Inequality and the Dynamics of Poverty and Growth

This paper models the dynamic interactions between growth and distribution in the analysis of the behavior of poverty over time. The model permits formal analysis of the factors that led to the growth collapse as well as the rise in poverty in Africa and other developing regions, except Asia, during 1975-96 period. Using indicators of average country performance during this period-- in terms of the rate of acceleration of growth, changes in poverty and extent of inequality—the model suggests tentative strategies for dealing with poverty. The main policy recommendation of this analysis is that, for the majority of countries—36 out of 47—any serious strategy for poverty reduction must include both policies for accelerating growth as well as measures for effecting more equitable income distribution. Moreover, the latter must be sufficiently deep either to shake-off the "transitional", though lingering, "low equilibrium trap" that characterizes some economies; or to more others from the "bad" equilibrium of stationary, but high, poverty.

Riots, coups and civil war : revisiting the greed and grievance debate

The most influential recent work on the determinants of civil wars found the factors associated with the grievance motivation to be largely irrelevant. Our paper subjects the results of this empirical work to further scrutiny by embedding the study of civil war in a more general analysis of varieties of violent contestation of political power within the borders of the state. Such an approach, we argue, will have important implications for how we think theoretically about the occurrence of domestic war as well as how we specify our empirical tests. In the empirical model, the manifestation of domestic conflict range from low intensity violence and coups to civil war. Our multinomial specification of domestic conflict supports the hypothesis that diversity accentuates distributional conflict and thus increases the risk of civil war. We also find that democracies may be more efficient than autocracies in reducing the risk of civil war.Post Conflict Reconstruction,Population Policies,Social Conflict and Violence,Peace&Peacekeeping,Hazard Risk Management

Macroeconomic framework for an oil-based economy : the case of Bahrain

Bahrain's economy is characterized by producer and consumer subsidies and, possibly misaligned currency. These subsidies have resulted in lower savings rates than would be consistent with the country's endowment in oil and gas. In addition, the misaligned real exchange rate has encouraged imports, at the same time creating incentives biased against the non-oil tradable sectors. So, Bahrain's economy remains largely dependent on a rapidly depleting hydrocarbon resource base. The authors espouse a macroeconomic consistency framework to focus on the behavior of Bahrain's economy along two paths. Part one is based on the assumption that the government's present macroeconomic policy will continue. In that case, the solution exhibits bubbles - fiscal and current account imbalances that would be unsustainable over time. Meanwhile, real appreciation of the dinar would suppress non-oil exports. As a result, the need for foreign borrowing would be more pressing. In an attempt to restore the equilibrium, the government would need to contain aggregate demand by compressing imports and investment, thereby worsening the economic situation. Path two is based on a reform strategy that includes policies to raise the domestic savings rate, improve the fiscal situation (by rationalizing expenditures and introducing income taxes and cost recovery measures), and correct the misaligned exchange rate. The results show that the expenditure-switching effect of the exchange rate alignment would shift resources in favor of the tradable sectors. Non-oil GDP and exports would register high growth rates while economic diversification, in the context of a growing and more dynamic economy, would foster investment efficiency. This would help Bahrainis maintain a high standard of living as the oil income dries up, without too much loss of consumption for the present generation.Economic Stabilization,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Macroeconomic Management

Theory and Empirics of Real Exchange Rates in Developing Countries

This paper develops a general equilibrium model of the real exchange rate for a small open economy, taking into account often overlooked characteristics of developing economies, such as the presence of significant aid flows, terms of trade variability, distorting trade taxes, and concentration of exports on natural resources. The equilibrium RER results from the intertemporal, optimal decisions of households on consumption, production, and trade of different goods, conditional upon government policies and external conditions. The model derives a concept of the sustainable current account based on the yield of the discounted present value of net exports which provides a rigorous framework for the computation of the equilibrium RER and misalignment indexes. We test the model in a sample of 73 developing countries in the 1970-2004 period using the PMG estimator proposed by Pesaran et al. (1999) and find it to be an encompassing representation of the data. We also develop a methodology to compute the misalignment of the real exchange rate, which requires to compute the permanent components of the determinants of the RER and to identify the equilibrium path for each country.Real exchange rates, general equilibrium, misalignment, panel data

External interventions and the duration of civil wars

The authors combine an empirical model of external intervention, with a theoretical model of civil war duration. Their empirical model of intervention allows them to analyze civil war duration, using"expected"rather than"actual"external intervention as an explanatory variable in the duration model. Unlike previous studies, they find that external intervention is positively associated with the duration of civil war. They distinguish partial third-party interventions that extend the length of war, from multilateral"peace"operations, which have a mandate to restore peace without taking sides - and which typically take place at war's end, or at least when both sides have agreed to a cease-fire. In a future paper, the authors will examine whether partial third-party interventions - whatever their effect on a war's duration - increase the risk of war's recurrence. If that proves true, then even if interventions reduce the length of civil war, they may do so at the cost of further destabilizing the political system, and sowing the seeds of future rebellion.Children and Youth,Peace&Peacekeeping,Post Conflict Reconstruction,Post Conflict Reconstruction,International Affairs,Post Conflict Reconstruction,Social Conflict and Violence,Peace&Peacekeeping,Post Conflict Reconstruction,International Affairs

Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia

A large thriving parallel market for foreign exchange has coexisted with a rich menu of official exchange rate policies aimed at achieving a more flexible exchange rate and price system as well as financial and trade liberalization. Despite aggresive policies in these areas, particularly for the exchange rate, the black market premium (defined as the ratio of the black market rate to the official rate) remains high. The authors examine the origins of the parallel market, the statistical properties of the parallel premium, and the shocks and macroeconomic policy changes that influence its evolution. Using annual data, they specify and estimate and eclectic error-correction model for the premium. They find that the large parallel market might have caused problems in macroeconomic management and economic reform. Also, the findings show that foreign inflation and depreciation of the black market rate (in a cost-push manner) directly increases domestic inflation. The authors conclude that exchange rate reform without fiscal reform may be futile and that it is important to liberalize major trade and financial markets in such a way as to compress the parallel market and prevent the premium from serving as a major signal to the economy.Environmental Economics&Policies,Fiscal&Monetary Policy,Macroeconomic Management,Economic Theory&Research,Economic Stabilization

Capital flows and long-term equilibrium real exchange rates in Chile

In the context of an empirical model, the authors examine the impact of capital flows, among other fundamentals, on long-term exchange rates in Chile. The real exchange rate and its fundamentals were found to be cointegrated during 1960-92. This cointegration allows a reinterpretation of uni-equatorial estimates of the equilibrium real exchange rate (ERER) to be consistent with long-run forward-looking behavioral models. It also permits the estimation of an error-correction model capable of disentangling short-run from long-run shocks in observed movements of the ERER. The nonstationary nature of the fundamentals allows one to decompose innovations into permanent and transitory components - to get an empirical measure of the sustainability of the fundamental with which the ERER is determined. In general, the estimate of the cointegration of the ERER and its corresponding dynamic error-correction specification corroborates the theoretical model and produces fairly consistent results. The derived ERER index and the corresponding real exchange rate misalignment (for given sustainable values of the fundamentals) successfully reproduce the salient episodes in Chile's recent macroeconomic history. Capital flows are disaggregated into four components: 1) short-term capital flows; 2) long-term capital flows; 3) portfolio investment; and 4) foreign direct investment. As expected from economic theory, short-term capital flows and portfolio investment were found to have no effect on the ERER (although they can affect the real exchange rate in the short run). But long-term capital inflows and foreign direct investment have a significant appreciating effect on the ERER. To the extent that the recent inflow of capital to Chile is dominated by long-term capital flows that are judged to be sustainable, an important part of the ensuing appreciation of the real exchange rate is consistent with equilibrium behavior - reducing the need for counterbalancing exchange rate on macroeconomic policies.Economic Stabilization,Environmental Economics&Policies,Achieving Shared Growth,Economic Theory&Research,Macroeconomic Management

Political violence and economic growth

This paper analyzes the economic growth impact of organized political violence. First, the authors articulate the theoretical underpinnings of the growth impact of political violence in a popular model of growth under uncertainty. The authors show that, under plausible assumptions regarding attitudes toward risk, the overall effects of organized political violence are likely to be much higher than its direct capital destruction impact. Second, using a quantitative model of violence that distinguishes between three levels of political violence (riots, coups, and civil war), the authors use predicted probabilities of aggregate violence and its three manifestations to identify their growth effects in an encompassing growth model. Panel regressions suggest that organized political violence, especially civil war, significantly lowers long-term economic growth. Moreover, unlike most previous studies, the authors also find ethnic fractionalization to have a negative and direct effect on growth, though its effect is substantially ameliorated by the institutions specific to a non-factional partial democracy. Third, the results show that Sub-Saharan Africa has been disproportionately impacted by civil war, which explains a substantial share of its economic decline, including the widening income gap relative to East Asia. Civil wars have also been costly for Sub-Saharan Africa. For the case of Sudan, a typical large African country experiencing a long-duration conflict, the cost of war amounts to $46 billion (in 2000 fixed prices), whichis roughly double the country's current stock of external debt. Fourth, the authors suggest that to break free from its conflict-underdevelopment trap, Africa needs to better manage its ethnic diversity. The way to do this would be to develop inclusive, non-factional democracy. A democratic but factional polity would not work, and would be only marginally better than an authoritarian regime.Post Conflict Reconstruction,Population Policies,Hazard Risk Management,Post Conflict Reintegration,Social Conflict and Violence