Mongolia - Privatization and system transformation in an isolated economy

The authors examine the process of economic transformation in Mongolia, a huge, isolated, sparsely populated country. After identifying factors that led to formulation of a radical adjustment program in such an isolated country, they focus on Mongolia's innovative voucher privatization scheme, and the interplay between the speed of contraction in resource availability and that of the movement to a market economy. They show that the reform process was not smooth: that after the rapid formulation and implementation of major reforms, there was a marked slowdown, when reform timetables were revised and a more gradualist approach adopted. Later, reforms driven by the privatization program picked up momentum again. But one important lesson learned in Mongolia is that voters are likely to shy away from radical reformers when faced with growing shortages and a collapsing economy. In June 1922, the Mongolian People's Revolutionary Party (the former communist party) was returned to power in general elections, capturing 72 of 76 parliamentary seats. The authors identify factors related to speed versus caution: organization and institutional limitations; political considerations; whether a model of transformation exists; and a contracting resource envelope. Using a simple computable general equilibrium model, they analyze the impact of the cutoff of Soviet aid, which amounted to 30 percent of GDP, and of the disruption of trade. They conclude that preventing a decline in welfare of more than 20 percent - which is close to the decline in 1991 - would require aid flows of about 15 percent of GDP. Their model suggests that the rural sector is reasonably well insulated from external shocks, in sharp contrast with the urban sector. One response scenario explored by the model is that of massive reverse migration to rural areas. They point out that the more the resource envelope tightens and squeezes away the margin above subsistence, the harder it will be to sustain an orderly pattern of reform. In the extreme, this pattern may force the country to adopt a rationed wartime economy, despite intentions to shift to a market system.Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies,Municipal Financial Management,Access to Markets

Improving the dynamics of aid : towards more predictable budget support

This paper considers approaches towards improving the predictability of aid to low income countries, with a special focus on budget support. In order to accelerate progress towards the Millennium Development Goals, the donor community is increasing aid flows while pushing for more coordination and tighter performance-based selectivity. However, these factors may increase the unpredictability of aid from current levels, which are already high enough to impose significant costs. Predictability is a particular challenge in the area of budget support, which will continue to increase in importance as aid is sought to underpin longer-term recurrent spending commitments. Budget support reduces transactions costs and drains on capacity, but it tends to be more vulnerable to fluctuations than multi-year project support. Poor predictability raises the threat of a low-level equilibrium: countries, budgeting prudently within a medium-term fiscal framework, will discount commitments; donors will see few funding gaps, so pledges will fall. With some countries discounting aid commitments in formulating budgets, some already see signs of this happening. To improve predictability, donors must extend their funding horizons. However, even if this can be done, several major issues will remainat country level. First, how can countries deal with residual short-run volatility of disbursements relative to commitments? Second, can donors lengthen commitment horizons to individual developing countries without excessive risk of misallocating aid? Third, within a country's overall aid envelope, how should donors set the shares of project aid and budget support? Finally, the paper considers the other main approach to budget support, the output or outcome-driven approach of the European Union. The paper concludes that many of these issues can be addressed. Simple spending and savings rules built around a buffer reserve fund of 2-4 months of imports can help smooth public spending. Aid can be pre-committed several years ahead with only small efficiency losses, using a strategy of"flexible pre-commitment."Guidelines can be set to limit the volatility of budget support while keeping it performance-based, and past experience can be used more systematically to develop"outcome"norms to better guide aid allocation.Development Economics&Aid Effectiveness,School Health,Economic Theory&Research,Markets and Market Access,Country Strategy&Performance

Trade in banking services : issues for multilateral negotiations

When the General Agreement on Tariffs and Trade was instituted in 1948, its mandate excluded such industries as banking, insurance and telecommunciaitons. These services sectors were highly regulated and protected in most countries, partly because of their sensitivity to national security and cultural identity. Under U.S. pressure, the Uruguay Round talks have included financial services, particularly banking. The response of developing countries to the U.S. proposal to liberalize trade in financial services ranges from cautious to hostile. Partly this reflects concern about the perceived comparative advantage of industrial countries and the desire of strong vested interests to continue to use the financial system as an instrument of public policy. It also reflects the weak situation of the banking industry in many developing countries. In some there is no real banking industry; in many the banking sector is technically insolvent and needs costly restructuring and reform. Opening the borders to foreign competition is essential to liberalization. But this process must proceed at the pace appropriate to the wide-ranging domestic reforms essential in most developing countries.Banks&Banking Reform,Financial Intermediation,Financial Crisis Management&Restructuring,Knowledge Economy,Education for the Knowledge Economy

Financial sector reforms in adjustment programs

The typical financial sector reform package involves policy changes to increase the power of centralized decision making in some areas and to reduce it in others. For regulation and supervision, reforms seek strengthened information systems, stronger and more detailed regulations, and closer credit supervision. At the level of the intermediaries, reforms seek improved procedures, some of which (credit policies, loan review) are natural complements to improvements at the central level. But insofar as the relative cost and availability of credit are concerned, the typical reform program calls for a reduction in government control, and tries to broaden the range of options for finance. Experience has shown the importance of the links between the financial sector policies and performance and the macroeconomic situation. Without an adequate degree of macroeconomic stability, financial sector reforms can fail, with serious consequences. Therefore the planning of a financial sector reform must be predicated on an appropriate macro-policy framework.Insurance&Risk Mitigation,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Financial Crisis Management&Restructuring

Issues in socialist economy reform

This paper examines issues involving the design and sequence of economic reform in formerly socialist economies that have made the political decision to move to a private market economy. They also examine the potential role of foreign countries in providing aid, technical assistance, and market access. In economies that are actually or potentially unstable macroeconomically, the first priority is macroeconomic stabilization and measures to harden budget constraints and create an emergency social safety net. At the center of the reform process are price reform, trade liberalization, enterprise restructuring, and privatization. Banking reform, training, and the development of other financial markets must begin immediately, but the ability of the financial system to allocate resources efficiently will remain limited until enterprise and price reform are sufficiently advanced. In systemwide reform, the notice of sequencing should be replaced by that of packaging. A large number of interrelated reforms - including those needed to create an appropriate legal structure and develop the skills needed in a market economy - has to be put in place very early, although the speed of implementation will differ. However rapidly the reforms are initiated, their completion - especially privatization - is bound to take many years.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Markets and Market Access,Access to Markets

Should Canada Worry About a Resource Curse?

