Measuring real exchange rate instability in developing countries : empirical evidence and implications

Exchange rate policy has received renewed attention because of its prominent role in adjustment programs. Several analysts have examined the impact of real exchange rate uncertainty on the performance of such economic variables as GDP growth, exports, and investment. The author uses data on the real exchange rate for 56 developing countries with managed exchange rates to make three points. First, the distribution of annual changes in real exchange rates is highly non-normal - both skewness and excess kurtosis. Secondly, this asymmetric non-normality implies that the common practice of using the standard deviation (or coefficient of variation) to compare real exchange rate uncertainty across countries is not justified. Finally, empirically, the higher order moments (skewness and kurtosis) are at least as important as the standard deviation in explaining cross-country performance.Macroeconomic Management,Achieving Shared Growth,Economic Stabilization,Statistical&Mathematical Sciences,Economic Theory&Research

Birth Satisfaction Units (BSU): Measuring Cross-National Differences in Human Well-Being

While everyone agrees that GDP per capita is an inadequate measure of a country’s overall “development” it is difficult to specify what, if anything, should take its place as a useful single summary number (or even just ranking). The Human Development Index is a prominent alternative which moves towards the notion of a more comprehensive measure of human wellbeing, but suffers many limitations in the limits of the domains it covers (only adding mortality and education) and in how those domains are assessed (only averages). I propose that a useful conceptual device is to imagine that individuals were ranking the countries they were to be born into, not knowing what position in that country they would occupy (e.g. male or female, rich or poor). The result could be a cardinal ranking of country of birth satisfaction units, how strongly someone would prefer to be born into country X versus country Y. While this thought experiment obviously does not of itself resolve any of the key issues, it can provide a framework for reasoning about how people would produce such a ranking: the domains of well being they would assess as important and how they would assess the distribution of well-being in those domains (e.g. would they care about the average, levels of absolute deprivation, inequalities).Human Development, Poverty, Vulnerability

Divergence, big time

Recently, much attention has been paid in the literature on economic growth to the phenomenon of"conditional convergence,"the tendencies of economies with lower-level incomes to grow faster, conditional on their rate of factor accumulation. The author documents that, regardless of conditional convergence, perhaps the basic fact of modern economic history is massive absolute divergence in the distribution of incomes across countries. Discussions of long-run convergence or divergence has been hindered by the lack of reliable historical estimates of per capita income for poor countries. The author shows that to draw reasonable inferences about whether incomes have converged or diverged does not require historical estimates of per capita income as a plausible lower limit for historical per capita incomes combined with estimates of current income in poor countries places a binding constraint on their historical growth rates. Finally, the author estimates that between 1870 and 1985 the ratio of incomes in the richest and poorest countries increased sixfold, the standard deviation of (natural log) per capita incomes increased by between 60 and 100 percent, and the average income gap between the richest and the poorest countries grew almost ninefold (from $1,500 to over$12,000).Economic Theory&Research,Economic Conditions and Volatility,Poverty Impact Evaluation,Public Sector Economics&Finance,Public Institution Analysis&Assessment,Economic Theory&Research,Inequality,Achieving Shared Growth,Governance Indicators,Economic Conditions and Volatility

The tyranny of concepts - CUDIE (Cumulated, Depreciated Investment Effort) is NOT capital

The cost of public investment is not the value of public capital. Unlike for private investors, there is no remotely plausible behavioral model of the government as investor that suggests that every dollar the public sector spends as"investment"creates capital in an economic sense. This seemingly obvious point has so far been uniformly ignored in the voluminous empirical literature on economic growth, which uses, at best,"cumulated, depreciated investment effort"(CUDIE), to estimate capital stocks. But in developing countries especially, the difference between investment cumulated at cost and capital value is of primary empirical importance: government investment is half or more of total investment. And perhaps as much as half, or more of government investment spending has not created equivalent"capital."This suggests that nearly everything empirical written in three broad areas is misguided. First, none of the estimates of the impact of public spending identify the productivity of public capital. Even where public capital could be very productive, regressions and evaluations, may suggest that public investment spending has little impact. Second, everything currently said about"total factor productivity"in developing countries is deeply suspect, as there is no way empirically to distinguish between low output (or growth) attributable to investments that created no"factors"and low output (or growth) attributable to low (or slow growth in) productivity in using accumulated"factors."Third, multivariate growth regressions to date have not, in fact,"controlled"for the growth of capital stock, so spurious interpretations have emerged.Economic Theory&Research,Fiscal&Monetary Policy,International Terrorism&Counterterrorism,Decentralization,Capital Markets and Capital Flows,Environmental Economics&Policies,Capital Flows,Economic Theory&Research,International Terrorism&Counterterrorism,Banks&Banking Reform

Population growth, factor accumulation, and productivity

In research on how population growth affects economic performance, some researchers stress that population growth reduces the natural resources and capital (physical and human) per worker while other researchers stress how greater population size and density affect productivity. Despite these differing theoretical predictions, the empirical literature hs focused mainly on the relationship between population growth and output per person (or crude proxies for factor accumulation). It has not decomposed the effect of population through factor accumulation and the effect through productivity. The author uses newly created cross-country, time-series data on physical capital stocks and the educational stock of the labor force to establish six findings: There is no correlation between the growth of capital per worker and population growth. The common practice of using investment rates as a proxy for capital stock growth rates is completely unjustified, as the two are uncorrelated across countries. There is either no correlation, or a weak positive correlation, between the growth of years of schooling per worker and the population growth rate. Enrollment rates are even worse as a crude proxy for the expansion of the educational capital stock, as the two are negatively correlated. There is no correlation, or a weak negative correlation, between measures of total factory productivity growth and population growth. Nearly all of the weak correlation between the growth of output per person and population growth is the result of shifts in participation in the labor force, not of changes in output per worker.Health Monitoring&Evaluation,Public Health Promotion,Economic Theory&Research,Environmental Economics&Policies,Economic Conditions and Volatility,Agricultural Research,Health Monitoring&Evaluation,Economic Growth,Achieving Shared Growth,Environmental Economics&Policies

