Study on Quality of Public Finances in Support of Growth in the Mediterranean Partner Countries of the EU

Until the early 1990s, the discussions on fiscal policy primarily centered on the functions of economic stabilization, income redistribution and resource allocation. Long-term growth was not usually viewed as an end itself, and fiscal policy was often not sufficiently tailored to the different circumstances and priorities of countries at different stages of development. It is only relatively recently that the discussion has gradually focused on the links between different dimensions of quality of public finances and economic growth. Based on the conceptual framework for linking the quality of public finances and economic growth that has been developed by the European Commission and applied to the EU Member States, this study examines the conditions under which the budgetary policy, and more specifically expenditure, revenue and financing design would be supportive of growth in the Mediterranean partner countries of the European Union. The study also highlights some of the interlinkages between fiscal policy and growth and summarises empirical findings found in the literature with particular focus on Mediterranean partner countries of the European Union. The main findings of the study are similar to those that apply to the EU Member States and can be summarised as follows: • The way government expenditures are financed matters. Deficit and debt financing clearly undermines growth performance. • The composition of expenditure does matter however the efficiency of the expenditure undertaken is even more important for growth. For countries with good governance indicators the positive impact of the productive expenditures on growth was enhanced. The analysis was applied to the efficiency of education and health expenditures with basically similar results. • Notwithstanding the importance of 'fair' income distribution, when tax policy relies heavily on income taxation to do so, the analysis suggests a likely negative effect on growth. Specifically, consumption taxes were found to depress growth by up to four times less than income taxes. The study concludes by highlighting possible areas in the planning and execution of fiscal policy and governance where growth enhancing interventions can be applied.public finance, economic growth, Mediterranean region

Do Phoenix miracles exist ? firm-level evidence from financial crises

This paper provides empirical evidence on firm recoveries from financial system collapses in developing countries (systemic sudden stops episodes), and compares them with the experience in the United States in the 2008 financial crisis. Prior research found that economies recover from systemic sudden stop episodes before the financial sector. These recoveries are called Phoenix miracles, and the research questioned the role of the financial system in recovery. Although an average of the macro data across a sample of systemic sudden stop episodes over the 1990s appears consistent with the notion of Phoenix recoveries, closer inspection reveals heterogeneity of responses across the countries, with only a few countries fitting the pattern. Micro data show that across countries, only a small fraction (less than 31 percent) of firms follow a pattern of recovery in sales without a recovery in external credit, and even these firms have access to external sources of cash. The experience of firms in the United States during the 2008 financial crisis also suggests no evidence of credit-less recoveries. An examination of the dynamics of firms'financing, investment and payout policies during recovery periods shows that far from being constrained, the firms in the sample are able to access long-term financing, issue equity, and significantly expand their cash holdings.Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Emerging Markets,Economic Theory&Research

Does the structure of banking markets affect economic growth? evidence from U.S. state banking markets

This paper examines the relationship between the structure of banking markets and economic growth using a new dataset on manufacturing industry-level growth rates and banking market concentration for U.S. states during 1899-1929 - a period when the manufacturing sector was expanding rapidly and restrictive branching laws segmented the U.S. banking system geographically. Unlike studies of modern developing and developed countries, we find that banking market concentration had a positive impact on manufacturing sector growth in the early twentieth century, with little variation across industries with different degrees of dependence on external financing or access to capital. However, because regulations affecting bank entry varied considerably across U.S. states and the industrial organization of the U.S. banking system differs markedly from those of other countries, we also examine the impact of other aspects of banking market structure and policy on growth. We continue to find that banking market concentration boosted industrial growth. In addition, we find evidence that a greater prevalence of branch banking and more banks per capita increased the growth of industries that rely relatively heavily on external financing or have greater access to external funding sources, while deposit insurance depressed growth in the manufacturing sector. Regulations on bank entry and other banking market characteristics thus appear to exert an independent influence on manufacturing growth in geographically fragmented banking markets.Bank supervision ; Banking market ; Financial services industry ; Economic development

Measuring the capability to raise revenue process and output dimensions and their application to the Zambia revenue authority

