Policy, Research working paper series : numbers 1248-1280

This paper contains a numerical listing of working papers prepared by the Policy, Research Complex. Each citation contains a brief abstract, and the contactpoint for the paper.Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,ICT Policy and Strategies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT

Policy, Research working paper series : numbers 1281-1302

This paper contains a numerical listing of working papers prepared by the Poilicy, Research Complex. Each citation contains a brief abstract, and the contact point for the paper.Public Sector Economics&Finance,Municipal Financial Management,Environmental Economics&Policies,Banks&Banking Reform,Economic Theory&Research

Human and physical infrastructure : public investment and pricing policies in developing countries

Almost by definition, the basis for development is infrastructure - whether services for human infrastructure (health, education, nutrition) or physical infrastructure (transport, energy, water). Although the infrastructure sectors are diverse, what they have in common is that public policy has had a great deal to do with how these services are provided and financed in almost all countries. The author reviews the recent literature on two key aspects of that involvement: investment and pricing. While the quality of the econometric evidence varies, recent literature reinforces the view that human and physical infrastructure are critical for economic growth and the reduction of poverty. And the state is recognized as playing a key role in ensuring the efficient, equitable allocation of resources for infrastructure. Despite many sound theoretical reasons for such public involvement, however, recent studies have shown that it leaves much to be desired in efficiency and equity. One symptom is underinvestment in key subsectors that have high economic returns and that help the poor the most, such as primary education and rural health clinics, in relation to more expensive interventions, such as tertiary education and urban hospitals. Another common malaise is the poor use of scarce resources, leading to low quality (students learning little) and reliability (irregular power and water flows), poor maintenance (dilapilated roads), and inappropriate input use (too many school adminstrators or health workers and not enough books or drugs in producing education health outcomes). Just as market failures necessitate government intervention in the infrastructure sectors, so government failures should be considered in deciding the depth and extent of that intervention. The literature has made some advances in diagnosing these problems in poor countries and proposing solutions. But information gaps remain, particularly in developing robust methodologies for: 1) making intersectoral comparisons across the wide range of infrastructure services; 2) crafting more diverse policies about the public-private balance in infrastructure investment, depending on the nature of"public goods"characteristics for various types of infrastructure services, or even across activities for the same service (for example, power transmission versus distribution); and 3) taking issues of political economy into account, such as the vested interests of those with large financial interests in infrastructure. The author also highlights public pricing as a policy initiative that has recently gotten much attention.After briefly reviewing the basic concepts of pricing, he focuses on the literature about pricing reform. Most commonly, the public sector is the main provider of infrastructure services, usually free or at subsidized prices. But the recent literature has aired a rethinking of the balance between public and private financing of infrastructure. The debate in this area is often heated. Health and education are traditionally provided free and some recent literature argues for positive prices, at least for higher tiers of service. The principle of public pricing has been more widely accepted in transport, energy, and to a lesser extent water, but often the levels are too low and do not provide the appropriate incentives for efficient and equitable use.Environmental Economics&Policies,Banks&Banking Reform,Health Monitoring&Evaluation,Public Sector Economics&Finance,Economic Theory&Research

Unstable inflation and seignorage revenues in Latin America : How many times can the government fool people?

In the past 20 years, high and extremely volatile inflation rates in Latin America have generally been associated with unstable monetary policies and the (temporary) use of inflationary revenues to finance fiscal deficits. There seems to be a consensus that high inflation is bad for economic development and growth, so it is unclear why governments have adopted unstable monetary policies they have known to be unsustainable in the long run. This paper argues that Latin America governments have followed unstable monetary policies principally to maximize their inflationary revenues. Explanations based on irrationality or on institutional and political shock are only partially convincing. A government maximizes inflationary revenues by adopting temporary unstable monetary policies because people tend to revise their expectations (slower) faster in periods of (dec-) accelerating inflation as the cost of collecting information (rises) falls compared with other welfare losses. When the rate of inflation is relatively high, a restrictive monetary policy is implemented so people can reconstitute monetary balances. When the inflation rate is low, an expansive monetary policy is adopted to confiscate existing real balances. Governments may appear for some time to succeed in fooling people, by adopting temporary reforms and restoring confidence, but their reputation is damaged when they repeatedly do so. Utlimately, private agents react so quickly and with such sophistication that even small fiscal gaps produce precipitous declines in money demand. Over time, private agents learn to anticipate the relationship between unstable inflation and monetary policy and progressively reduce their real monetary balance. In the end, the optimal inflation rate tends toward its steady-state value, as Friedman found 20 years ago. The author develops a small dynamic model to stylize these facts and applies it to Argentina.Economic Theory&Research,Environmental Economics&Policies,Public Sector Economics&Finance,Inflation,Banks&Banking Reform

The structure, regulation, and performance of pension funds in nine industrial countries

