Competitive Rent Preservation, Reform Paralysis, and the Persistence of Underdevelopment

Initial inequality in endowments and opportunities, together with low average levels of endowments, can create constituencies in a society that combine to paralyze reforms, even though the status quo hurts them collectively. Each constituency prefers reforms that expand its opportunities, but in an unequal society, this will typically hurt another constituency’s rents. Competitive rent preservation ensures no comprehensive reform path may command broad support. Though the initial conditions may well be a legacy of the colonial past, persistence does not require the presence of coercive political institutions, perhaps one reason why underdevelopment has survived independence and democratization. Instead, the roots of underdevelopment may lie in the natural tendency towards rent preservation in a divided society.

The credit crisis and cycle-proof regulation

This article was originally presented as the Homer Jones Memorial Lecture, organized by the Federal Reserve Bank of St. Louis, St. Louis, Missouri, April 15, 2009.Financial crises ; Systemic risk

Dollar Shortages and Crises

Emerging markets do not handle adverse shocks well. In this paper, I will outline an explanation of why emerging markets are so fragile, and why they may adopt contractual mechanisms -- such as a dollarized banking system -- that increase their fragility. I draw on this analysis to explain why dollarized economies may be prone to dollar shortages and twin crises. The model of crises described here differs in some important aspects from what is now termed the first, second, and third generation models of crises. I then examine how domestic policies, especially monetary policy, can mitigate the adverse effects of these crises. Finally, I will ask if there is a constructive role for international financial institutions both in helping to prevent the crises and in helping resolve them.

Has Financial Development Made the World Riskier?

Developments in the financial sector have led to an expansion in its ability to spread risks. The increase in the risk bearing capacity of economies, as well as in actual risk taking, has led to a range of financial transactions that hitherto were not possible, and has created much greater access to finance for firms and households. On net, this has made the world much better off. Concurrently, however, we have also seen the emergence of a whole range of intermediaries, whose size and appetite for risk may expand over the cycle. Not only can these intermediaries accentuate real fluctuations, they can also leave themselves exposed to certain small probability risks that their own collective behavior makes more likely. As a result, under some conditions, economies may be more exposed to financial-sector-induced turmoil than in the past. The paper discusses the implications for monetary policy and prudential supervision. In particular, it suggests market-friendly policies that would reduce the incentive of intermediary managers to take excessive risk.

Are Perks Purely Managerial Excess?

Why do some firms tend to offer executives a variety of perks while others offer none at all? A widespread view in the corporate finance literature is that executive perks are a form of agency or private benefit and a way for managers to misappropriate some of the surplus the firm generates. According to this view, firms with plenty of free cash flow that operate in industries with limited investment prospects should typically offer perks. The theory also suggests that firms that are subject to more external monitoring should have fewer perks. Overall, the evidence for the private benefits explanation is, at best, mixed. We do, however, find evidence that perks are offered most in situations where they are likely to enhance managerial productivity. This suggests that a view of perks that sees them purely as managerial excess is incorrect.

The Emergence of Strong Property Rights: Speculation from history

How did citizens acquire rights protecting their property from the depredations of the government? In this paper, we argue that one important factor strengthening respect for property is how it is distributed. When there is some specificity associated with property, and property is held by those who are most productive, the distribution of property becomes relatively easy to defend. By contrast, when property is owned by those who get rents simply by virtue of ownership, the distribution of property becomes much harder to defend. We speculate on why some countries have been able to develop a climate of respect for property rights while others have not.

Aid, Dutch Disease, and Manufacturing Growth

We examine the effects of aid on the growth of manufacturing, using a methodology that exploits the variation within countries and across manufacturing sectors, and corrects for possible reverse causality. We find that aid inflows have systematic adverse effects on a country’s competitiveness, as reflected in the lower relative growth rate of exportable industries. We provide some evidence suggesting that the channel for these effects is the real exchange rate appreciation caused by aid inflows. We conjecture that this may explain, in part, why it is hard to find robust evidence that foreign aid helps countries grow.manufacturing; economic development; dutch disease; cgd; center for global development

The Influence of the Financial Revolution on the Nature of Firms

Major technological, regulatory, and institutional changes have made finance more widely available in recent years, amounting to a bone fide 'financial revolution'. In this article, we focus on the impact the financial revolution has had on the way firms are (or should be) organized and managed, and on the policy consequences.

Aid and Growth: What Does the Cross-Country Evidence Really Show?

We examine the effects of aid on growth--in cross-sectional and panel data--after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance. Even after thiscorrection, we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings, which relate to the past, do not imply that aid cannot be beneficial in the future. But they do suggest that for aid to be effective in the future, the aid apparatus will have to be rethought. Our findings raise the question: what aspects of aid offset what ought to be the indisputable growth enhancing effects of resource transfers? Thus, our findings support efforts under way at national and international levels to understand and improve aid effectiveness.