Rent Seeking

This paper examines the relationship between rent seeking and economic performance when governments cannot enforce property rights. With imperfect credit markets and a fixed cost to rent seeking, only wealthy agents choose to engage in it, as it allows them to protect their wealth from expropriation. Hence, the level of rent seeking and economic performance are determined by the initial distribution of income and wealth. When individuals also differ in their productivity, not all wealthy agents become rent seekers, and the social costs of rent seeking are typically lower. In both cases, multiple equilibria with different levels of rent seeking and production are possible. Copyright 2006, International Monetary Fund

Debt Relief, Demand for Eduction, and Poverty

government expenditures, debt, poverty, schooling

Business Cycle Fluctuations, Large Macroeconomic Shocks, and Development Aid

AbstractWe examine the cyclical properties of development aid using bilateral data for 22 donors and 113 recipients during 1970–2005. We find that bilateral aid flows are on average procyclical with respect to the business cycle in both donor and recipient countries. While aid outlays contract sharply during severe downturns in donor countries, they rise steeply when aid-receiving countries experience large adverse shocks. Our findings suggest that development aid may play an important cushioning role in developing countries, but only during times of severe macroeconomic stress. Our results are robust to alternate definitions of aid flows, specifications, and estimation techniques

The rise of the middle class and economic growth in ASEAN

We present instrumental variables estimates of the relationship between the share of income accruing to the middle class and GDP per capita. The increase in GDP per capita that ASEAN economies experienced during 1970–2010 significantly contributed to a higher share of income accruing to the middle class in these countries. Econometric model estimates show that the impact of a rise of the middle class on economic growth depends on initial levels of GDP per capita. In the majority of ASEAN countries, a rise of the middle class that is unrelated to GDP per capita growth would have had a significant negative effect on economic growth for levels of ASEAN economies' GDP per capita in 1970. In contrast, for recent values of GDP per capita a rise of the middle class would positively contribute to growth of GDP per capita in ASEAN. We show that investment is an important channel through which the income share of the middle class affects economic growth

Making Decentralization Work: the Case of Russia, Ukraine, and Kazakhstan

Russia, Ukraine, and Kazakhstan have all carried-out comprehensive reforms of their inter-governmental fiscal systems in the decade since the inception of transition; and all three countries are in the process of considering or implementing far-reaching "second-generation" reforms in this area. In retrospect, the combination of efforts aimed at consolidating macroeconomic stabilization during the early years of the transition, together with the fundamental structural changes in the economy, in some cases strong centrifugal forces, and political and ethnic conflicts, created an extremely complex setting for fiscal decentralization. This goes a long way in explaining why the fiscal decentralization process in the three countries has been rapid, haphazard and largely non-transparent, with the emerging system of federalism having important implications for budgetary developments.The objectives of this paper are to discuss key aspects of the ongoing decentralization process in three important transition economies, Russia, Ukraine, and Kazakhstan; to identify areas where the present systems have clear adverse impacts on efficiency and -- potentially -- macroeconomic performance; and to offer a roadmap for future reform.Working Paper Number 00-09

Issues in Intergovernmental Fiscal Relations in China

The paper reviews the changing nature of intergovernmental fiscal relations between the provinces and the central government in China over the past two decades and provides an assessment of the success of previous reforms in meeting their objectives. Key existing weaknesses in the current system that undermine these objectives are identified. Alternative instruments, procedures, rules, and incentives that could result in better outcomes are outlined by drawing upon relevant cross-country experiences.Intergovernmental fiscal relations;Income distribution;expenditure, expenditures, expenditure assignments, fiscal relations, intergovernmental fiscal, public expenditure, intergovernmental transfers, taxation, fiscal policy, expenditure responsibilities, tax system, fiscal management, fiscal decentralization, fiscal system, budget constraints, tax administration, tax reforms, expenditure management, budget constraint, expenditure needs, tax revenues, fiscal disparities, tax reform, fiscal federalism, local revenues, budget process, budget revenues, public expenditure management, fiscal discipline, expenditure mandates, capital expenditures, public expenditures, fiscal contracting system, tax rebates, horizontal fiscal disparities, fiscal activities, fiscal accountability, debt service, fiscal behavior, budget law, assignment of expenditure responsibilities, fiscal responsibility, fiscal contracting, intergovernmental transfer, fiscal transfers, local budgets, subnational expenditure, fiscal disparities across regions, public spending, fiscal contract, fiscal deficits, expenditure management systems, accumulation of arrears, fiscal spending, fiscal sustainability, fiscal adjustments, fiscal risks, tax burden, quasi-fiscal deficits, fiscal reforms, state budget, local expenditures, fiscal resources, fiscal capacity, fiscal incentives, government revenue, fiscal position, national budget, expenditure share, governmental fiscal relations, expenditure capacity, intergovernmental fiscal transfers, revenue collection, fiscal arrangements, local taxes, budgetary control, central fiscal, tax policy, fiscal stimulus, intergovernmental fiscal arrangements, budget management system, budgetary expenditures, fiscal reform, fiscal contract system, budget deficits, fiscal operations, fiscal pressures, tax systems, budget management, fiscal resource, fiscal distress, budget expenditures, budgetary funds, expenditure requirements, fiscal responsibility law, total expenditures, provincial expenditure, fiscal capacities, tax collections, budgetary implications, fiscal powers

A Game-Theoretic Analysis of Corruption in Bureaucracies

This paper examines interactions between self-interested agents in a two-tier government hierarchy, consisting of a central authority and bureaucrats in a two-stage game, where the actions of agents affect private sector allocations. Conditions under which lower-tier corruption arises as an equilibrium characterization of the game are identified. If bureaucratic corruption sufficiently reduces the tax base, policies that deter corruption may be optimal. When monitoring is expensive or ineffective, lower-level corruption arises as equilibrium. Tax farming and the sale of offices can occur in these equilibria. In addition, strategic complementarities between bureaucrats may give rise to multiple equilibria.

The Challenge of Fiscal Decentralization in Transition Countries

This paper examines key aspects of the ongoing decentralization process in transition economies and identifies areas where the present systems can have potentially adverse impacts on both service delivery and macroeconomic performance. We discuss three critical principles of a sound and efficient decentralized fiscal system-and then show the contrasts between these and actual trends and policies in transition countries.

The Quality of Public Investment

Macro-level estimates of the productivity of public capital are typically larger than micro-level estimates. The evidence also shows sizable cross-country differences in the quality of public capital. A general equilibrium growth model is introduced to explain both facts. The productivity of firms specializing in differentiated intermediate inputs depends on public capital whose provision is subject to bureaucratic corruption. Higher corruption lowers the quality of public capital and discourages specialization as well as development. Persistent difference in this quality results from multiple equilibrium levels of corruption. Simple calculations show that (i) relatively small micro-level productivity effects of public capital generate large macro-level effects, and (ii) quality differences in public capital can potentially explain a large fraction of the income gap between rich and poor nations.