How international economic links affect East Asia

The author applies the theme of the last two papers in the Global Economic Prospects series, written by the International Economics Department, to the case of one developing region: East Asia. He documents the rapid integration of the East Asian economies into the world economy through trade and foreign direct investment, and suggests that this has helped create a relatively well-diversified structure of production and of external markets. As a result, East Asia was relatively unaffected by the great terms-of-trade shocks experienced by other developing countries in the 1980s. East Asia's creditworthiness in international financial markets meant that (except for the Philippines) it could maintain access to external capital flows during the world years of the debt crisis. East Asia's close economic links with the rest of the world makes the region particularly vulnerable to shocks originating externally. Simulations suggest that its growth rate is closely related to the growth rate of the OECD economies, even if its export markets are more diversified than those of other developing regions. Similarly, given the strength of its export drive to the industrial economies in the last two decades, especially in the labor-intensive products, East Asia would stand to gain the most from a successful Uruguay Round. By the same token, it would hurt more if the Uruguay Round failed and industrial protection increased as a result. So, East Asia must closely watch developments involving the North America Free Trade Agreement (NAFTA). Although preliminary analysis suggests that the immediate trade consequences of NAFTA would be negligible for East Asia, the longer-run consequences for foreign direct investment and trade flows are more difficult to predict. Finally, the region's strong physical and institutional infrastructure, its outwardly oriented trade policies, and its well-developed human resource base, have attracted a large share of incremental private capital flows to developing countries. But such flows are volatile and sensitive to macroeconomic conditions and the regulatory environment in host countries. Were these conditions to change in East Asia and inhibit foreign direct investment and private portfolio flows, the region's rapid transformation into a competitive producer of manufactures would be affected adversely.Earth Sciences&GIS,Environmental Economics&Policies,Economic Theory&Research,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Banks&Banking Reform

East Asia and the Pacific Confronts the “New Normal”

Developing East Asia is leading the global economic recovery, although performance varies across the region. In some countries, the monetary stance is already being tightened in light of emerging inflationary pressures; but it is premature to withdraw the fiscal stimulus until the global recovery is on a firmer footing. Fortunately, most countries in the region have adequate fiscal space and relatively low debt burdens. To ensure that the momentum of the recovery transitions into sustainable and inclusive growth over the medium term, the governments in the region must once again focus their attention on medium-term structural reforms. This means different policy priorities in different countries—especially given the diversity of the region. In addition, the region faces two common priorities— regional economic integration and climate change. Making progress on both fronts will be critical to the region’s medium-term prospects.East Asia, Pacific, New Normal, economic recovery, structural reforms, inflation, integration, climate change, development, stability

The concept of odious debt : some considerations

Despite the popularity of the term among advocates of debt forgiveness, there is little agreement on a workable definition of"odious"debts and there are but few examples where the concept has been invoked in law to justify non-payment of sovereign debts. Most often, these have been cases when a successor state or government has refused to honor certain debts contracted by its predecessor state or government. Repudiating sovereign debts on broader grounds - such as that money may have been misused by the borrower or that results were not as hoped for at the outset of lending - would create real risks not only of reduced financial flows to poorer countries as a result of the danger of ex post challenges to lenders'claims, but also of moral hazard and lack of project ownership. This paper presents a discussion of the extant legal and financial environment facing developing country sovereign borrowers and develops a proposed approach within this environment to address issues of concern underlying the concept of odious or illegitimate debt. The authors make the case for focusing attention on codes of conduct along the lines of the Equator Principles and on refining forward-looking attempts to increase aid effectiveness and recover stolen assets.Debt Markets,Bankruptcy and Resolution of Financial Distress,,Access to Finance,External Debt

When is external debt sustainable?

This paper examines the determinants of"debt distress,"which they define as periods in which countries resort to exceptional finance in any of three forms: (1) significant arrears on external debt, (2) Paris Club rescheduling, and (3) nonconcessional International Monetary Fund lending. Using probit regressions, the authors find that three factors explain a substantial fraction of the cross-country and time-series variation in the incidence of debt distress: the debt burden, the quality of policies and institutions, and shocks. They show that these results are robust to a variety of alternative specifications, and that their core specifications have substantial out-of-sample predictive power. The authors also explore the quantitative implications of these results for the lending strategies of official creditors.Banks&Banking Reform,Economic Theory&Research,Strategic Debt Management,Environmental Economics&Policies,Payment Systems&Infrastructure,Economic Theory&Research,Strategic Debt Management,Banks&Banking Reform,Environmental Economics&Policies,Housing Finance

New estimates of total factor productivity growth for developing and industrial countries

The authors present new estimates of long-term total factor productivity (TFP) growth for 83 industrial and developing countries for 1960-87. These estimates are based on new data developed for the research project on total factor productivity growth (and available on diskette). Although based on the"old"growth theory, the estimates are derived from a cross-country production function using an error-correction model. This is more appropriate than the usual first-difference model for capturing long-term relations. The authors concluded the following: (a) The estimated cross-country production function shows that human capital accumulation is far more important in explaining growth than several earlier studies have indicated. This conforms with recent studies that find raw labor's share in income to be much less than thought previously. (b) Contrary to the results of other studies, TFP growth in high-income countries has been comparable to that in faster-growing low and middle income countries. (c) The fastest growing developing economies have based their growth more on the rapidity with which they have accumulated physical and human capital than on high TFP growth. (d) Cross-country differences in TFP growth are largely due to differences in the level of political stability and initial conditions (notably, initial per capita income and the initial level of human capital). (e) Cross-country differences in TFP growth (once corrected for initial conditions and political stability) cannot be explained by structural and policy differences for which data are readily available (despite and exhaustive search for other explanations). (f) Sub - Saharan Africa is the only region for which the actual TFP growth is significantly lower than the TFP growth predicted on the strength of initial conditions and political stability (by about 1.1 percentage points a year). The cross-country profile of TFP growth and the role of initial conditions point toward the dual role played by human capital in the development process: as a standard factor of production to be accumulated and as a source of learning and entrepreneurship and hence of interesting growth dynamics. It may be necessary to rethink the concept of"TFP as the residual"in models with human capital. The relationship between policy variables and TFP growth is likely to be sensitive tothe way human capital is incorporated in the production function. These substantive issues, along with a number of econometric refinements, are fruitful avenues for further research.Economic Growth,Economic Theory&Research,Achieving Shared Growth,Environmental Economics&Policies,Inequality