DO AS I SAY NOT AS I DO: A CRITIQUE OF G-7 PROPOSALS ON REFORMING THE MULTILATERAL DEVELOPMENT BANKS

The paper addresses three key issues raised by the G-7 in its proposals in 2001 to reform the multilateral development banks: (i) the restructuring of the International Development Association (IDA), with a part of its lending in the form of grants rather than loans; (ii) the harmonization of procedures, policies and overlapping mandates among multilateral development banks (MDBs;) and (iii) the volume of support by MDBs for global public goods (GPGs) and the rankings and priorities among them. The paper argues that while in principle shifting a fraction of IDA´s resources to grants can address some of the problems associated with loans, these gains are limited. At the same time it poses long-term political risks for the World Bank. Moreover, the paper cautions that the more fundamental problem with IDA is the manner in which the IDA Deputies - the representatives of the donor countries - have been making policy decisions relating not just to IDA but also to the institution as a whole. The result has been a creeping constitutional coup that has fundamentally subverted the role of the Executive Board in the institution´s governance. The paper also questions whether developing countries in their quest for a larger IDA may not be sacrificing their larger interests in the global system. With regard to GPGs, the paper questions the degree to which the Bank´s research contributes to GPGs. It argues that there is little analytical and empirical evidence that the G-7´s priorities for GPGs would maximize the well-being of the poor relative to a host of notional alternatives. With regard to the harmonization of procedures and policies among the MDBs, the paper supports the harmonization of procedures, especially those related to procurement and financial reporting, while arguing that harmonization of policies and overlapping of jurisdictions should not be formalized. The paper further argues that increasingly stringent compliance standards of the international financial institutions are imposing high financial and opportunity costs on their borrowers. It is easy for the major shareholders to insist on standards whose costs they do not bear. The most inimical aspect of this pressure is that it has forced the Bank to shift lending towards sectors where it has little comparative advantage and away from the very sectors where it does have comparative advantage.

REMITTANCES: THE NEW DEVELOPMENT MANTRA?

Remittances have emerged as an important source of external development finance for developing countries in recent years. This paper examines the causes and implications of remittance flows. It first highlights the severe limitations in remittance data, in sharp contrast to other sources of external finance. It then examines the key trends in remittance flows, and their importance relative to other sources of external finance. The paper subsequently analyses the many complex economic and political effects of remittances. It highlights the fact that remittances are the most stable source of external finance and play a critical social insurance role in many countries afflicted by economic and political crises. While remittances are generally pro-poor, their effects are greatest on transient poverty. However, the long-term effects on structural poverty are less clear, principally because the consequences of remittances on long-term economic development are not well understood. The paper then concludes with some policy options. It suggests a role for an international organization to intermediate these flows to lower transaction costs and increase transparency, which would both enhance these flows and maximize their benefits

Quid Pro Quo: Builders, Politicians, and Election Finance in India- Working Paper 276

In developing countries where elections are costly and accountability mechanisms weak, politicians often turn to illicit means of financing campaigns. This paper examines one such channel of illicit campaign finance: India’s real estate sector. Politicians and builders allegedly engage in a quid pro quo, whereby the former park their illicit assets with the latter, and the latter rely on the former for favorable dispensation. At election time, however, builders need to re-route funds to politicians as a form of indirect election finance. One observable implication is that the demand for cement, the indispensible raw material used in the sector, should contract during elections since builders need to inject funds into campaigns. Using a novel monthly-level data set, we demonstrate that cement consumption does exhibit a political business cycle consistent with our hypothesis. Additional tests provide confidence in the robustness and interpretation of our findings.elections, election finance, corruption, political economy, India

Beyond the IMF

A consensus has developed that the International Monetary Fund (IMF) is not fulfilling its role, prompting multiple proposals for reform. However, this paper argues that the focus on reform should be complemented with an exploration of alternatives outside the IMF which hold the potential to not only give developing countries greater bargaining leverage with the Fund but also, by increasing competition, spurring the institution to better performance. The paper argues that most of the IMF’s functions are being carried out in part through alternative institutional arrangements. It focuses in particular on the insurance role of the Fund and argues that developing countries are developing alternative insurance mechanisms, from a higher level of reserves, to regional co-insurance facilities to remittances as a counter-cyclical source of foreign exchange. The de facto exit of its clientele has been driven by the high political costs associated with Fund borrowing and now poses unprecedented challenges for the Fund, in particular pressures on its income. The paper argues for a rapid restructuring and significant cuts of the Fund’s administrative budget with the budget savings instead directed to lower the interest rates charged to borrowers.IMF, reform, developing countries, insurance, foreign exchange, remittances,

Beyond the ABCs: Higher Education and Developing Countries

This paper analyzes a relatively neglected facet of the complex debate regarding human capital – higher (or tertiary) education. It addresses five broad questions examining higher education in developing countries. One, are the economic effects of higher education on developing countries different from those in industrialized countries, with its links with labor markets of lesser importance than its impact on institutional development? Two, how does the impact of higher education depend on the type of education and its beneficiaries? Three, with the state unable to meet growing demand pressures, what should be the proper role of the state to ensure not just quality but also equity and access? Four, how should countries rethink the provision of higher education in an “open economy” from seeking education abroad or encouraging foreign providers into the country or simply linking domestic institutions with foreign quality assurance mechanisms? And five, do new technologies offer developing countries a new paradigm to expand the provision of high quality but low cost higher education? The aim is not to provide categorical answers to these complex questions, but rather highlight the analytical and empirical lacuna with regard to each of these questions.higher education, human capital

Birds of a Feather - Better Together? Exploring the Optimal Spatial Distribution of Ethnic Inventors

We examine how the spatial and social proximity of inventors affects knowledge flows, focusing especially on how the two forms of proximity interact. We develop a knowledge flow production function (KFPF) as a flexible tool for modeling access to knowledge and show that the optimal spatial concentration of socially proximate inventors in a city or nation depends on whether spatial and social proximity are complements or substitutes in facilitating knowledge flows. We employ patent citation data, using same-MSA and co-ethnicity as proxies for spatial and social proximity, respectively, to estimate the key KFPF parameters. Although co-location and co-ethnicity both predict knowledge flows, the marginal benefit of co-location is significantly less for co-ethnic inventors. These results imply that dispersion of socially proximate individuals is optimal from the perspectives of the city and the economy. In contrast, for socially proximate individuals themselves, spatial concentration is preferred - and the only stable equilibrium.

Brain Drain or Brain Bank? The Impact of Skilled Emigration on Poor-Country Innovation

The development prospects of a poor country depend in part on its capacity for innovation. The productivity of its innovators depends in turn on their access to technological knowledge. The emigration of highly skilled individuals weakens local knowledge networks (brain drain), but may also help remaining innovators access valuable knowledge accumulated abroad (brain bank). We develop a model in which the size of the optimal innovator diaspora depends on the competing strengths of co-location and diaspora effects for accessing knowledge. Then, using patent citation data associated with inventions from India, we estimate the key co-location and diaspora parameters; the net effect of innovator emigration is to harm domestic knowledge access, on average. However, knowledge access conferred by the diaspora is particularly valuable in the production of India's most important inventions as measured by citations received. Thus, our findings imply that the optimal emigration level may depend, at least partly, on the relative value resulting from the most cited compared to average inventions.