Democracy and External Shock Resilience in Developing Countries. Evidence from the Great Recession

While some developing countries appear to have been largely unaffected by the Great Recession that originated in advanced economies, others took a severe blow in 2008-2009. A number of recent studies have attempted to explain the observed heterogeneity of developing country growth performances during the latest global financial and economic crisis by linking it to pre-crisis macro-economic and financial country features - with rather mixed success. In this newly emerging body of research, surprisingly little attention has, however, been paid to institutional differences between countries, and the variation in political institutional arrangements more particularly. The current paper takes a first shot at bridging this hiatus by gauging the impact of democracy on the crisis growth of developing countries. From a theoretical point of view, and as suggested in the political economy literature, democracy could be either growthretarding or growth-enhancing in times of economic crisis, the overall effect ultimately being an empirical question. Using a cross-section sample of more than 100 non-advanced countries and controlling for a range of macroeconomic, financial and standard institutional factors as well as pre-crisis trends, we find evidence suggesting that, on the whole, democratic country features are negatively correlated with growth performance during the 2008-2009 global crisis. Our findings are seemingly robust to the use of various sets of controls, different estimators, several country subsamples and alternative measures of democracy and crisis growth.Global Financial Crisis, Growth, External Shocks, Democracy

An assessment of debt-for-education swaps. Case studies on swap initiatives between Germany and Indonesia and between Spain and El Salvador

In the light of worldwide commitments to meet global basic learning needs made at the 1990 United Nations Conference on Education for All (EFA) in Jomtien, the 2000 World Education Forum in Dakar and the 2000 United Nations Millennium Summit in New York, UNESCO has established a Working Group on Debt Swaps for Education which has met on two occasions so far, in 2006 and 2007. Drawing on experiences of bilateral donors such as Spain and Germany, this UNESCO Working Group is now promoting debt-for-education swaps, constructions whereby external debt is cancelled by the creditor in exchange for the debtor government’s commitment to mobilise domestic resources for education sector spending. The experience with debt swaps in the mid 1990s was, however, far from positive, and recent improved insight in the economics of debt relief suggests extreme caution. In reviewing debt-for-education swaps between Germany and Indonesia and between Spain and El Salvador, this paper examines to what extent these second- generation debt swaps differ from their contested predecessors. We argue that, while the Paris Declaration’s principles of policy and system alignment appear to have been fairly well implemented on education sector level in both case studies considered, it is mainly the macro-economic nature of such swaps that remains problematic. For debt relief to hold at least some promise of translating into an efficient and effective instrument of development, it should be large and comprehensive, as in the case of the HIPC Initiative and its successor the MDRI.

Financing the Clean Development Mechanism through debt-for-efficiency swaps? Case study evidence from a Uruguayan wind farm project

As one of Kyoto’s three flexibility mechanisms for reducing the cost of compliance, the Clean Development Mechanism (CDM) allows the issuance of Certified Emission Reduction (CER) credits from offset projects in non-Annex I countries. Whilst much attention has focused on the widespread use of the mechanism by China and India, the complex project cycle, and the lack of convincing baselines, little attention has been paid to the financing of CDM projects. In this paper we assess the extent to which CDM projects with public bodies should utilise debt swaps as a form of finance. The paper does this through analysing the use of a debt swap between Uruguay and Spain within a CDM wind farm project in Uruguay. The paper assesses this transaction according to a simple framework by which debt swaps can be evaluated: whether it delivers additional resources to the debtor country and/or debtor government budget; whether it delivers more resources for climate purposes; whether it has a sizeable effect on overall debt burdens (thereby creating ‘indirect’ benefits); and whether it adheres to the principles of alignment with government policy and systems (key elements within the new aid approach).

The pitfalls and potential of debt-for-nature swaps : a US-Indonesian case study

The vital role of forests in limiting the likelihood of dangerous climate change has precipitated renewed interest in debt-for-nature swaps. This article uses evidence on past debt-for-nature swaps and similar debt mechanisms to assess the recent second wave of debt swaps. It outlines five typical shortcomings of this form of financial transaction: that they often fail to deliver additional resources to the debtor country; often fail to deliver more resources for conservation/climate purposes; often have a negligible effect on overall debt burdens, and, as such, do not generate more ‘indirect’ benefits; and are often in conflict with the new aid delivery paradigm’s emphasis on alignment with government policy and systems. Our analysis is applied to a recent debt-for-nature swap initiative between the United States and Indonesia. We show that this case, which we consider as a litmus test for current swap practice, performs unevenly across the five shortcomings identified. On the one hand, the swap does not create additional resources for the Government of Indonesia, is too insignificant to create indirect (positive) economic effects, and appears at odds with the new aid delivery paradigm’s insistence on system alignment. On the other hand, the swap does not reduce Government of Indonesia resources, and is very much in line with current national policy. The extent to which the resources provided by the swap are additional to other donor support and reserved domestic budget lines for conservation goals is unclear. Whilst a second generation of debt-for-nature swaps should clearly be avoided, there is a need to debate broader ways of linking debt service repayments to forest conservation.

