Microfinance as a Poverty Reduction Tool—A Critical Assessment

This paper attempts to provide a critical appraisal of the debate on the effectiveness of microfinance as a universal poverty reduction tool. It argues that while microfinance has developed some innovative management and business strategies, its impact on poverty reduction remains in doubt. Microfinance, however, certainly plays an important role in providing safety-net and consumption smoothening. The borrowers of microfinance possibly also benefit from learning-by-doing and from self-esteem. However, for any significant dent on poverty, the focus of public policy should be on growth-oriented and equity-enhancing programs, such as broad-based productive employment creation.microfinance, poverty, employment, growth

Growth Oriented Macroeconomic Policies for Small Islands Economies: Lessons from Singapore

Most small island economies or ?microstates? have distinctly different characteristics from larger developing economies. They are more open and vulnerable to external and environmental shocks, resulting in high output volatility. Most of them also suffer from locational disadvantages. Although a few small island economies have succeeded in generating sustained rapid growth and reducing poverty, most have dismal growth performance, resulting in high unemployment and poverty. Although macroeconomic policies play an important role in growth and poverty reduction, there has been very little work on the issue for small island economies or microstates. Most work follows the conventional framework and finds no or very little effectiveness of macroeconomic policies in stabilization. They also concentrate on short-run macroeconomic management with a focus almost entirely on either price stability or external balance. The presumption is that price stability and external balance are prerequisite for sustained rapid growth. This paper aims to provide a critical survey of the extant literature on macroeconomic policies for small island economies in light of the available evidence on their growth performance. Given the high output volatility and its impact on poverty, this paper will argue for a balance between price and output stabilization goals of macroeconomic policy mix. Drawing on the highly successful experience of Singapore, it will also outline a framework for growth promoting, pro-poor macroeconomic policies for small island economies/microstates.Caribbean, Pacific Islands, fiscal policy, small open economies

Aid and Fiscal Behaviour in Indonesia: The case of a lazy government

This paper aims to assess the effects of aid on fiscal behavior in Indonesia. There are four main findings. First, aid inflow is primarily driven by the need to fill the fiscal gap. That is, aid is demand driven. Second, although project aid is by definition intended for development expenditures, it results in an increase in routine expenditure as well. This suggests that project aid is fungible: it creates extra resources available to increase nondiscretionary spending. Third, program aid tends to increase routine expenditure but not development expenditure; thus it mainly serves as budget support. Fourth, aid flows make the government fiscally ?lazy?. The availability of aid is a disincentive to mobilise domestic revenue through a more efficient and effective taxation system.Foreign aid, economic growth, balance of payments, government fiscal behaviour.

How Significant and Effective has Foreign Aid to Indonesia been?

With the improvement of relationship with the western countries after the demise of the old order regime of President Soekarno, Indonesia received a large volume of foreign aid that played a crucial role in the recovery of the economy. Indonesia remained a significant recipient of foreign aid through out the 1970s and 1980s, especially during the balance of payments crises. In addition to smoothing out balance of payments problems and providing budgetary supports, aid played an important catalyst for policy reforms that are believed to have contributed to the spectacular success of the Indonesian economy. However, no systematic study has been done so far on the effectiveness of foreign aid in Indonesia. This issue has become critical in the wake of the financial crisis of the late 1990s which turned Indonesia a heavily aid-dependent country as well as the renewed world wide debate on aid effectiveness. This paper, thus, attempts to examine the historical significance and effectiveness of aid flows to Indonesia. It finds that aid did contribute positively to economic growth, but made the government lazy in terms of domestic resource mobilisation. As a result, despite significance progress, Indonesia remained aid-dependent.Foreign aid, economic growth, balance of payments, government fiscal behaviour.

Gearing Macroeconomic Policies to Manage Large Inflows of ODA: The Implications for HIV/AIDS Programmes

This paper examines how macroeconomic policies can be managed to accommodate a large inflow of foreign aid to combat the HIV/AIDS epidemic and still maintain macroeconomic stability. Because of the daunting scale of this epidemic, funds need to be disbursed urgently in order to contain its spread, yet some economists worry that rapidly scaling up foreign assistance for this purpose will cause inflation and appreciation of the real exchange rate. If such effects occur, they could impair a country's international competitiveness and endanger its growth prospects. However, this paper maintains that such effects can be minimized if governments and central banks coordinate fiscal, monetary and exchange rate policies. If they do, they should be able to both 'spend' aid in order to finance larger government programmes and 'absorb' aid in order to import more real resources. Often, governments that receive foreign aid neither spend nor absorb it fully, defeating the basic purpose of development assistance. Because governments fear inflation, they are reluctant to finance a significant increase in spending on HIV/AIDS programmes even when the funding is available. Central banks are reluctant to sell the foreign currency they receive from HIV/AID related aid because they fear ...foreign aid, Dutch disease, HIV/AIDS, macroeconomic policies

