PolICy Reserch I I 1 I WORKING PAPERS Catalog The World Bank November 1993 WPS 135 (Update) Policy Research WVorking Papers Catalog of Numbers 801-1200 PbhcyR--hWa*ingPzpcmdincEnVc5wdiz8psafmproSgds md unRagczhccdza agidmsaagBankstfffnd a3ilaoh=c5I d in d-vdonrcatuusuc.cpapars.ditbudrytbtRshAdvisxyStaff.oanyh nas=a(ed h any BhErv ondbeuseandcited a r4yhefinduimagincr,pvmayafdasm.dcaaei hexdaes w. T A not d o rWedd Bac, ieBoad af DiTeams. is ma=,mnt cr Jm afits mcibcrouw Policy Re eurch' WPS 135 (Update) Copies of this catalog only are available free from the World Bank Bookstore, 1818 H Steet NW. Washington, DC 20433. Order stock #31326. To obtain copies of individual working papers listed in the cataog, please call or write to the contact person listed in the last paragraph of each abstLract Policy Research Working Papers dissemn te fidings of work under way in fte Barn An objectve of the seies is to get these findings out quicldy. even if presentaions ar less tm fiuly polished. TMe findings. interpretations, and conclusions in these papas do notnecessarily repent official Bank policy. Produced by the Policy Research Dissemination Cerntr a Policy Research Working Paper Series Catalog of Numbers 801-1200 I.dex WPS # Autor Working Paper re Page Agdcultural Polides 823 Steven NL Jaffee How Private Enterprise Organized Agricultural Markets in Kenya 12 836 Richard H.. Adams, Jr. and Harold Sources of lIcome Inequalityin Rural Pakistan: Alderman A Decomposition Analysis 18 865 Hrold Alderman and Marito Garcia Food Secuity and Health Seamitr Explaing the Levels of Nutrition in Pakistan 31 875 Jacob Yaron Rural Finance in Developing Countries 36 884 HaroldAlderman Intercomnodity Pricey Taiittab Analysis of Food Markets in Ghana 40 888 Csaba Cstki Transrbrmation of Agricultume in Central Eastern Europe and the Former USSRL Major Poliy Ises and Perspectives 42 949 Hans Binswanger and Shabiidur The Impact ofFormal Finance on the Rural Economy Khtndker of Tndia 75 1008 Harold Alderman and Christina H Do the Poor Insure? A Synthesis of the Literatre Parson on Risk and Consumption in Developing Countries 107 1009 Paul A. Hgi and Harnid Alderman Labr and Women's Nutrition: A Study of Energy Expenditure, Fertility, and Nutritional Status in Ghana 108 1055 MarkR Rosenweig and Hans P Wealth, Weather Risk, and the Composition and Praitahlbity Biswanger of Agricultural Investments 128 1116 Ant8cio Salazar P Brandio and Will Martin Implications ofAgricultural Trade lIberalization for the DevelopingCountries 157 1140 Bruce Gardner and Karen ML Brooks How Retail Foold Markets Responded to Pnce liberalization in Russia after January 1992 168 1164 Hans P- Binswanger, laus Deininer, Power, DisLtortions, Revolt and Reform and Gershon Feder in Agricultural Land Relations 178 Co-Financing and Flnancial Advisory Servke 886 Sudarhan Gooptu and Mari Soledad FactorsTat Affect Short-Term Commeril Bank Martinez Peria Lending to Developing Countries 41 895 Mohua Mukhejee How Can Debt Swaps Be Used for Development? 46 Debt and InteMational Flnrance 812 Stijn Claessens Alternatve Forms of Externl Finance: A Survey 7 817 Mohua Mukhexjee How Does Brady-Type Commercial Debt RestrcrWork? 