How trade and macroeconomic policies affect economic growth and capital accumulation in developing countries

The author of this report provides cross-country empirical evidence on the relationship between trade and macroeconomic policy and economic growth. He finds that countries following sustainable strategies perform better than those following unsustainable strategies. Indeed, unsustainable policies hurt growth. Sustainable policies (as in Korea, Taiwan, Singapore, Hong Kong, Thailand, and Malaysia) promote exports and lead to real exchange rates that are either fully aligned or even undervalued for prolonged periods of time but are relatively stable. Unsustainable policies (more common in developing countries) include polices that tax export and overvalue exchange rates for extended periods, leading to periodic balance of payments crises and a highly unstable real exchange rate. The author also finds that: (a) export promotion policies generate faster growth than policies that remove import restrictions; (b) economic instability and foreign debt are key determinants of capital growth; and (c) contrary to conventional belief, capital accumulation appears to be stimulated by direct export restrictions and does not seem to be directly affected by economic instability.Achieving Shared Growth,Environmental Economics&Policies,Economic Growth,Economic Stabilization,Economic Theory&Research

Microeconomic distortions : static losses and their effect on the efficiency of investment

In the past decade the developing countries have tried much harder to achieve macroeconomic stability than they have to eliminate inefficiencies from microeconomic distortions. The author has pursued a relatively new line of inquiry in examining measurement of the social income losses induced by the reduction of the investment efficiency caused by trade distortions. Empirical findings of the study suggest a strong negative effect of trade distortions on the social efficiency of investment. The social income losses caused by the reduced investment efficiency are considerable. Countries that have a moderate investment ratio (about 20 percent of GDP) can experience social income losses in excess of 18 percent in 30 years, if tariffs are about 50 percent. This study confirms earlier findings about the relatively modest efficiency losses caused by the independent effects of specific distortions. The author alsofound a significant synergistic effect when trade and wage distortions coexist and lead to larger efficiency losses. The key issue is the combination of price distortions favoring capital-intensive activity with wage distortions that cause unemployment and underemployment. This pattern is pervasive in developing countries.Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Economic Growth,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT

Why governments should stopnon-social subsidies : measuring their consequences for rural Latin America

The provision of public goods and the amelioration of market failure are the classical justifications for government intervention in the economy. In reality, (1) governments intervene in markets that are not affected by failure, and (2) a large share of the government resources is spent in private goods, not in public goods. In contrast to issue 1, issue 2 has received little attention in the literature, in spite of the potentially large efficiency and equity losses arising from misguided allocations of public expenditures. López empirically documents the size of (2) in the rural sector and investigates its consequences for rural development for 10 Latin American countries over the 1985-2000 period. The econometric evidence suggests that the structure of public expenditures is an important factor of economic development in the rural sector, much greater than that of the level of public expenditures and of other factors on which the development literature has traditionally focused. Expanding total public expenditure in rural areas while maintaining the existing public expenditure composition prevailing in certain countries does little to promote agricultural income and reduce rural poverty. Spending a significant share of government resources in (non-social) subsidies causes less agriculture income, induces an excessive reliance of agriculture on land expansion, and reduces the income of the rural poor.Environmental Economics&Policies,Economic Theory&Research,Public Sector Economics&Finance,Health Economics&Finance,Banks&Banking Reform

APPLICATIONS OF DUALITY THEORY TO AGRICULTURE

Research Methods/ Statistical Methods,

Fiscal Policies in Highly Unequal Societies: Implications for Agricultural Growth

The paper discusses the economic effects of misallocation of public expenditures in favor of private goods rather than public goods. It first lays out certain key hypotheses regarding the consequences of the apparent public sector allocation inefficiency and the factors that explain this phenomenon. It then discusses existing empirical evidence that lends at least indirect support to these hypotheses. Finally, it presents new empirical evidence for the rural sector in Latin America which documents the extent of the misallocation of public expenditures, its consequences for agricultural growth and rural poverty, and the role of certain key politico-institutional factors in explaining the misallocation.public expenditure, public goods, agricultural growth, subsidies, social equity, International Development, H40, H41, H42, O13, Q15, Q18,

Do labor market distortions cause overvaluation and rigidity of the real exchange rate?

The main objective of this paper was to measure the importance of labor market distortions in explaining the marked tendency to real exchange rate overvaluation and the relatively low effectiveness of devaluation in Latin America. The main finding is that distortions in the formal labor market are a major factor explaining wage rigidity and the diminished responsiveness of the real exchange rate to devaluation. The implication is that greater liberalization of the labor market can substantially improve the efficacy of exchange rate policies in preventing overvaluation of the real exchange rate. Another important finding is that changes in the minimum wage have substantially broader effects on the wage structure of the economy than previously thought. This, in turn, implies that continuous increases in the minimum wage are an important factor underlying the observed tendencies to overvaluation of the exchange rate in Latin America.Environmental Economics&Policies,Macroeconomic Management,Economic Stabilization,Labor Markets,Economic Theory&Research

Trade restrictions with imported intermediate inputs : when does the trade balance improve?

The author's model demonstrates that when imports are predominantly intermediate inputs - as they are in most developing countries - import restrictions can not always be relied upon to improve the trade balance. Such restrictions act as a supply shock to the economy. Unless nontraded goods are intensive users of imported intermediaries, the general equilibrium consequence of import restrictions is a large enough reduction in export supplies to swamp the direct effect of the restrictions. The result is a deterioration of the trade balance.Environmental Economics&Policies,Economic Theory&Research,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Trade Policy,Rules of Origin

Imports and growth in Africa

Broad comparisons show that growth is linked to imports, but country coomparisons over short periods show the link to be more flexible than fixed. In these stringent times, the big question for African countries is whether they can reduce their historically high import dependence? Or put differently, can they resume growth without substantially increasing imports? What emerges from this analysis is that some policy changes and structural adjsutments in Africa can change traditional import intensities. But if African countries are to achieve faster sustained growth, imports will need to increase substantially from the recently depressed levels. Also, the countries will need to use those imports far more efficiently than in the past.Economic Theory&Research,Environmental Economics&Policies,Achieving Shared Growth,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Inequality