Macroeconomic Policies for Growth in Small Pacific Island Economies

This paper examines macroeconomic performance and policies in small Pacific island economies (SPIEs). These economies are highly prone to various supply shocks and face severe obstacles to development arising from their geography and demography. However, the paper contends that their lacklustre growth performance over the last two decades has also been due to excessively conservative macroeconomic policies. That is, a confluence of supply shocks and policy-induced constrained demand has resulted in poor economic performance. Given a very weak private sector, poor state of infrastructure and low-level human capital, the paper argues for the leading role of the government. It then elaborates on the elements of macroeconomic policies within a state-led development strategy.Pacific islands, macroeconomics, growth, aid, fiscal policy

Gearing macroeconomic polices to manage large inflows of ODA: The implications for HIV/AIDS programmes

This paper examines how macroeconomic policies can be managed to accommodate a large inflow of foreign aid to combat the HIV/AIDS epidemic and still maintain macroeconomic stability. Because of the daunting scale of this epidemic, funds need to be disbursed urgently in order to contain its spread, yet some economists worry that rapidly scaling up foreign assistance for this purpose will cause inflation and appreciation of the real exchange rate. If such effects occur, they could impair a country?s international competitiveness and endanger its growth prospects. However, this paper maintains that such effects can be minimised if governments and central banks coordinate fiscal, monetary and exchange rate policies. If they do, they should be able to both ?spend? aid in order to finance larger government programmes and ?absorb? aid in order to import more real resources. Often, governments that receive foreign aid neither spend nor absorb it fully, defeating the basic purpose of development assistance. Because governments fear inflation, they are reluctant to finance a significant increase in spending on HIV/AIDS programmes even when the funding is available. Central banks are reluctant to sell the foreign currency they receive from HIV/AIDS related aid because they fear that such an action might appreciate the domestic currency. However, if aid-induced spending on HIV/AIDS programmes minimises the adverse impact of the epidemic on human capabilities, not only would it combat a grave human development crisis but also it could safeguard long-term economic growth. Instead of adhering to restrictive macroeconomic policies, governments could target their increased spending on productivity enhancing public investment and central banks could amplify the flow of low-cost credit to stimulate private investment. If the real exchange rate does begin to appreciate, the central bank can implement means to manage its fluctuations in order to maintain competitiveness. Moreover, if a significant proportion of HIV/AIDS funds is used to directly finance the import of drugs and medical equipment that are not produced domestically (which is often the case), there is likely to be even less impact on inflation or appreciation of the exchange rate.policies, ODA, HIV/AIDS, Poverty

Macroeconomic policies for growth in small Pacific island economies

This paper examines the macroeconomic performance of the Pacific island countries. It includes analyses of economic growth, inflation and balances of payment, and the possible contributions of fiscal, monetary and exchange rate policies. Wherever possible, comparisons are made with small island economies in other regions, such as in the Caribbean. Finally, the paper provides a general framework for macroeconomic policies as part of a state-led development strategy

Reconsidering Public-Private Partnerships in Developing Countries

Where large-scale investments are needed, especially for infrastructure projects, public-private partnerships (PPPs) have been touted as an option. With encouragement by the international financial institutions, PPPs have been promoted in developing countries, especially those facing large public sector debt burdens. PPPs can be very diverse and complex. Many developing country governments lack the institutional and human resource capacity to handle the complexities of PPPs, and hence, PPPs may not yield the results promised. Complex financial contracts, involving commitments to future payments, often reduce transparency. Thus, PPPs can suffer similar problems – such as corruption, cronyism, monopolies – faced in privatization. The transfer of risks to private contractors may be partial, with the government having to step in if something goes wrong. A further consideration is to ensure equitable access for poor and low income households to maintain political support for PPPs. Even when PPP contracts take investments off government balance sheets, and thereby seemingly improve the fiscal balance, commitments to pay for future service flows and other contingent liabilities have similar economic effects to public debt. PPPs do not necessarily entail lower capital costs than investments financed by public borrowing.Public-private partnership, public debt, privatization, developing countries

What Uzbekistan tells us about industrial policy that we did not know?

This paper discusses Uzbekistan’s recent experience with structural shifts and industrial policy, with a particular focus on various industry policy instruments, and its implications for the existing theories of industrial policy. In particular, two major hypotheses are discussed: (1) the hypothesis of Haussmann, Hwang and Rodrik (the more technologically sophisticated the export structure, the better for growth) and (2) the hypothesis of Justin Yifu Lin (export specialization should build on existing comparative advantages and should not jump over the necessary technological stages)