Fixed parity of the exchange rate and economic performance in the CFA zone : a comparative study

The authors compare economic performance in the CFA (franc) zone with the economic performance in similar countries outside the CFA zone in recent years. The results of their model estimates indicate that the competitive position for CFA members was weaker in the second half of the 1980s than in the first half and weaker than in non-CFA countries in terms of output growth as well as the performance of exports, investment, and savings. The exception was domestic inflation: the CFA fared better on that front. Results for a longer-term comparison are somewhat mixed. The CFA zone performed better than the others in exports, domestic savings and investment, and inflation, but failed in the long run to distinguish itself in terms of economic growth. The authors use a modified control group approach to compare changes in macroeconomic indicators in the CFA countries with those in countries elsewhere in sub-Saharan Africa and similar low-income developing countries. They control for initial conditions, changing exogenous internal and world environment, and policy stance. Their approach allows for a formal testing of whether zone membership is a random choice. The implication of randomness is that the CFA zone economies would have performed the same as the rest of sub-Saharan Africa, for example, if there had been no zone. Their results show the assumption of randomness to be valid only for GDP growth and inflation.Economic Theory&Research,Environmental Economics&Policies,Economic Stabilization,Achieving Shared Growth,Financial Intermediation

A typology of foreign auction markets in sub-Saharan Africa

The authors compare and contrast the design and outcomes of different foreign exchange auctions in four countries in sub-Saharan Africa and present a typology of such auctions. They identify two distinct sets of countries in terms of the auctions'features, policy interventions, and outcomes. In Ghana and Uganda, the exchange rate auctions are judged to have been largely on target in exchange rate unification, exchange rate stabilization,and efficient allocation of foreign exchange. The auctions in Nigeria and Zambia, on the other hand, were subject to frequent policy interventions, resulting in unsustainable auctions, inefficient allocation of foreign exchange (through ad hoc disqualifications), limited unification, and a rather volatile exchange rate. The conclusions reached by the authors are broadly corroborated by a statistical analysis of weekly micro-auction data for all four countries.Economic Theory&Research,Markets and Market Access,Access to Markets,International Terrorism&Counterterrorism,Economic Stabilization

A typology of foreign exchange auction markets in sub-Saharan Africa : dynamic models for auction exchange rates

In this analytical sequel to"A Typology of Foreign Exchange Auction Markets in sub-Saharan Africa", the authors compare the micromanagement of different foreign exchange auctions in sub-Saharan Africa. Multi-unit auctions for foreign exchange were introduced in a number of countries in the 1980s and 1990s, in a transitional step toward a credible, sustainable, unified regime, such as efficient interbank market. But there is little understanding of how auction markets function in sub-Saharan Africa, and there has been virtually no research on the causes of frequent policy reversals or of auction failure. One possible cause of failure -- apart from thin markets, macroeconomic laxity, and vulnerability to terms-of-trade shocks and fluctuations in the disbursement of foreign aid -- is the inappropriate design and management of auctions. The authors estimate models for the microdeterminants of the auction rate, using weekly data on foreign exchange auctions for Ghana, Nigeria, Uganda, and Zambia. Among the policy lessons: 1) Nigeria and Zambia failed to unify and stabilize the exchange rate partly because there was no reserve price rule. When bidders learn such a rule, speculative bidding diminishes. 2) The management of a credible, sustainable reserve price policy requires an efficient secondary market. A simple underlying model, synthesized from the theoretical literature on auctions, specifies the auction rate as a function of fundamental variables and structural shift dummies. The repeated, sequential nature of these multi-unit auctions and the nonstationary nature of most of the auction variables are captured empirically by a cointegrated (error connection) framework. In addition to consistently estimating long-run and short-run parameters of auction fundamentals, the error correction model allows asymptotically efficient testing of three policy hypotheses deriving from auction theory: the competitiveness hypothesis, the effect of uncertainty on the auction-determined rate, and the revenue-equivalence hypothesis. In other words, they used these models to test the impact on the level of the auction rate of increased comptetition among bidders, of the effect of uncertainty (proxied by a volatile supply of foreign exchange), and of different pricing mechanisms.International Terrorism&Counterterrorism,Economic Theory&Research,Markets and Market Access,Access to Markets,Environmental Economics&Policies

How much war will we see? Estimating the incidence of civil war in 161 countries

Quantitative studies of civil war have focused either on war's onset, or its termination, producing important insights into these end points of the process. The authors complement these studies by studying how much war we are likely to observe in any given period. To answer this question, they combine recent advances in the theory of civil war initiation, and duration, and, develop the concept of war incidence, denoting th probability of observing an event of civil war in any given period. They test theories of war initiation, and duration against this new concept, using a five-year panel data set for 161 countries. Their analysis of the incidence of war corroborates most of the results of earlier studies, enriching those results by highlighting the significance of socio-ppolitical variables as determinants of the risk of civil war. Their findings: 1) Steps toward advancing political liberalization, or economic development reduce the risk of civil war, whatever the degree of ethno-linguistic fractionalization in a society. 2) This effect is amplified in polarized societies. The probability of civil war is lower in very homogeneous societies, and (less so) in more diverse societies. 3) In polarized societies, the risk of civil war can be reduced by political, rather than economic liberalization. At high levels of political freedom, ethnic diversity - even polarization - has a minimal impact on the risk of civil war. 4) Economic diversification that would reduce a country's reliance on primary exports would also reduce the risk of civil wars, especially in polarized societies. 5) In strategies for preventing civil war, political liberalization should be a higher priority than economic development, but the best possible results would combine political reform, economic diversification, and poverty reduction.Peace&Peacekeeping,International Affairs,Post Conflict Reconstruction,Social Conflict and Violence,Safety Netsand Transfers

