A Brave New World for Latin America

With variations across countries, Latin America’s economic agenda will change over the next few years. Fiscal policy will be monitored more independently, and may lean more against cycles. Financial regulation will be heavier, and less attuned with a single international model. Innovation will be at the center of trade strategies. Equity will begin to replace equality as the driver of social programs. More state agencies will be managed by results, starting the long process of earning citizens’ trust. The region will play a larger global role, led by Brazil. And if the world’s economy holds, most Latin Americans will be on a faster development path.Latin America, fiscal policy, financial regulation, equality, equity, social programs, innovation, trade, Brazil, development

Reflections on credit policy in developing countries: its effect on private investment

Previous approaches to credit policy in the stabilization and adjustment of developing countries have emphasized either the role of the availability of credit or the role of its price - that is, the interest rate. The authors argue that effective credit policy in developing countries must take into account both interest rate and credit channels. The authors develop their argument in the context of the link between credit policy and private investment, using a model of firms'investment behavior in an economy with exogenous, time-varying borrowing constraints. The model incorporates a credit ceiling linked to the firms'net worth and the state of the credit market. The state of the credit market depends on factors such as credit and interest rate policy, regulatory and supervisory practices, and market sentiments that banks consider in making lending decisions. These factors affect banks'decisions independent of a borrower's creditworthiness. Thus, in times of tight money, firms that would otherwise have received loans may be denied them and have to postpone or cut back investment plans. The authors use their model to specify an equation relating aggregate private investment to aggregate output and to two credit market variables. Their findings show that interest rates and credit volume exert a joint influence on the behavior of private investment in the countries examined.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Financial Intermediation,International Terrorism&Counterterrorism

Shock persistence and the choice of foreign exchange regime - an empirical note from Mexico

The academic and policy debate about optimal foreign exchange rate regimes for emerging economies, has focused more on the theoretical costs and benefits of possible regimes, than on their actual performance. The authors report on what can be called exchange-rate-regime-dependent differential shock persistence - that is, the time output takes to return to its trend after a negative shock - in a sample of countries representing various points on the spectrum of nominal foreign exchange flexibility. They find strong evidence that Mexico's stimulated output recovery after a negative external shock was faster (a third as long) when the country's policymakers let the nominal foreign exchange rate float, than when they fixed it, and much faster than in other developing countries that kept nominal foreign exchange rates constant, especially those that resorted to currency board arrangements to support that constancy. These results are insufficient to guide the choice of regime (they lack general equilibrium value, and are based on a limited sample of countries), but they highlight an important practical consideration in making that choice: How long it takes for output to adjust after negative shocks, is sensitive to the level of rigidity of the foreign exchange regime. This factor may be critical when the social costs of those adjustments are not negligible.Fiscal&Monetary Policy,Economic Theory&Research,Payment Systems&Infrastructure,Environmental Economics&Policies,Banks&Banking Reform,Economic Stabilization,Macroeconomic Management,Economic Theory&Research,Fiscal&Monetary Policy,Environmental Economics&Policies

Money, inflation, and deficit in Egypt

Egypt has been able to escape high inflation by depleting its stocks of creditworthiness, money illusion, and enforceable foreign-exchange controls. These nonrecoverable assets are quickly becoming extinct and the economy is on an unsustainable path. The authors present a short- and medium-term dynamic model of the Egyptian economy and use it to simulate the effects on output and inflation of a stabilization-cum-adjustment program. Their conclusion is to make the public sector live within its means, and to do so at once. This is a demanding prescription; political and social pressure can become intolerable under adjustment. The authors show that both a slowdown in output and the initial rise in inflation associated with a tough reform program will be short-lived. And a do-nothing strategy will soon push the country into a serious crisis, the correction of which will certainly be more painful.Economic Theory&Research,Economic Stabilization,Environmental Economics&Policies,Banks&Banking Reform,Public Sector Economics&Finance