The author offers an overview of issues relating to the development of funded pension schemes in industrial countries. The analysis applies the economic theory of pension regulation to experience with the structure, regulation, and performance of funds in nine countries - Canada, Denmark, Germany, Japan, Netherlands, Sweden, Switzerland, the United Kingdom, and the United States - seeking to shed light on the finance of old age security in developing countries and the reform of pension funds in industrial countries. The main points of the analysis follow. Pension funds are either defined benefit or defined contribution. The individual bears more risk with defined contribution plans because the pension benefit depends on asset returns. Conceptually, defined benefit funds offer better employee retirement insurance. Private defined benefit pensions are generally available only through companies and typically include some restriction of labor mobility. Because of some shortcomings of fully or largely funded plans, especially for income redistribution, governments have chosen to maintain at least basic levels of pay-as-you-go social security. The scope of such unfunded social security schemes is the key determinant of the scale of private retirement savings. The extent to which pension funds are used as a vehicle for retirement saving depends on the regulatory regime. Tax advantages are the most important incentive, but a wide range of other regulatory choices also make pension funds more or less attractive to firms and employees. And some regulations, such as those affecting the portability of pensions, may have important consequences for economic efficiency. Though countries differ widely in their regulation of pension funds, some suggestions for good practice can still be made. Whether pension funds are a cost effective way of providing pensions depends on the real asset returns that can be attained, in relation to the growth of real wages. Ideally, there should be a gap of 2 to 3 percent between them. Portfolio distributions and fund management are the key determinants of returns to pension funds, subject to the returns available in the market. Prudent diversification in domestic and foreign markets and indexation of much of pension funds'portfolios both appear to be important. Pension funds affect capital markets in many ways. They influence market structure and demand for securities; stimulate innovation, allocative efficiency, and market development; and have a positive effect on overall saving. They may also have some deleterious effects, such as increases in volatility, short termism, and weakening of the control exerted by investors and creditors over firms. Prospects for pension funds in industrial countries vary with the maturity of existing funds and the generosity of social security benefits. In countries such as France, Germany, and Italy, growth in coming decades could be sizable. The key recommendations for countries that are just starting pension funds are for a mix of social security and private funds; for separate funding rather than book reserves; for defined benefit plans, subject to appropriate regulation; and for company-based pension funds.Pensions&Retirement Systems,Insurance&Risk Mitigation,Environmental Economics&Policies,Insurance Law,Banks&Banking Reform

The public finance of infrastructure : issues and options

Using economic principles, the author provides criteria for financing infrastructure services where consumption-related user charges can be levied effectively. In light of the suggested criteria, the author examines the experience of developing countries in financing publicly provided infrastructure services in transport (road), water, telecommunications, and power. In developing countries, most infrastructure is provided by the public sector, although the private sector has become increasingly involved. Because it is difficult to raise funds through general taxes, self financing of these services remains a desirable second-best policy, one that almost all developing countries endorse. But experience suggests that, except in telecommunications, full cost recovery is more the exception than the rule. Financing remains inadequate. The political economy of tariff setting is an important element in low improperly designed user charges, infrequent adjustments for inflation, and poor enforcement. Such sectors as water, power, and transportation drains funds from the treasury, although their impact varies from sector to sector. When it is difficult to get budget transfers to materialize - especially during a fiscal crisis - there is often a reduction in nonwage operations and maintenance expenditures. As a result, services deteriorate. The private provision of infrastructure services is often suggested as an alternative. The private provision of services can certainly reduce the public sector's financing requirement. For infrastructure services for which technological advances have made competition possible, the market system could ensure efficient private provision of services, which could be a relief to the public sector. But for services that require a single provider to achieve economies of scale and similar benefits, the private provision of services will work only if an appropriate rate of return is assured - and only if user charges cover costs.Urban Economics,Public Sector Economics&Finance,Environmental Economics&Policies,Town Water Supply and Sanitation,Banks&Banking Reform

Making a market : mass privatization in the Czech and Slovak Republics

The author assesses the Czechoslovak mass privatization program for speed, equity, and corporate governance. The program transferred claims on assets in 1,491 enterprises - assets worth about $10.7 billion - to the 8.5 million citizens who participated in the scheme. The entire cycle of project preparation, public information, and nationwide simultaneous bidding took 14 months. This was equivalent to privatizing more than three medium-scale and large-scale enterprises, on average, per day. Equity objectives were achieved by transferring equal claims (equivalent to about$1,250 per person) to all participants and by putting in place a transparent and decentralized process. The government's role was simple to provide a framework and a set of rules for potential firms, managers, and shareholders to find each other. The scheme's design - based on simultaneous sequential bidding rounds - worked to put information about enterprise values into the public domain by allowing increasingly informed bidders to interact. The structure of ownership that emerged will have very different implications for corporate governance. Enterprises in the Czech Republic, and those that sold for high prices in the bidding rounds, are characterized by a greater concentration of shareholdings. Those in the Slovak Republic, and those that sold for lower prices, have more diffuse ownership structures. The mass privatization scheme served to quickly differentiate the enterprises with favorable prospects from those with unfavorable prospects under current conditions. But enterprises that could have survived in some form, if they had been restructured before privatization, or enterprises that could have been viable but lacked effective governance, were sacrificed for the sake of speed and decentralization.Banks&Banking Reform,International Terrorism&Counterterrorism,Municipal Financial Management,Markets and Market Access,Economic Theory&Research