10 835 Patricio Arrau and Stin Claessn Commodity Stabilization Thmds 18 ii ~~~~~~~~~~~~~~~~~~~~~Index WPS # Author Working Paper rTt Page 840 Alfredo E- Thorne and Azita Dastgheib Public Sector Debt, Fiscal Deficits, and Econoinc Adjustmentc A Comparative Study of Six EMENA Countries 20 842 Ishrat Husain and Kwang W. Jun Capital Fows to South Asian and ASEAN Countries: Trends. Determinants, and Policy Imnplications 21 855 Jonathan Eaton Sovereign Debt: A Primer 26 861 Patricio Arrau and Daniel Oks Private Saving in Mexico, 1980-90 29 901 James A. Hanson Opening the Capital Accomt: A Survey of IRs and Results 3 916 Marc Chesney and Jacques Morisset Measuring the Risk of Default in Si-x Hghly Indebted Countrief' 60 917 Asli DemiTg0-Kunt Creditor Country Regulatims and Commercial Bank Lending to Developing Countries 60 932 Ash Demirgag-Kimt and EnricaL Interest Rates, Official Lending, and the Debt Crisis: Detragiadue AReassessment 67 933 Asli Demirg0f-Kunt Developing Country Capital Strctures and Emerging Stock Markets 68 943 Ash Demirg-KEunt and Eduardo Burden-haring Among Official and Private Creditors FernAndez-Arias 73 993 S. hi Ajayi An Economic Analysis of Capital Fliglht frm Nigeria 98 995 Stiun Claesens, Ishac Diwan, Recent Experience with Commercia Bank Debt and Eduardo Fernandez-Arias Reduction 99 1012 altuk Unal, AsH Demirgtlg-Kunt, The Brady Plan, the 1989 Meicam Debt Reduction and Kwok-Wai Leung Agreement, and Bank Stock Returns in the United States and Japan 109 1043 Stiun CiLessens and George Pennaccbi Derving Developing Country Repayment Capacity froim the Market Prices Of Sovereign Debt 122 1058 Ishac Diwan, V^iang Errunza, The Pricing of Country Funds and Their Role in Capital and Lemma W. Senbet Mobilization for Emerging Economies 129 1073 Peter J. Montiel Fical Aspets ofDeveloping Country Debt Problems and Debt and Debt-Service Reduction Opetions: A Conceptual Framework 136 1103 Peter J. Montiel Capital Mobility in Developing Countries: Some Measurement Issues and Empirical Estimates 151 1117 Sudarsban Gooptu Portfolio Investment Flows to Emerging Markets 158 1121 Herald Eggerstedt, Rebecca Brides Hall, Measuring Capital Flight A Case Study ofMexico 160 and Sweder van Wljnbergen 1141 Maxwell J. Fry Foreign Direct Investment in a Macroeconomic Framework Finance, Efficiency, Incentives, and Distortions 169 Index i WPS S Author Working Paper Ti Page 1147 Stijn Claessens, Daniel Oks, Interest Rates, Grovwth, and External Debt and Sweder van Wijabergen The Macoeconomic Inpact of Me3xi0os Brady Deal 171 1160 PNa Chuhan, Stin Csesens, and Equity and Bond flows to Asia and Latn Americ= Nlandu Mamingi The Role of Global and Country Factors 176 1169 Eduardo Ferndndez-Arins Costs and Benefits of Debt and Debt Service Reduction 181 1180 Harry Hnizinga The Einancing and Tantion of US. Direct Investment Abroad 186 1186 Stijn CGesns and David Naud6 Recent Estimates of Capital light 189 Development Economics 807 Rudiger Dornbusch and Stanley Fischer Moderate Inflation 5 44 Rayi Kanbur Heterogeneity, Distribution, and Cooperation in Common Property Resou Management 21 894 Gregory Ingram Social Indicators and Productivity Convergence in Developing Countries 46 905 Lawrence H. Summers Investing inAU the People 54 1168 Rasbid Farqee How M n ic Projections in Policy Franework Papers for the Afica Region Compare with Outcomes 180 Education and Social Policy 822 Nancy Jesurun-Clements Paternalism and the Alleviation of Poverty 12 825 Marlaine .E Lockheed and Qinghua Zhao The Empty Opportunity: Local Control ofSeoandary Schools and Student Achievemnent in the Phlippines 13 828 Arvil Van Adams, Robert Coldfirb, How the Macroeconomic Enviromment Affects Humnn and Terence Kely Resoumce Development 15 837 Arvil Van Adams, Johin Midileton, Manpower Plannin in a Market Economy with Labor and Adrian Ziderman Market Signals 19 856 George Psabharopoulos and Zafiris Latin American Women's Earnings and Paridcipation Tzannabos in the Labor Force 27 862 Alan Richards Higher Education in Egypt 29 889 Stephen W. Raudenbush, Suwanna On-the-Job Improvements in Teacher Compatence: Eamsuklawat, Ikechuku Di-Ibor, Policy Options and Their Effects on Teaching and Mohamed Kamali, andWimnol Taoklam Learning in Thliland 43 896 George Pscharopoulos, Cabos Rqjas, Achievement Evaluation of ColombiWs Ecuela Nueua and Eduardo Velez Is Multigrade the Answer? 