How much fiscal adjustment is enough? The case of Colombia

This paper concludes that Colombia's impressive fiscal adjustment during 1985 - 1987 was due to structural changes in fiscal policy, not simply to such fortuitous events as the coffee boom. Although impressive, the fiscal adjustment fell short of actually improving the government's net financial position. Total public debt as a percentage of GDP was roughly unchanged, even after correcting for the effect of currency devaluation on dollar denominated instruments. Public development lending as a percentage of GDP fell slightly during the same period. The model simulations suggest that to reduce interest rates to more manageable levels would require continued reduction of the fiscal deficit, below levels currently envisioned. To reduce inflation would require even tighter fiscal policy. The magnitudes of required deficit reduction do not seem out of reach however, even allowing for uncertainty about the figures.Economic Stabilization,Economic Theory&Research,Banks&Banking Reform,Macroeconomic Management,Financial Intermediation

Policy determinants of growth : survey of theory and evidence

This paper explores the broad themes of the literature on economic growth. It makesthe following two broad conclusions. First, it notes that the efficiency of investment is as important as the level of investment in determining growth performance. Secondly, it states that keeping to a minimum the distortion of resource allocation by government policies makes saving and investment more efficient and promotes long-term economic growth. Policies that contribute to the efficiency of investment and that lower distortions in resource allocation will thus generally encourage growth. Policies that promote investment, liberalize trade restrictions and remove distortions in financial markets are likely to raise a country's long-run rate of growth. It is noted, however, that more research is needed to formulate structural models of growth that give clear guidance on the effect of various policy measures.Achieving Shared Growth,Economic Theory&Research,Environmental Economics&Policies,Economic Growth,Governance Indicators

Low Investment is Not the Constraint on African Development

While many analysts decry the lack of sufficient investment in Africa, we find no evidence that private and public investment are productive, either in Africa as a whole (unless Botswana is included in the sample), or in the manufacturing sector in Tanzania. In this restricted sense, inadequate investment is not the major obstacle to African economic development.African Development, private and public investment, economic development

Fiscal adjustment and deficit financing during the debt crisis

To study the adjustment to the debt crisis, this paper compares the experience of seven"crisis"debtor countries with those of five"noncrisis"debtor countries. In response to a sharp reduction in external capital flows, the crisis countries rescheduled their debt during 1982-87. The noncrisis group avoided debt resheduling during that period and maintained access to external capital. The paper finds that highly indebted countries are probably better off raising conventional taxes and cutting current spending, rather than raising taxes on financial intermediation and cutting public investment. Shifting to sounder policies may require the breathing space only new external financing or debt relief would provide.Economic Stabilization,Public Sector Economics&Finance,Banks&Banking Reform,Strategic Debt Management,Environmental Economics&Policies

Globalization, Inequality, and Development: The Big Picture

Models of trade and factor flows based on differences in factor endowments give clear predictions as to how globalization affects inequality and development. Models in which productivity differences between countries drive trade and factor flows gave more ambiguous predictions. Unfortunately, productivity differences seem necessary to understand many, though not all, "big picture" globalization, inequality, and development outcomes. The factor endowment predictions help give us insight into how the North Atlantic economy achieved decreasing inequality between countries in the last five decades. They also give us insight into the great migration of Europeans from the land-scarce Old World to the land-abundant New World in the late 19th and early 20th centuries, accompanied by the predicted movements in land rental/wage ratios. However, productivity differences appear to be an important facet of many globalization, inequality, and development episodes. In the Old Globalization era, they seem to be crucial to understand the lack of convergence between North Atlantic economies, the great divergence between rich and poor countries in that same era, and the bias of capital flows toward rich countries. In the New Globalization era, productivity differences are important to capture the very different performance of poor country regions in recent decades, the flow of all factors of production toward the rich countries, the low returns to physical and human capital in many poor countries, and the "perverse" behavior of within-country inequality in reaction to trade and capital flows.

Policy distortions, size of government, and growth

This paper analyzes the structural relationship between policies that distort resource allocation and long-term growth. It briefly reviews the Solow model in which steady-state growth depends only on exogenous technological change, but finds it unsatisfactory as a model of long-term growth. The author proposes an increasing-returns model in the spirit of the new literature on economic growth. With increasing returns, endogenous economic variables - and thus policy - will affect the steady-state rate of growth. This model gives output as a linear function of total capital, but a decreasing function of each of two types of capital. The distortion is defined as a policy intervention that increases the cost of using one of the types of capita. The results suggest that simple linear relationships between distortions and growth, or between size of government and growth, are untenable. Easterly's model shows that reducing the distortions does not have an equal effect on growth in all circumstances. The effect depends on how flexible the economy is, how large the share of the factor being penalized in production is, and how high the distortions are initially. Small changes in either very low or very high levels of initial distortions have a minimal effect on growth.Economic Theory&Research,Economic Growth,Economic Conditions and Volatility,Environmental Economics&Policies,Achieving Shared Growth

Rhetoric versus reality: the best and worst of aid agency practices

Foreign aid critics, supporters, recipients, and donors have produced eloquent rhetoric on the need for better aid practices— has this translated into reality? This paper attempts to monitor the best and worst of aid practices among bilateral, multilateral, and UN agencies. We create aid practice measures based on aid transparency, specialization, selectivity, ineffective aid channels, and overhead costs. We rate donor agencies from best to worst on aid practices. We find that the UK does well among bilateral agencies, the US is below average, and Scandinavian donors do surprisingly poorly. The biggest difference is between the UN agencies, who mostly rank in the bottom half of donors, and everyone else. Average performance of all agencies on transparency, fragmentation, and selectivity is still very poor. The paper also assesses trends in best practices over time—we find modest improvement in transparency and more in moving away from ineffective channels. However, we find no evidence of improvements (and partial evidence of worsening) in specialization, fragmentation, and selectivity, despite escalating rhetoric to the contrary

Rhetoric versus reality: the best and worst of aid agency practices

Foreign aid critics, supporters, recipients, and donors have produced eloquent rhetoric on the need for better aid practices— has this translated into reality? This paper attempts to monitor the best and worst of aid practices among bilateral, multilateral, and UN agencies. We create aid practice measures based on aid transparency, specialization, selectivity, ineffective aid channels, and overhead costs. We rate donor agencies from best to worst on aid practices. We find that the UK does well among bilateral agencies, the US is below average, and Scandinavian donors do surprisingly poorly. The biggest difference is between the UN agencies, who mostly rank in the bottom half of donors, and everyone else. Average performance of all agencies on transparency, fragmentation, and selectivity is still very poor. The paper also assesses trends in best practices over time—we find modest improvement in transparency and more in moving away from ineffective channels. However, we find no evidence of improvements (and partial evidence of worsening) in specialization, fragmentation, and selectivity, despite escalating rhetoric to the contrary