The worldwide diffusion of the good governance agenda and new public management has triggered a renewed focus on state capability and, more specifically, on the capability to raise revenue in developing countries. However, the analytical tools for a comprehensive understanding of the capability to raise revenue remain underdeveloped. This article aims at filling this gap and presents a model consisting of the three process dimensions ‘information collection and processing’, ‘merit orientation’ and ‘administrative accountability’. ‘Revenue performance’ constitutes the fourth capability dimension which assesses tax administration’s output. This model is applied to the case of the Zambia Revenue Authority. The dimensions prove to be valuable not only for assessing the how much but also the how of collecting taxes. They can be a useful tool for future comparative analyses of tax administrations’ capabilities in developing countries.Die weltweite Verbreitung der Good-Governance- und New-Public-Management-Konzepte hat zu einer zunehmenden Konzentration auf staatliche Leistungsfähigkeit und, im Besonderen, auf die Leistungsfähigkeit der Steuererhebung in Entwicklungsländern geführt. Allerdings bleiben die analytischen Werkzeuge für ein umfassendes Verständnis von Leistungsfähigkeit unterentwickelt. Dieser Artikel stellt hierfür ein Modell vor, das die drei Prozess-Dimensionen „Sammeln und Verarbeiten von Informationen“, „Leistungsorientierung der Mitarbeiter“ und „Verantwortlichkeit der Verwaltung“ beinhaltet. „Einnahmeperformanz“ ist die vierte Dimension und erfasst den Output der Steuerverwaltung. Das mehrdimensionale Modell wird für die Analyse der Leistungsfähigkeit der Steuerbehörde Zambias (Zambia Revenue Authority) genutzt. Es erweist sich nicht nur für die Untersuchung des Wieviel, sondern auch des Wie des Erhebens von Steuern als wertvoll. Die vier Dimensionen können in Zukunft zur umfassenden und vergleichenden Analyse der Leistungsfähigkeit verschiedener Steuerverwaltungen in Entwicklungsländern genutzt werden

Towards a Principal-Agent Based Typology of Risks in Public-Private Partnerships

There is a strong economic rationale for close cooperation between the public and private sectors. This has resulted in a significant increase in the demand for the provision of public services through instruments combining public and private money such as public-private partnerships (PPPs or P3s). We describe these arrangements and explore how they can be analyzed using standard tools in economics (incentives and principal-agent theory). We discuss the implications of our approach in terms of identifying risks that are often overlooked before turining to the optimal risk-sharing between the public and private partners, in particular with respect to information asymmetries in risk perceptions. This allows us to propose a typology of the risks associated with PPPs, where both internal risks (the risks associated with the contract) and external risks (those associated with the project) are considered.infrastructure financing, public-private partnerships, principal-agent framework, risk classification, transportation infrastructure, value for money

Malaysian banking sector outlook during global financial crisis

This paper is to discuss the Malaysian banking sector outlook and examine whether Malaysian banks are well placed to weather this Global Financial Crisis. The current international financial turmoil has demonstrated the vulnerabilities in the financial systems of even the developed countries. As we have witnessed, the sub-prime mortgage crisis and the slowdown of the global economy originated from the United States which is regarded as the most developed and advanced financial market in the world. In this study, we attempt to exam whether Malaysian banks are being well placed to weather this Global Financial Crisis by testing the Capital Adequacy Ratio of Malaysian Banking System. Our finding shown that net NPL has significant relationship with risk-weighted capital ratio (RWCR), which means higher net NPL ratio will lead to higher probability of banking crisis. We believes that the Malaysian banks are fairly well placed to weather the weaker conditions ahead given the progress in the last two to three years in the clean up of their balance sheets and the buffer resulting from higher provision reserves and a generally stable capital position. While this should support the Stable Outlook on the ratings for most of the banks, the situation will have to be watched closely given the potential for further downward revision in global and regional growth prospects, particularly in 200