47 897 Daniel S. Hamermesh UnemploynienL Thsrarse 4r Developing Countlies 47 iv Index WPS Author Woriing Paper riti Paage 913 Maitreyi Das The Women!s Development Prgram in Rgajastian: A Case Study in Group Formation for Womens Development 58 944 Gail Stevenson How Public Sector Pay and Employment Affect Labor Markets: Research sues 73 946 Duane E. Leigh Refraining Displaced Woerkes: What Can Developing Countries Learn from OECD Nations? 74 947 Stephen L. Mangum, Garth L Mangum, Strategies for Creating Transitional Jobs during and Janine Bowen Structural Adjustment 75 977 Estelle James Income Security for Old Age: Conceptual Bakground and Major lsues 90 1013 AnaRlevenga, Michelle Riboud, The Impact of Mezind's Retraining Program andHongTan on Employment and Wages 109 1014 George Psadcropoulos Ethnicity, Education, and Earnings in Bolivia and Guatemala 110 1028 Harry Anthony Patinos and George Socioeconomic and Ethnic Determinants ofGrade Psacharopoulos Repetition in Bolivia and Guatemala 116 1037 An-Maia Arriagada and Adrian Vocational Seconday Schooling, Occupatoald Choice, Ziderman and Earnings in Braz 120 1039 Martin Weale Education, Exteralties, Fertility, and Econmnic Growth 121 1045 Kalanidhi Subbarso and Iara Raney Social Gains firm Female Educatiown A Cross-National Study 128 1056 George Psacharopoulos and Ying Chu Ng Earmings and Education in LatIn America: Assessng Priorities for Schooling Investments 128 1065 Thomas Owen Eisemon, John Sheehan, Strengthening Uganda!s Policy Environment for Investing George Eyoku, Frnklin Van Buer, in University Development Delano Welscb, Louisa Masutti, Nat Coletta, and Lee Roberts 132 1067 George Psahaopoulas Returns to Investment in Education A Global Update 133 1069 Estelle James Why is There Proportionately More Enrollment in Priwvae Schools in Some 3cuntries? 134 1075 Adrian Ziderman and Robin Horn Many Paths to Skilled Employment A Reverse Tracer Study of Eight Occpations in Colombia 137 1086 George Psacharopoulos, Jorge Teachers? Salaries in Latin America: A Comparadve Valenzuela, and Mary Arends Analysis 141 1099 Hay C. Katz, Ssrosh Kuruvilla, Trade Unions ani Collective Bargaining and Lowell Turner 146 1106 Hahl Dandar and Jennfifer Hawarth Improving Womenfs Access to Higher Education: A Review of Wotld Bank Project Experience 153 Index v WPS # Author Wos*ing Paper T-ite Page 1113 ChristiaEn Grootaert and Ra-vi Kanbur The Lucky Few Amidst Economic Decline: Distnbutional Change in Cote d'Ivoire As Seen Through Panel Data Sets, 1985488 156 1118 Olivia S. Mitchell Trends in Retirement Systems and Lessons for Reform 158 1123 Nancy Birdsall Social Development is Economic Development 161 1130 Michael Lipton and Martin Ravallion Poverty and Policy 164 1181 Zeliko Bogetic and Denrns Heffley Reforming Health Care: A Case for Stay-Well Health Insurance 186 Finance and Prhrate Sector Development 815 Deborah Brautigam Governance and Economy A Review 9 819 Robert G. King and Ross Levine Financial Indicators and Growth in a Cross Section of Countries 11 864 Ralph Bradburd Privatization of Natural Monopoly Public Enterprises: The Regulation lssue 30 891 Andrew Stone, Brian Levy, Public Institutions and Private Transactions: and Ricardo Paredes The Legal and Regulatoy Environment for Busmness Transactions in Brazil and Chile 44 899 Christian Harm The Financing of Small Firms in Germany 48 900 Christian Harm The Relationship between