Inflation tax and deficit financing in Egypt

Although Egypt's budget deficit is far above the level found in other low-middle-income countries, the inflation rate in Egypt has never been very high. This is because the country has managed to finance these budget deficits by resorting to an inflation tax that, at 11 percent of GDP in 1987, constitutes a large share of total tax revenues. By contrast, conventional tax revenues come to only 17 percent of GDP. The authors report a large, underlying inflation-tax base - from which the Egyptian government has collected substantial revenues which exist because of money balances held by the private sector. The authors find that the private business sector, with anet borrowing position of 14 percent of GDP, has benefited from the inflation tax. Households, on the other hand, pay more of the inflation tax than other sectors, turning over 8 percent of GDP to the government. This compares with 0.5 percent of GDP that households pay in income tax. Although income tax in Egypt is fairly progressive, the greater reliance on the inflation tax makes Egypt's overall tax structure fairly regressive. The authors argue that : i) understanding the role and size of the inflation tax will help in determining the sequencing and equity aspects of any future reform program; and ii) the financial side cannot continue to bear the burden for the real side; Egypt must move swiftly to cut its budget deficit, the underlying cause of its dependence on the inflation tax.Economic Theory&Research,Public Sector Economics&Finance,Banks&Banking Reform,Environmental Economics&Policies,Macroeconomic Management

Capital inflow reversals, banking stability, and prudential regulation in Central and Eastern Europe

The authors show that capital inflows into the countries of Central and Eastern Europe (CEE)--inflows that are mainly private, debt-driven, and increasingly supplied by banks on a shortening maturity--are especially vulnerable to reversals. They show that the region's banking systems are disproportionately exposed to those reversals, and absorb the lion's share of bank-supplied inflows. They analyze the main links through which external finance turbulence is transmitted to the domestic banking industry, especially during the transition. Mechanisms for prudential regulation are in place in the region--and largely mimic the standards directed by the European Union--but the authors argue that these standards are insufficient for CEE countries. They base their arguments not on actual enforcement (a genuine concern) but on the fact that EU banking directives were designed for more stable economies and for banking systems less vulnerable to reversals in capital inflows. A strong case can be made, for CEE countries to overshoot those directives, at least until the transition is complete.Banks&Banking Reform,Payment Systems&Infrastructure,Financial Intermediation,International Terrorism&Counterterrorism,Financial Crisis Management&Restructuring,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Settlement of Investment Disputes,Financial Crisis Management&Restructuring

The Rationale for Structural Adjustment: A Layman\u27s Guide

[abstract not provided]https://fount.aucegypt.edu/faculty_book_chapters/1925/thumbnail.jp

A new model for market-based regulation of subnational borrowing - the Mexican approach

Faced with weak sub-national finances that pose a risk to macroeconomic stability, Mexico's federal government in April 2000 established an innovative incentive framework to bring fiscal discipline to state and municipal governments. That framework is based on two pillars: an explicit renunciation of federal bail-outs, and a Basel-consistent link between the capital-risk weighting of bank loans to sub-national governments, and the borrower's credit rating. In theory, this new regulatory arrangement should reduce moral hazard among banks and their state, and municipal clients; differentiate interest rates on the basis of the borrower's creditworthiness; and, elicit a strong demand for institutional development at the sub-national level. But its access will depend on three factors critical to implementation: 1) Whether markets find thefederal commitment not to bail out defaulting sub-national governments credible. 2) Whether sub-national governments have access to financing other than bank loans. 3) How well bank capital rules are enforced.Environmental Economics&Policies,Banks&Banking Reform,Payment Systems&Infrastructure,Economic Theory&Research,Financial Intermediation,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,Financial Intermediation,Insurance&Risk Mitigation

Informality, Size, and Regulation: Theory and an Application to Egypt

The paper shows how, when the enforceability of regulations is size-sensitive, price competition can lock firms into informality and, thus, smallness, depending on the form of the production function. In that context, exogenous help packages targeted to informal firms promote micro and small enterprises (i.e., increase their numbers) but do not develop them (i.e., foster their growth). The help only generates a short-term span of abnormal profits for existing informal firms, and a long-term income transfer toward informal-market consumers. The model is tested in the context of Egypt\u27s micro and small enterprise sector