Reflections on the South African rand crisis of 1996 and its consequences

After South Africa's democratic elections in 1994, large capital inflows were induced by the cessation of trade and financial sanctions, improved creditworthiness and a liberalised capital account for foreigners. The flows were managed in a classic trade-off between currency stability, and raised interest rates to counter inflation resulting from a credit boom and partially sterilised intervention. In early 1996, the currency suffered a speculative attack. Using a theoretical model of currency crises, we present some empirical results suggesting the importance of economic fundamentals and policy credibility as determinants of investors' devaluation expectations prior to the crisis. Poor growth associated with subsequent protracted currency volatility and high interest rates argues for a range of complementary policies to manage inflows in South Africa. These include reserve requirements on certain inflows, prudent further liberalisation of domestic exchange controls, improved private and government savings policies, a medium-term public debt framework and closer monitoring of risk management by banking and other financial institutions.

Exchange Rate and Monetary Policy for Sustainable Post-conflict Transition

This paper asks the question as to whether the choice of the exchange rate regime matters for post-conflict economic recovery and macro stabilization. Though an important aspect of the macroeconomic agenda for post-conflict, it has however, been largely ignored by the literature. We identify three main exchange rate regimes (fixed, managed floating and free float) and estimate their marginal contributions to post-conflict economic recovery and macro stabilization in the context of fully specified models of four pivotal macroeconomic variables: per capita GDP and export growth, the demand for money balances and inflation. The paper estimates extended versions of these models in a panel over 1970-2008 covering 132 countries, including the 38 post-conflict countries and 94 peaceful ones as a control group. The evidence suggests that the managed floating regime appears to have an edge on some critical areas of economic performance for post-conflict reconstruction.Monetary policy, civil wars, transition, economic growth

Fiscal Regimes In and Outside the MENA Region

The 1990s ushered the world not only into a democracy wave, following the collapse of the former Soviet Union, but also a wave of fiscal rules, where the number of countries adopting this fiscal regime steadily rose from only 10 in 1990 to reach 97 in 2009. Countries that depend on hydrocarbons tend to suffer from fiscal policies that are highly susceptible to energy price shocks. This provides incentives for implementing fiscal stabilization instruments in the form of “fiscal rules”. However, the resource-rich but largely democracy-deficit MENA region has been a fiscal rules-free region. Against this backdrop, this paper asks two fundamental questions: why has MENA chose not to adopt fiscal rules? And what role, if any, resources dependence and political institutions might have played in this outcome? We find that lack of democracy and weak systems of political checks and balances that characterize MENA countries appear to have outweighed the positive impacts of oil resources so that fiscal instability persists despite ample oil revenues. The nascent Arab 'democracy spring' might tip the scale in favor of the adoption of fiscal rules by emerging democratic governments in the region. However, stronger systems of political checks and balances are also needed and, unfortunately, not necessarily a certain outcome. A move toward inflation targeting regimes, as proposed for Tunisia and Egypt, might also provide additional impetus for adoption of fiscal rules as the evidence of Chile and other inflation targeters suggests.Fiscal regimes, fiscal stabilization, discrete-choice panel-data models

Theory and Empirics of Real Exchange Rates in Developing Countries

This paper develops a general equilibrium model of the real exchange rate for a small open economy, taking into account often overlooked characteristics of developing economies, such as the presence of significant aid flows, terms of trade variability, distorting trade taxes, and concentration of exports on natural resources. The equilibrium RER results from the intertemporal, optimal decisions of households on consumption, production, and trade of different goods, conditional upon government policies and external conditions. The model derives a concept of the sustainable current account based on the yield of the discounted present value of net exports which provides a rigorous framework for the computation of the equilibrium RER and misalignment indexes. We test the model in a sample of 73 developing countries in the 1970-2004 period using the PMG estimator proposed by Pesaran et al. (1999) and find it to be an encompassing representation of the data. We also develop a methodology to compute the misalignment of the real exchange rate, which requires to compute the permanent components of the determinants of the RER and to identify the equilibrium path for each country.Real exchange rates, general equilibrium, misalignment, panel data

Riots, coups and civil war : revisiting the greed and grievance debate

The most influential recent work on the determinants of civil wars found the factors associated with the grievance motivation to be largely irrelevant. Our paper subjects the results of this empirical work to further scrutiny by embedding the study of civil war in a more general analysis of varieties of violent contestation of political power within the borders of the state. Such an approach, we argue, will have important implications for how we think theoretically about the occurrence of domestic war as well as how we specify our empirical tests. In the empirical model, the manifestation of domestic conflict range from low intensity violence and coups to civil war. Our multinomial specification of domestic conflict supports the hypothesis that diversity accentuates distributional conflict and thus increases the risk of civil war. We also find that democracies may be more efficient than autocracies in reducing the risk of civil war.Post Conflict Reconstruction,Population Policies,Social Conflict and Violence,Peace&Peacekeeping,Hazard Risk Management