German Banks and Large German irms 49 923 Andrew H. W. Stone listening tD Firms: How to Use Firm-Level Surveys to Assess Constaints on Private Sector Development 63 997 John R. Harris, Fabio Schiantarelli, How Financia Liberalization in IndonesiaAffected and Miranda G. Siregar Firms' Capital Structure and Investment Decisions 100 1019 Anita M. Schwarz How Effective are Directed Credit Policies in the United States? A Literature Study 112 1027 Guillermo Barnes L iessons fom Bank Privatization in Mexidc 115 1083 Robert G. King and Ross Levne Finance and Growth: Schumpeter Might Be Right 140 1114 Anita George and Jacques Morisset Does Price Uncertainty Really Reduce Private Investmentl. A Small Model Applied to Chile 156 1115 Ross Levine and Sara Servos Looling at the Facts: What We Know about Policy and Growth firom Cross-Country Analysis 157 1159 Asli Demirgag-Kunt and Ross Levine Stock Market Development and Financial Intermediary Growth: A Research Agenda 176 1199 Olivia Mitehell Public Pension Governance and Performance: Lessons for Developing Countries 194 vi Index WPS # Author Woddng Paper rTil Page 1200 Jane Faflcngham and Paul Johnson The Life-Cycle Distributional Consequences of Pay-As-You-Co and Funded Pension Systems 195 Financial Sector Development 803 Millard Long and Dimnitri Vittas Financial Regulation: Changing the Rules of the Game 3 806 Dimitri Vittas Measuring Commercial Bank Efficency Use and Misuse of Bank Operaing Ratios 5 814 Mark Gertler and Andrew Rose Finance, Growth, and Public Policy 8 829 Terry M. Chuppe and Michael Atkin Regulation of Securities Markets: Some Recent Trends and Their Implications for Emerging Markets 15 843 Ejaz GhaTn How Financial Markets Affect LAng-Run Growth: A Cro-Country Study 21 847 Silvia B. Sagari and Loic Chiquier Coping with the Legacies of Subsidized Mortgage Credit in Hungary 22 849 Ross Levine Financial Structures and Economic Development 23 853 Gerard Caprio Policy Uncertainty, Information Asymnetries, and Financial Intermediation 25 857 Kenneth M. Wright The Life Insurance Industry in the United States. An Analysis of Economic and Regulatory Issues 27 858 Dimitri Vittas Contractual Savings and Emerging Securities Markets 28 866 Robert Pardy Regulatory and Institutional Impacts of Securities Market Computerization 31 867 Dimitri Vittas and Augusto Iglesias The Rationale and Perfornance of Personal Pension Plans in Cluhle 32 9D7 RobertPardy Institutional Reform in Emerging Securities Markets 55 910 Dimitri Vrittas Policy Issues in Financial Regulation 57 984 Ash Demirg0-Kzmt and Harry Huinga Barriers to Portfolio uivestmentsin Emergig Stock Markets 93 1010 Dimitri Vittas and Craig Neal Competition and Efficiency in Hungarian Banling 108 1084 Dong Hle and Robert Perdy Stock Market Development and Financial Deepening in Developing Countries: Some Correlation Pattems 140 1091 Fidel Jaramillo, Fabio Schiantarelli, Capital Market Imperfections Before and After Financ and Andrew Weiss Liberalization: A Euler-Equation Approach to Panel Data for Ecuadorian Firms 143 1092 Fidel Jaramillo, Fabio Schiantarefli, The Effect of Financial liberalization an the Allocation and Andrew Weiss of Credit Panel Data Evidence for Ecuador 143 Index vii WPS Author Working Paper Title Page 1095 Sanuel H. Talley Are Failproof Banking Systems Feasible? Desirable? 