Why higher fiscal spending persists when a boom in primary commodities ends

The author analyzes the fiscal policy of primary commodity exporters. After the initial boom in fiscal spending that accompanies a commodity boom, he asks, why do commodity-exporting countries tend to maintain higher spending levels despite a drop in commodity prices. He identifies three factors that might explain the tendency: a pressure (from political constituents, for example) to keep spending, the difficulty of reversing policy (or disinvesting - the costs of firing people, for example), and the effects of limited indebtedness, or credit-rationing constraints. Fiscal policy must be developed with these three factors in mind. Using a fiscal policy optimizing model, the author examines evidence for the existence of these three factors. He uses the model's unconstrained and constrained Euler equations to estimate the Lagrange multipliers associated with the limited indebtedness constraint. The empirical work is done using data from Africa's franc zone countries. The persistence of pressure to spend may not play an important role, says the author. More important in explaining the tendency to maintain spending levels after a commodity boom ends are liquidity constraints and the costs of policy reversal.Economic Theory&Research,Environmental Economics&Policies,National Governance,Economic Stabilization,ICT Policy and Strategies

Informal gold mining and mercury pollution in Brazil

The Amazon region has been responsible for a major share of Brazilian gold production in recent years. The region has witnessed a sizable gold rush comparable only to the California gold rush last century. The gold rush has spawned a powerful informal mining sector and has attracted many people - some who have come to the region in search of wealth and some who were already there but were displaced from other, unsuccessful economicactivities. What these people encounter at the mining sites are dreadful living and working conditions. Gold mining also causes substantial environmental problems, which may persist whether gold deposits do or not. The author discusses the environmental effects of gold mining in the region, focusing on mercury pollution. Mercury, an important input in gold extraction, is being discharged into the atmosphere and the rivers at alarming rates. The environmental costs of the present extraction, is being discharged into the atmosphere and the rivers at alarming rates. The environmental costs of the present extraction technology will be faced primarily by future generations, because of natural chemical processes. Although removing the mercury already discharged from the Amazonian environment may be an enormous task, at least future discharges should be curtailed through the use of appropriate technology, environmental education, and a combination of command and control measures and market-based incentives. The author describes the gold extraction process and the extent of mercury use and contamination. He analyzes key elements of the environmental problem, especially the informal miner and the fish economy. Finally, he suggests a combination of command and control regulations and market-based incentives adapted to the informal gold mining economic environment. He emphasizes the need for an education campaign about the perils of using mercury and the availability of more appropriate, and inexpensive, alternative extraction technologies.Mining&Extractive Industry (Non-Energy),Montreal Protocol,Water and Industry,Coastal and Marine Resources,Primary Metals

Eastern Europe's experience with banking reform : is there a role for banks in the transition?

Are there lessons to be learned about how Eastern European countries have dealt with problems in their banking systems? What role have these countries assigned to banks during the transition? How have they used banks in dealing with the enterprise problem? The author addresses these questions by analyzing experience in Bulgaria, Hungary, Poland, Romania, and the former Czech and Slovak Federal Republic. Most of these countries have made substantial progress in restructuring their banking systems, but few have used their banking systems to improve the allocation of credit and hence stimulate the supply response. The author finds the following. The problem is not whether banks hold nonperforming loans but how banks can avoid accumulating more nonperforming loans. The underlying problem is how to close loss-making and nonviable enterprises. The countries that have encouraged the establishment of new private banks, that have introduced regulation and supervision, and that have tried to make banks more competitive have been more successful at improving the allocation of credit and achieving more control over loss-making enterprises. Banks must focus on assessing risk - and for this, capital, private ownership, and adequate regulation are crucial. How quickly banks achieve independence in credit decisions depends on how fast new governance structures can be introduced. In this, the five countries have been less successful. The objectives of bank recapitulation should be to prevent banks from accumulating more nonperforming loans (that is, dealing with the enterprise problem) and to give them the governance structure that would prevent them from incurring new nonperforming loans. This requires introducing a system of risk and reward - by making banks comply with capital adequacy requirements, by privatizing a critical number of banks, and by introducing strong regulation and supervision. Government should see that banks provide efficient payment systems, the basis for trust in banking systems. Introducing adequate regulation and supervision has been difficult as it requires knowing what the banks'role should be. Evidence strongly supports the need to recapitalize and privatize a critical number of banks. Authorities cannot rely on banks to exert control on enterprises early in the transition. In the early stages, control over state-owned enterprises should be exercised by a semipublic institution.Banks&Banking Reform,Financial Intermediation,Financial Crisis Management&Restructuring,Municipal Financial Management,Banking Law