A test of the international convergence hypothesis using panel data

The author, using a neoclassical Solow model, estimates an economy's rate of convergence to its own steady state. Using panel date for a sample of 98 countries, the author applies Chamberlain's (1984) estimation procedures to account for the presence of country-specific effects resulting from idiosyncratic unobservable factors. This procedure also prevents the estimation bias due to measurement error in the Gross Domestic Product. Controlling, additionally, for the country's level of education, the author estimates the rate of convergence to be 0.0494, which implies a half-life of about 14 years. This estimated rate of convergence is about two and a half times higher than those obtained by Barro and Salai-Martin (1992) and Makiw, Romer, and Weil (1992). The author claims that those estimates are biased toward zero because they fail to account for country specific effects. Finally, the author estimates the capital share in production to be 0.374, which is very close to the accepted benchmark value.Economic Theory&Research,Environmental Economics&Policies,Inequality,Health Monitoring&Evaluation,Economic Growth

Infrastructure and economic growth in Egypt

In the past half a century, Egypt has experienced remarkable progress in the provision of infrastructure in all areas, including transportation, telecommunication, power generation, and water and sanitation. Judging from an international perspective, Egypt has achieved an infrastructure status that closely corresponds to what could be expected given its national income level. The present infrastructure status is the result of decades of purposeful investment. In the past 15 years, however, a worrisome trend has emerged: Infrastructure investment has suffered a substantial decline, which may be at odds with the country’s goals of raising economic growth. Improving infrastructure in Egypt would require a combination of larger infrastructure expenditures and more efficient investment. The analysis provided in this paper suggests that an increase in infrastructure expenditures from 5 to 6 percent of gross domestic product would raise the annual per capita growth rate of gross domestic product by about 0.5 percentage points in a decade’s time and 1 percentage point by the third decade. If the increase in infrastructure investment did not imply a heavier government burden (for instance, by cutting down on inefficient expenditures), the corresponding increase in growth of per capita gross domestic product would be substantially larger, in fact twice as large by the end of the first decade. This highlights the importance of considering renewed infrastructure investment in the larger context of public sector reform.Transport Economics Policy&Planning,Public Sector Economics,Non Bank Financial Institutions,Debt Markets,Economic Theory&Research

The structural determinants of external vulnerability

The authors examine empirically how domestic structural characteristics related to openness and product- and factor-market flexibility influence the impact that terms-of-trade shocks can have on aggregate output. For this purpose, they apply an econometric methodology based on semi-structural vector auto-regressions to a panel of 90 countries with annual observations for the period 1974-2000. Using this methodology, the authors isolate and standardize the shocks, estimate their impact on GDP, and examine how this impact depends on the domestic conditions outlined above. They find that larger trade openness magnifies the output impact of external shocks, particularly the negative ones, while improvements in labor market flexibility and financial openness reduce their impact. Domestic financial depth has a more nuanced role in stabilizing the economy. It helps reduce the impact of external shocks particularly in environments of high exposure-that is, when trade and financial openness are high, firm entry is unrestricted, and labor markets are rigid.Achieving Shared Growth,Free Trade,Economic Theory&Research,Inequality,Macroeconomic Management

On the measurement of market-oriented reforms

This paper presents policy- and outcome-based ways of measuring the progress of market-oriented reforms in both traditional areas of first-generation reform and the areas of institutional reform that have been emphasized lately. These policy areas are the domestic financial system; international financial markets; international trade; the labor market; the tax system; public infrastructure and public firms; the legal and regulatory framework; and governance. For each of them, first, we discuss the general principles underlying market-oriented reform; second, we present various indicators of the policy stance in the area in question; and third, we present various outcome indicators of the policy stance.Banks&Banking Reform,Economic Theory&Research,Payment Systems&Infrastructure,Environmental Economics&Policies,Labor Policies,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Financial Intermediation,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT

Taxation, public services, and the informal sector in a model of endogenous growth

Large informal sectors are an important characteristic of developing countries. The authors build a dynamic model in which the informal sector exists when overregulation (high tax rates and high cost for entering the formal sector) is coupled with an inefficient and corrupt system of compliance control. They consider a production technology in which public services are essential and subject to congestion. The public services are financed by taxes collected from the formal sector. Informal producers evade taxes and, because of their illegal status, can use only some public services, cannot use capital or insurance markets, and are subject to stochastic penalties. The authors find that the relative size of the informal sector is negatively related to the severity of the penalties and positively related to tax rates and the extent of informal use of public services. They also find that economies with larger informal sectors have lower capital return and growth rates because the contribution of public services to productivity decreases with informality. They argue that self-interested bureaucracies create an economic environment that makes informality attractive or simply unavoidable because they profit from the presence of the informal sector.Economic Theory&Research,Banks&Banking Reform,Poverty Assessment,Environmental Economics&Policies,National Governance