144 1107 Gerard Capria, Jr., Izak Atiyas, Financial Reform Lessons and Strategies 153 and James Hanson 1109 Andrew Sheng and Yoon Je Cho Risk Management and Stable Financial Structures 154 1145 Dimitri Vittas The Simple(r) Algebra of Pension Plans 170 1153 Alberto Musalem, Dinmitri Vittas, and North American Free Trade Agreement: Issues Ash Demirgaf-Kunt on Trade in Financial Services for Mexico 173 1154 Dimitri Vittas Options for Pension Reform in Tunsia 174 1155 Martin F. Grace and Michael M. Barth The Regulation and Structure of Nonlife Insuance in the United Sttses 174 1171 Gerard Caprio, Jr. and Lawrence HI Finance and Its Reform: Beyond Laissez-Faire 181 Summers 1190 Yoon Je Cho and Thomas Hellmarm The Govermments Role in Japanese and Korean Credit Markets: A New Institutional Economics Perspective 190 Infrastructure 929 Antonio Estache and Ksngbin Zheng Managing Pollution Control in Brazil: The Potential Use of Taxes and Fines by Federal and State Governments 66 1006 Jorge BE Rebelo Preparing Multiyear Ranway Investment Plans: A Market-Oriented Approach 106 1066 Antonio Estache and Kangbin Zheng Pollution Control in a Decentralized Economy: Whidh Level of Government Should Subsidize What in Brazil 133 internatIonal Economic Analysis and Prospects 834 Shabrokh Fardoust and LaJn-Ping Zhou Scenarios for Growth in the 1990s 18 870 F. Desmond McCarthy and Ashok Economic Shodks and the Global Environment Dhareshwar 33 922 Sylvia Saborio and Constantine Central America at a Crossroads Michalopoulos 63 954 Chris Allen, David Currie, T. G. How OECD Polices Affected Latin America in the 1980s Srinivasan, andDavid Wines 78 1102 Andrew-" Wamer Did the Debt Crisis or Declining Oil Prices Cause Mexicos Investment Collapse? 151 1187 Andrew AL Warner How Should Sovereign Debtors Restucture Their Debts? Fixed Interest Rates, Flexible Interest Rates, or Inflation-indexed 189 viii Index WPSS Author Working Paper itle Page Intemational Trade 804 Boum-Jong Choe Globa] Trends in Raw Materials Consumption 4 813 Takamasa Aluyama and Panos Varangis Price Stabilization for Raw Jute in Bangladesh 8 827 Refik Erzan and Alexander Yeats Free Trade Agreements with the United States: What's in It for Latin America? 14 848 Merlinda D. Ingeo and Donald 0. Mitchell How EC-1992 and Reforms of the Common Agricultural Policy Would Affect Developing Countries' Grain Trade 23 854 Takamasa Akiyama Is There a Case for an Optimal Export Tax on Perennial Crops? 26 860 Refik Erzan and Chnstopher Holmes The Restrictiveness of the Multi-Fibre Arrangement on Eastern European Trade 28 874 James E. Anderson and Geoffrey The Trade Restrictiveness Index: An Application Bannister to Mexdcan Agriculture 35 885 A J. Hughes Hallett The Impact dEC-92 on DIeveloping Countries' Trade: ADissentingView 41 911 Yfng Qian and Panos Varangis Does Exchange Rate Volatility Hinder Export Growth? Additional Evidence 58 935 Boum-Jong Choe The Precautionary Demand for Commodity Stocks 69 955 George Alogoskoufis and Panos Varangis OECD Fiscal Policies and the Relative Prices of Primxay Commodities 79 958 Breut Borrell and Maw-Cheng Yang EC Bananarama 1992: The Sequel - The EC Commission Proposal 80 973 Refik Erzan, Christopher Holmes, How Changes in the Former CMEAArea May Affect and Raed Safadi intemational Trade in Manufactures 88 974 C. K Primo Braga and Alexander Yeats How Minilateral Trading Argements May Affect the Post-UruguayRoundWorld 38 994 Geoffrey Bannister and Patrick Low Textiles and Apparel in NAFTAk A Case of Constrained Liberalization 99 1003 Kala Krishna and Ling Hui Tan Rent-Sharing in the Multi-Fbre Arrangement Evidence from U.S.