An abundance of natural resources might seem like something any nation would want to be blessed with. But in some countries, a bounty of energy, minerals and other resources can become as much a curse as a blessing. The difference between whether resources benefit a country’s people, or lead to adversity and even suffering, has everything to do with how a country manages its resources. It is the difference between a resource-rich, free and democratically accountable country, such as Canada, and a resourcerich, corrupt, violent and impoverished country, such as the Democratic Republic of Congo. In many resource-rich countries, the effect of ample natural wealth has been to sever the accountability link between citizens and government, slowing or even reversing democratic and social progress, while mostly enriching a few politically favoured constituencies. Canada’s plentiful resources are an indisputable blessing, and those critics of federal industrial policy who compare this country to illiberal and corrupt “petro-states” are being either ignorant or deceitful. There are numerous critical factors at work here that ensure that the Canadian public benefits, rather than suffers, from our natural endowments. We have a diversity of resources, as opposed to being reliant on a single commodity, and our natural-resource sector makes up only a small portion of our larger economy. We have well-established and diligently enforced standards for financial transparency and accountability, in both the private and public sectors. But, just as importantly, there is a national consensus in Canada that public wealth amassed from resource rents should be invested in strengthening human capital, through education, training and social services, as well as in improved infrastructure and better governance, eventually parlaying natural-resource wealth into a yet larger, further-diversified economy. But Canada — and especially resource-rich provinces, such as Alberta — cannot take these factors for granted. A combination of complacency and natural wealth has the potential to turn a blessing into a curse. Even once reasonably democratic and accountable countries, such as Venezuela, have been caught unprepared on the dangerous double edge of a resource boom and have seen their governance systems substantially eroded. Developing the fiscal capacity to withstand commodity-market shocks, creating effective and durable checks and balances on systems of legislative power, enforcing transparency in budgeting and public-investment management, and maximizing tax efficiencies and tax administration, are all areas where Canadians can and should focus their efforts. These are the fundamental safeguards that will ensure our ample natural resources continue to be seen by our citizens as a blessing and not — as is the unfortunate case in so many other countries — a curse

Can Communist economies transform incrementally? China's experience

The authors try to answer important questions. How important is the phasing of political and economic liberalization and the active (versus passive) role of the state in reform? What lessons can be learned about comprehensive top-down reform as opposed to experimental bottom-up reforms; fast versus slow liberalization and opening up of the economy; the need to establish full private property rights at the beginning of reform; and reform's implications for welfare and distribution? Can China's excellent performance be linked toparticular reform measure, or does it reflect distinctive initial conditions or social or demographic factors? Is China's performance sustainable without more comprehensive transformation, or does it reflect transient gains that are substantially exhausted? Among the lessons China offers are the following. Partial reform can succeed in raising productivity in agriculture and industry; industrial productivity has grown very rapidly in the nonstate sector but also in state enterprises. A"big bang"is not economically necessary unless justified by the need to address macroeconomic imbalances. There may be virtue in a decentralized"bottom-up"approach to reform. Rapid privatization is not necessary for successful reform, but it is important to diversify ownership and encourage the entry of new firms. Small scale privatization and the liberalization of distribution and service sectors are likely to have the fastest payoff in the reform of property rights. China's rapid growth momentum and macroeconomic stability cannot be sustained without further reforms, including the reform of banking, taxation, and property rights.Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Health Monitoring&Evaluation,Municipal Financial Management

Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data

This paper ties together the macroeconomic and microeconomic evidence on the competitiveness of African manufacturing sectors. The conceptual framework is based on the newer theories that see the evolution of comparative advantage as influenced by the business climate -- a key public good -- and by external economies between clusters of firms entering in related sectors. Macroeconomic data from purchasing power parity (PPP), though imprecisely measured, estimates confirms that Africa is high-cost relative to its levels of income and productivity. This finding is compared with firm-level evidence from surveys undertaken for Investment Climate Assessments in 2000-2004. These confirm a pattern of generally low productivity, and also suggest the importance of high indirect costs and business-environment-related losses in depressing the productivity of African firms relative to those in other countries. There are differences between African countries, however, with some showing evidence of a stronger business community and better business climate. Finally, the paper adopts a political-economy perspective on the prospects for reform of Africa’s business climate, considering African attitudes to business and the fractured nature of African business sectors as between indigenous, minority and foreign investors. The latter have far higher productivity and a greater propensity to export; however, Africa’s difficult business climate and the tendency to overcome this by working in ethnic networks slows new entry and may decrease the incentives of key parts of the business community form constituting an aggressive pressure group for reform. Even though reforms are moving forward in several countries, this slows their impact and raises the possibility that countries settle into a low-productivity equilibrium. The paper concludes with a discussion of the findings for reforms to boost the competitiveness and diversification of African economies.Africa, manufacturing, private sector, business climate,