The IMF and precautionary lending: An empirical evaluation of the selectivity and effectiveness of the flexible credit line. National Bank of Belgium Working Paper No. 323

This paper provides an empirical evaluation of the Flexible Credit Line (FCL), the IMF's prime precautionary lending instrument since 2009 to which so far only three emerging market economies have subscribed: Mexico, Colombia and Poland. We consider both questions of selectivity and effectiveness: first, which factors explain the three FCL countries' participation in such arrangements? And second, to which extent have the FCL arrangements delivered on their promise of boosting market confidence in their respective users? Based on a probit analysis we show that FCL selectivity can be explained by both demand- and supply-side factors. The probability of participation in the FCL was greater in countries that experienced larger exchange market pressures prior to the creation of the instrument, that had lower bond spreads and inflation, that accounted for higher shares in US exports, and that exhibited a higher propensity of making political concessions to the US. Our estimation of the effects of the FCL employs the ‘synthetic control’ methodology, a novel counterfactual approach. We find evidence for some but not spectacular beneficial effects on sovereign bond spreads and gross capital inflows in FCL countries. Overall, our results suggest that any economic stigma eligible countries still attach to entry into an FCL arrangement is unwarranted. Conversely, the apparent link of FCL participation with US interests may not be conducive to overcoming political stigma

Local currency bond market development in Sub-Saharan Africa: A stock-taking exercise and analysis of key drivers

This paper studies the current state and drivers of government local currency bond market (LCBM) development in Sub-Saharan Africa. We argue that well-developed government LCBMs could reduce countries’ exposure to external shocks; help overcome ‘original sin’; facilitate domestic savings mobilisation; and may have important financial, macroeconomic and institutional spill-overs. With detailed information collected from various sources the paper first shows that quite a few African countries have made significant progress in developing LCBMs. Increasingly, African governments issue fixed-rate local currency bonds with tenors of ten years and more on a regular basis. However, we also find that LCBMs in Africa often have low liquidity, feature very few corporate securities and generally have relatively narrow investor bases dominated by commercial banks. The second part of the study presents an econometric analysis of the drivers of African government LCBMs based on a new high-quality panel dataset compiled by the OECD. Our results indicate that LCBM capitalisation is correlated negatively with governments’ fiscal balance and inflation, and positively with common law legal origins, institutional quality and strong democratic political systems

Local currency bond market development in Sub-Saharan Africa: A stock-taking exercise and analysis of key drivers

This paper studies the current state and drivers of government local currency bond market (LCBM) development in Sub-Saharan Africa. We argue that well-developed government LCBMs could reduce countries’ exposure to external shocks; help overcome ‘original sin’; facilitate domestic savings mobilisation; and may have important financial, macroeconomic and institutional spill-overs. With detailed information collected from various sources the paper first shows that quite a few African countries have made significant progress in developing LCBMs. Increasingly, African governments issue fixed-rate local currency bonds with tenors of ten years and more on a regular basis. However, we also find that LCBMs in Africa often have low liquidity, feature very few corporate securities and generally have relatively narrow investor bases dominated by commercial banks. The second part of the study presents an econometric analysis of the drivers of African government LCBMs based on a new high-quality panel dataset compiled by the OECD. Our results indicate that LCBM capitalisation is correlated negatively with governments’ fiscal balance and inflation, and positively with common law legal origins, institutional quality and strong democratic political systems

CUX1 transcription factor is required for optimal ATM/ATR-mediated responses to DNA damage

The p110 Cut homeobox 1 (CUX1) transcription factor regulates genes involved in DNA replication and chromosome segregation. Using a genome-wide-approach, we now demonstrate that CUX1 also modulates the constitutive expression of DNA damage response genes, including ones encoding ATM and ATR, as well as proteins involved in DNA damage-induced activation of, and signaling through, these kinases. Consistently, RNAi knockdown or genetic inactivation of CUX1 reduced ATM/ATR expression and negatively impacted hallmark protective responses mediated by ATM and ATR following exposure to ionizing radiation (IR) and UV, respectively. Specifically, abrogation of CUX1 strongly reduced ATM autophosphorylation after IR, in turn causing substantial decreases in (i) levels of phospho-Chk2 and p53, (ii) γ-H2AX and Rad51 DNA damage foci and (iii) the efficiency of DNA strand break repair. Similarly remarkable reductions in ATR-dependent responses, including phosphorylation of Chk1 and H2AX, were observed post-UV. Finally, multiple cell cycle checkpoints and clonogenic survival were compromised in CUX1 knockdown cells. Our results indicate that CUX1 regulates a transcriptional program that is necessary to mount an efficient response to mutagenic insult. Thus, CUX1 ensures not only the proper duplication and segregation of the genetic material, but also the preservation of its integrity