06/2006
The World Bank has recently published the report Sustaining Gains in Poverty Reduction and Human Development in the Middle East and North Africa. The report states that there has been little progress in poverty reduction in the MENA region since the mid 1980s. The slow growth can be at the origin of this lack of progress in poverty reduction.
In an interview, Farrukh Iqbal, Lead Economist and author of the report, talks about the relationship between growth and poverty in the region:
Slow growth has a social cost. In the region, average per capita income grew by only 1 percent per annum between 1985 and 2000. Over roughly the same period, the number of poor grew by 11.5 million to reach 52 million. This shows what happens when populations continue to grow while economies don't. This also justifies the Bank's concern with promoting growth in the region as the most effective way of fighting poverty.
The good news is that human development indicators have improved in the region, regardless of the lack of growth:
Surprisingly, the lack of income growth did not constrain human development in MENA. While per capita incomes stagnated, health and education indicators improved tremendously. For example, between 1985 and 2000, literacy spread from 47 to 69 percent of the population, child mortality rates plunged from 108 per thousand to 46 per thousand, and average years of schooling rose from 3.2 to 5.4. Indeed, the region did better than its middle-income comparators over this period.
There is reason to believe that the gains in human indicators were due to a combination of factors including enhanced private spending and improvements in the delivery of public health and education services. This is an encouraging finding. It suggests that, even in the absence of income growth, it is possible to improve health and education attainments through attention to public service delivery. It provides a strong empirical justification for the Bank's operational focus on such issues.
Access the whole report.
Read the interview with Farrukh Iqbal.
Related article: Poverty in the Middle East and North Africa: A Cause for Concern?
Posted by Ignacio on
Fri, 02/06/2006
As every Friday, from Raj Nallari and Breda Griffith's lecture notes.
Variations in Poverty Responses
While economic growth is critical, especially in the long run, the response of poverty to economic growth differs across countries. Key in this respect is the initial level of income inequality and how this inequality changes over time. Lopez (2005) cites the cases of Senegal and Burkina Faso with similar levels of economic growth (2.2% per capita per annum) over a similar time frame poverty declined by 2.5% per annum in Senegal but by just 1.8% in Burkina Faso. Relatedly, the sectoral composition of economic growth can explain why given economic growth rates can lead to differences in poverty reduction rates (see below). Understanding these factors enables us to view growth in a pro-poor context.
The composition of economic growth also has implications for poverty reduction. Growth that derives from the intensive use of unskilled labor will have a greater impact on reducing the incidence of poverty given that the poor are more likely to be unskilled. A recent paper by Loayza and Raddatz (2005) shows that not only does the incidence of poverty fall in the face of aggregate economic growth but that poverty reduction is stronger when growth has a labor-intensive inclination (Loayza and Raddatz, 2005). Furthermore, the Operationalizing Pro-Poor Growth group found that most of the absolute reduction in poverty in countries experiencing economic growth occurred in the rural areas, where the majority of the poor live and draw their livelihoods from agriculture. Thus land and labor policies will affect participation by the rural poor with consequent implications for economic growth and poverty reduction.
Pro-Poor Growth
From the previous section, we know that the incidence of poverty responds to changes in economic growth. We also know that how receptive poverty is to economic growth depends on the initial level of income inequality and how this changes with economic growth. In recent years the concept of pro-poor growth was introduced to provide greater insights to the relationship between economic growth, poverty and income inequality. The concept of pro-poor growth attempts to capture the way in which economic growth improves the welfare of society’s poor given the accompanying changes in income inequality. Thus assessing whether growth is pro-poor requires knowledge of the distributional changes in income and the extent to which this has impacted the welfare of the poor.
What do we mean by ‘pro-poor growth’? Put simply, ‘pro-poor’ growth is the type of growth process that is most effective in raising the incomes of the poor. More formally, the literature suggests two definitions. The first focuses on whether the distributional shifts accompanying growth favors the poor, i.e. whether poverty falls by more than it would have had all incomes grown at the same rate. The second focuses on whether economic growth benefits poor people in absolute terms as reflected by changes in an appropriate measure of poverty. The measures of poverty generally used are the headcount index, the Watts index and the poverty gap and the concepts of relative and absolute poverty are also used to detect underlying levels of inequality.