Investment Policy, Internal Financing and ownership Concentration in the UK

This paper investigates whether investment spending of firms is sensitive to the availability of internal funds.Imperfect capital markets create a hierarchy for the different sources of funds such that investment and financial decisions are not independent.The relation between corporate investment and free cash flow is investigated using the Bond and Meghir (1994a) Euler-equation model for a panel of 240 companies listed on the London Stock Exchange over a 6 year period. This method allows for a direct test of the first-order condition of an intertemporal maximisation problem.It does not require the use of Tobin s q, which is subject to mis-measurement problems.Apart from past investment levels and generated cash flow, the model also includes a leverage factor which captures potential bankruptcy costs and the tax advantages of debt.More importantly, we investigate whether ownership concentration by class of shareholder creates or mitigates liquidity constraints.Control is expected to influence the investment financing relation for two reasons.First, due to asymmetric information, the link between liquidity and investment could be a symptom of underinvestment.Firms pass up some projects with positive net present values because of the inflated cost of external funds.Second, from an agency perspective, external funds may not be too expensive but internal funds (free cash flow) may be too inexpensive from the manager s perspective.Whereas high insider ownership concentration reduces the liquidity constraints induced by agency costs, high insider shareholding concentration increases the liquidity constraints in the case of asymmetric information.It is expected that the induced liquidity constraints due to insider ownership is substantially reduced when outside investors control a substantial share stake and have therefore an increased propensity to monitor management.When industrial companies control large shareholdings, there is evidence of increased overinvestment.This relation is strong when the relative voting power (measured by the Shapley values) of the combined equity stakes of families and industrial companies and the Herfindahl index of industrial ownership are high.This suggests that a small coalition of industrial companies is able to influence investment spending.In contrast, large institutional holdings reduce the positive link between investment spending and cash flow relation and hence suboptimal investing.Whereas there is no evidence of over- or underinvesting at low levels of insider shareholding, a high concentration of control in the hands of executive directors creates a positive investment-cash flow relation.corporate governance;investment;corporate ownership;corporate control;liquidity constraints

Financial development and growth in the short and long run

The authors analyze the relationship between financial development and inter-industry resource allocation in the short and long run. They suggest that in the long run, economies with high rates of financial development will devote relatively more resources to industries with a"natural"reliance on outside finance due to a comparative advantage in these industries. By contrast, in the short run the authors argue that financial development facilitates the reallocation of resources to industries with good growth opportunities, regardless of their reliance on outside finance. To test these predictions, they use a measure of industry-level"technological"financial dependence based on the earlier work of Rajan and Zingales (1998) and develop new proxies for shocks to (short-run) industry growth opportunities. The authors find differential effects of these measures on industry growth and composition in countries with different levels of financial development. They obtain results that are consistent with financially developed economies specializing in"financially dependent"industries in the long run, and allocating resources to industries with high growth opportunities in the short run.Public Health Promotion,Health Monitoring&Evaluation,Banks&Banking Reform,Water and Industry,Payment Systems&Infrastructure,Achieving Shared Growth,Water and Industry,Governance Indicators,Health Monitoring&Evaluation,Banks&Banking Reform

Abstracts : Policy Research working paper series - numbers 2458 - 2498

This paper contains abstracts of Policy, Research Working Paper series Numbers 2458 - 2498.Environmental Economics&Policies,Banks&Banking Reform,Health Economics&Finance,ICT Policy and Strategies,Non Bank Financial Institutions

Financial crises, financial dependence, and industry growth

The authors investigate the link between financial crises and industry growth. They analyze data from 19 industrial and developing countries that have experienced financial crises during the past 30 years to investigate how financial crises affect sectors dependent on external sources of finance. Specifically, the authors examine whether the impact of a financial crisis on externally dependent sectors varies with the depth of the financial system. They find that sectors highly dependent on external finance tend to experience a greater contraction of value added during a crisis in deeper financial systems than in countries with shallower financial systems. They hypothesize that the deepening of the financial system allows sectors dependent on external finance to obtain relatively more external funding in normal periods, so a crisis in such countries would have a disproportionately negative effect on externally dependent sectors. In contrast, since externally dependent firms tend to obtain relatively less external financing in shallower financial systems (and hence have relatively lower growth rates in such countries during normal times), a crisis in such countries has less of a disproportionately negative effect on the growth of externally dependent sectors.Economic Conditions and Volatility,Payment Systems&Infrastructure,Banks&Banking Reform,Economic Theory&Research,International Terrorism&Counterterrorism,Economic Theory&Research,Governance Indicators,Banks&Banking Reform,Achieving Shared Growth,Economic Conditions and Volatility