Time-Bound Labor Access to the United States: A Four-Way Win for the Middle Class, Low-Skill Workers, Border Security, and Migrants

The US economy needs low-skill workers now more than ever, and that requires a legal channel for the large-scale, employment-based entry of low-skill workers. The alternative is what the country has now: a giant black market in unauthorized labor that hinders job creation and harms border security. A legal time-bound labor-access program could benefit the American middle class and low-skill workers, improve US border security, and create opportunities for foreign workers

Explaining the Cross-National Time Series Variation in Life Expectancy: Income, Women’s Education, Shifts, and What Else?

This paper examines the variation across countries and evolution over time of life expectancy. Using historical data going back to the beginning of the 20th century several basic facts about the relationship between national income and life expectancy are established. The paper shows that even by examining the augmented Preston curve there is no indication that the Preston curve is “breaking down” and no indication from over 100 years of data that a very strong relationship between national income and life expectancy will not persist, particularly over the ranges of income of primary interest to the Human Development Report. Empirical findings show that there are actually fewer “puzzles” than might appear while trying to reconcile the strong cross-sectional association with the time evolution of life expectancy in specific countries and most of the existing “puzzles” come from using either very short time-horizons or very small moves in income per capita when the Preston curve is a long-run phenomena. The paper also discusses the phenomena of the cross-national convergence, with the life expectancy of the poorer countries increasing, in absolute terms, faster than those of the rich countries and how the findings about the augmented Preston curve relate to discussions of health policy.economic development, economic growth, health, life expectancy, mortality.

Child mortality and public spending on health : how much does money matter?

The authors use cross-national data to examine the impact on child (under 5) and infant mortality of both nonhealth (economic, cultural, and educational) factors and public spending on health. They come up with two striking findings: 1) Roughly 95 percent of cross-national variation in mortality can be explained by a country's per capita income, the distribution of income, the extent of women's education, the level of ethnic fragmentation, and the predominant religion. 2) Public spending on health has relatively little impact, with a coefficient that is numerically small and statistically insignificant at conventional levels. Independent variations in public spending explain less than one-tenth of 1 percent of the observed differences in mortality across countries. The estimates imply that for a developing country at average income levels, actual public spending per child death averted is $50,000 to$100,000. This contrasts markedly with a typical range of estimates for the cost-effectiveness of medical interventions to avert the main causes of child mortality of $10 to$4,000. They outline three possible explanations for this divergence between the actual and apparent potential of public spending: the allocation of public spending, the net impact of additional public supply, and public sector efficacy.Health Monitoring&Evaluation,Health Systems Development&Reform,Health Economics&Finance,Public Health Promotion,Early Child and Children's Health,Statistical&Mathematical Sciences,Health Monitoring&Evaluation,Health Systems Development&Reform,Health Economics&Finance,Inequality

What educational production functions really show : a positive theory of education spending

The accumulated results of empirical studies show that the public sector typically chooses spending on inputs such that the productivity of additional spending on books and instructional materials is 10 to 100 times larger than that of additional spending on teacher inputs (for example, higher wages, small class size). The authors argue that this pervasive and systemic deviation of actual spending from the technical optimum requires a political, not economic or technical, explanation. The evidence is consistent only with a class of positive models in which public spending choices are directly influenced by a desire for higher spending on teacher inputs, over and above their role in producing educational outputs. This desire could be due either to teacher power, or bureaucratic budget-maximizing behavior, or political patronage. The authors conclude by exploring the implications of these positive political models of educational spending behavior for various types of proposed educational reforms (localized control, parental participation, vouchers, and so on) which requires an examination of how the proposed reforms shift the relative powers of the stakeholders in the educational system: students and parents, educators, bureaucrats, and politicians.Economic Theory&Research,Curriculum&Instruction,Teaching and Learning,Environmental Economics&Policies,Fiscal&Monetary Policy,Curriculum&Instruction,Teaching and Learning,Economic Theory&Research,Environmental Economics&Policies,Gender and Education

Desired fertility and the impact of population policies

Ninety percent of the differences across countries in total fertility rates are accounted for solely by differences in women's reported desired fertility. Using desired fertility constructed from both retrospective and prospective questions, together with instrumental variables estimation, it is shown this strong result is not affected by either ex-post rationalization of births nor the dependence of desired fertility on contraceptive access or cost. Moreover, despite the obvious role of contraception as a proximate determinant of fertility, the additional effect of contraceptive availability or family planning on fertility is quantitatively small and explains very little cross country variation. These empirical results are consistent with theories in which fertility is determined by parent's choices about children within the social, educational, economic, and cultural environment that parents, and especially women, face. They contradict theories that assert a large causal role for expansion of contraception in the reduction of fertility.Reproductive Health,Gender and Social Development,Life Sciences&Biotechnology,Biodiversity,Poverty Reduction Strategies