The composition of growth matters for poverty alleviation

This paper contributes to explain the cross-country heterogeneity of the poverty response to changes in economic growth. It does so by focusing on the structure of output growth. The paper presents a two-sector theoretical model that clarifies the mechanism through which the sectoral composition of growth and associated labor intensity can affect workers'wages and, thus, poverty alleviation. Then it presents cross-country empirical evidence that analyzes first, the differential poverty-reducing impact of sectoral growth at various levels of disaggregation, and the role of unskilled labor intensity in such differential impact. The paper finds evidence that not only the size of economic growth but also its composition matters for poverty alleviation, with the largest contributions from labor-intensive sectors (such as agriculture, construction, and manufacturing). The results are robust to the influence of outliers, alternative explanations, and various poverty measures.Achieving Shared Growth,Population Policies,Economic Growth,Rural Poverty Reduction,Labor Markets

Informality trends and cycles

This paper studies the trends and cycles of informal employment. It first presents a theoretical model where the size of informal employment is determined by the relative costs and benefits of informality and the distribution of workers'skills. In the long run, informal employment varies with the trends in these variables, and in the short run it reacts to accommodate transient shocks and to close the gap that separates it from its trend level. The paper then uses an error-correction framework to examine empirically informality's long- and short-run relationships. For this purpose, it uses country-level data at annual frequency for a sample of industrial and developing countries, with the share of self-employment in the labor force as the proxy for informal employment. The paper finds that, in the long run, informality is larger in countries that have lower GDP per capita and impose more costs to formal firms in the form of more rigid business regulations, less valuable police and judicial services, and weaker monitoring of informality. In the short run, informal employment is found to be counter-cyclical for the majority of countries, with the degree of counter-cyclicality being lower in countries with larger informal employment and better police and judicial services. Moreover, informal employment follows a stable, trend-reverting process. These results are robust to changes in the sample and to the influence of outliers, even when only developing countries are considered in the analysis.Labor Markets,Economic Theory&Research,Work&Working Conditions,Labor Standards,Inequality

Why aredeveloping countries so slow in adopting new technologies ? the aggregate and complementary impact of micro distortions

This paper explores how developmental and regulatory impediments to resource reallocation limit the ability of developing countries to adopt new technologies. An efficient economy innovates quickly; but when the economy is unable to redeploy resources away from inefficient uses, technological adoption becomes sluggish and growth is reduced. The authors build a model of heterogeneous firms and idiosyncratic shocks, where aggregate long-run growth occurs through the adoption of new technologies, which in turn requires firm destruction and rebirth. After calibrating the model to leading and developing economies, the authors analyze its dynamics in order to clarify the mechanism based on firm renewal. The analysis uses the steady-state characteristics of the model to provide an explanation for long-run output gaps between the United States and a large sample of developing countries. For the median less-developed country in the sample, the model accounts for more than 50 percent of the income gap with respect to the United States, with 60 percent of the simulated gap being explained by developmental and regulatory barriers taken individually, and 40 percent by their interaction. Thus, the benefits from market reforms are largely diminished if developmental and regulatory distortions to firm dynamics are not jointly addressed.Economic Theory&Research,Emerging Markets,E-Business,Technology Industry,Political Economy

Informality in Latin America and the Caribbean

This paper studies the causes and consequences of informality and applies the analysis to countries in Latin America and the Caribbean. It starts with a discussion on the definition and measures of informality, as well as on the reasons why widespread informality should be of great concern. The paper analyzes informality's main determinants, arguing that informality is not single-caused but results from the combination of poor public services, a burdensome regulatory regime, and weak monitoring and enforcement capacity by the state. This combination is especially explosive when the country suffers from low educational achievement and features demographic pressures and primary production structures. Using cross-country regression analysis, the paper evaluates the empirical relevance of each determinant of informality. It then applies the estimated relationships to most countries in Latin America and the Caribbean in order to assess the country-specific relevance of each proposed mechanism.Labor Markets,Labor Policies,Population Policies,Economic Theory&Research,Debt Markets

Labor regulations and the informal economy

The informal economy, which evades labor regulations, provides employment for much of the labor force in developing countries. The author explores how labor regulations and imperfections in informal capital markets affect income inequality and the speed of industrialization. Empirical evidence shows that labor costs are higher in the formal sector, and that the cost of capital is higher in the informal sector (in part because many informal activities are illegal, so contracts are unenforceable). The author develops a theoretical model based on such factor-cost asymmetry. He applies it to an urban economy with and without ample supplies of labor from the rural sector. The dynamic analysis considers rural-urban migration and optimal capital accumulation. He finds the following. First, labor regulations that mandate workers'compensation above its market-dictated level induce the formation of an informal sector and thus the dispersion of wages across homogeneous workers. And labor regulations slow capital accumulation and retard the process of rural-urban migration. Second, when capital allocation to informal producers becomes more efficient, the informal sector expands relative to the formal sector, the gap between formal and informal wages narrows, and rural-urban migration speeds up. Finally, policies with an urban bias hasten rural-urban migration, inducing an expansion of the informal labor force relative to the total labor force. Post-World War II experience in informal economies in Latin America motivates and in some respects supports the theoretical findings, says the author.Banks&Banking Reform,Environmental Economics&Policies,Economic Growth,Economic Theory&Research,Urban Housing and Land Settlements