Measuring how pro-poor growth is means measuring both how poverty responds to economic growth and to changes in income distribution. To do this we break down poverty, e.g. the headcount index, into a component attributable to economic growth and a component attributable to the change in income distribution. This method has proved to be informative about the reasons for variations in the rate of poverty reduction across countries and has been developed by Datt and Ravallion (1992) and more recently by Kraay (2005). According to Kraay (2005) there are three potential sources of pro-poor growth – (i) a high rate of growth of average incomes, (ii) a high sensitivity of poverty to growth in average incomes, and (iii) a poverty-reducing pattern of growth in relative incomes. The outcome from the large sample of developing countries considered by Kraay during the 1980s and 1990s is that most of the variation (greater than 90 percent) in changes in poverty over the medium to long term is due to the growth in average incomes. The remainder of the variation comes from changes in relative income. A high sensitivity of poverty to growth in average incomes was not found to be relevant for the sample considered.
Two conclusions emerge – the first suggests quite strongly that the search for pro-poor growth should begin by focusing on the determinants of growth in average incomes. Second, although inequality and poverty elasticity were found to be weak sources of pro-poor growth, a deeper understanding of what drives growth will shed further light on its distributional impact and the response of poverty. Undeniably high income inequality hampers the ability of growth to reduce poverty and is in fact a barrier. Ravallion found that for very high inequality countries, a 1 percent increase in income levels had a much lower impact (0.6% reduction) in poverty levels than for low inequality countries (4.3%). The interpretation then must be that faster economic growth is necessary to reduce poverty in countries with high inequality. In other words, the concept of pro-poor growth becomes relevant.
Poverty will be more responsive to growth the greater the equality of income distribution. While the literature largely agrees that growth tends to be distribution neutral, i.e. changes in inequality are not related to changes in economic growth; distributional changes have been an important factor in explaining differing rates of poverty reduction at a country level. The 1990s have been characterized by rising within-country inequality in every region except the Middle East and North Africa. The Gini coefficient for Sub-Saharan Africa and Latin America is similar. Between 1993 and 2002, the Gini coefficient grew by 2.3 percent annually in Vietnam and by 2 percent per annum in China between 1990 and 2001. Ravallion (2001) suggests that ‘the median rate of decline in the “$1/day” headcount index is 10% per year among countries that combined growth with falling inequality, while it is only 1% per year for those countries for which growth came with rising inequality. Rising inequality reduces the impact of future economic growth on poverty reduction. Bourguignon (2004) finds that a fall in the Gini coefficient from 0.55 to 0.45 (still a relatively high inequality country) would cause poverty to drop by more than 15 percentage points in 10 years. It would take 30 years to achieve the same reduction in poverty if inequality remained unchanged.
To conclude, we note that:
(i) growth is the fundamental factor for poverty reduction,
(ii) growth accompanied by progressive distributional change is, however, better for poverty reduction than growth alone; and
(iii) high initial inequality reduces the impact of growth on poverty reduction.
The existing literature suggests that both growth and inequality are important for pro-poor growth and that their relative importance depends on country conditions, most notably the initial level of income and inequality. In order for growth to be pro-poor, it will have to disproportionately benefit the poorer levels of any given society. In low-income countries, the need to accelerate pro-poor growth for poverty reduction has emerged as critical, particularly in the context of poverty reduction strategies and the efforts to accelerate progress towards the Millennium Development Goals (MDGs).
Next week: Economic Growth and Inequality
Posted by Ignacio on
Thu, 01/06/2006
The Poverty and Growth Program of the World Bank Institute will deliver two courses on Macroeconomic Management during the month of June, both organized by one of this blog's authors Hippolyte Fofack.
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Macroeconomic Management for Growth and Financial Stability in the SADC region, from June 13-15 in Pretoria, South Africa: Course description and agenda.
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Macroeconomic and Development Challenges in the Post-HIPC Era in Cameroon, from June 26-29 in Yaounde, Cameroon: Course description (in French), and agenda.
Please contact directly Hippolyte Fofack if you are interested in any of these courses (his email is included in the course descriptions).
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