-Hong Kong Trade in Apparel 105 1021 Jonathan IL Coleman and Chris Jones Measuring Welfare Changes from Commodity Prce Stabilization in Small Open Economies 113 1022 James E. Anderson and J. Peter Neary A New Approach to Evaluating Trade Policy 113 1023 James E. Anderson Tariff Index Theory 114 1024 Will Martin and Julian M. Alston An Exact Approach for Evaluating the Benefits from Technological Change 114 Index ix WPSS Author Woing Paper rnb Page 1077 Pance Varangis, Elton Thigpen, Risk Manapment Prospects for Egyptian Cotton and Takamasa Akiyana 137 1089 St:Un Classens Equity Portfolio Investment in Doveloping Countries: A Literature Survey 142 1097 Takanasa Akiyama and Jonathan R. A Production Function-Based Policy Simulation Model Coleman of Perennial Commodity Markets 145 1110 Will Martin What Would Happen If All Developing Countries Expanded Their Manufactured Exports? 155 1112 Ving Qian and Ronald C. Duncan Privatization, Concentration, and Pressure for Protection: A Steel Sector Study 156 1119 Raed Safadi end Alexander Yeats The North Amencan Pree Trade Agreement Its Effect on South Asia 159 1120 Donald P. Larson Policies for Coping with Price Uncertainty for Mexicn Maize 159 1127 Vikram Nehru How International Economc Licnks Affect East Asia 162 1129 Jonathan R. Coleman, Takamasa Aliyama, flow Policy Changes Affected Cocoa Sectors in and Penos N. Varangis Sub-Saharan African Countries 163 1136 Kila Krishna and Ling Hui Tan The Dynamic Behavior of Quota License Prices Theory and Evidence firom the Hong KCong Apparel Quotas 166 1139 Jonathan R. Coleman and hL Elton Should Sub-San Africa Expand Cotton Exports? Thigpen 168 1144 Bartlomiej Kaminsld The Foreign Trade Dimension of the Market Transition in Poland: The Surprising Export Performance and Its Sustainability 170 1156 Psnayotis N. Varangis, Carlos A. Primo Tropical imber Trade Palicies: What Impact Will Braga, and Kenji Takeuchi Eco-Labeling Have? 175 1163 James E. Anderson and J. Peter Neary Domestic Distortions and International Trade 178 1174 Raed Safadi and Alexander Yeats Asian Trade Barriers Against Primary end Processed Commodities 183 1175 Bartlomiej Kaminksi and Alender Yeats OECI Trade Barriors Faced by the Successor States of the Soviet Union 183 1179 Bartlomiej Kaminaki How the Market Transition Affected EWxprt Performance in the Central European Economies 185 1191 Geofy J. Bannister Rent-Sharing in the Multi-Fibre Arrangement The Case of Mexco 191 Legal 1198 Natalie Lichtenstein Enterprise Reform in Chin: fThe EvolvingLegal Framework 194 x Index WPS # Author Working Paper rN& Page National Economic Management 811 Peter T. Knight and Sulaiman S. Wasty Comparative Resource Allocations to Human Resource Development in Asia, Europe, and Latin America 7 1166 Simon Commander, Leonid Libermnnen, The Behavior of Russian Pirms in 1992: Evidence Cecilia Ugaz, and Ruslan Yemtsov from a Survey 179 1167 Simon Commander, Leonid Liberman, Unemployment and labor Market Dynamics in Russia and Pausln Yemtsav 180 1184 Simon Commander and Richard Jackman Providing Social Benefits in Russia: Redefining the Roles of Firms and Government 188 Pollutlon and Environmental Economics 824 Sergio Iargulis Back-of-the-Envelope Estimtes of Environmental Damage Costs in Mexico 13 -1;51 Charles van Marrewijk, Federick van Is Growth Bad fir the Environment? Poflution, Abatement, der Ploeg, and Jos Verbeek and Endogenous Growth 173 Population, Health, and Nutrition 802 Steven W. Sinding Strengthening the Banks Population Work in the Nimeties 3 826 Ariel Eiszbein Do Workers in the Informal Sector Benefit fiam Cuts in the Minimum Wage? 14 841 Susan Cocbrane and David K Guilkey How Access to Contaception Affects Fertility and Contraeptive Use in Tunisia 20 846 Larry Forgy, Diana . Measham, Incorporating Cost and Cost-Effectiveness Analysis and Anne G. śnker into the Development of Safe Motherhood Programs 22 851 Eduard Boa, My T. Vu, and Patience Sources of World Bank Estimates of Ccrrent W. Stephens Mortality Rates 24 852 Joseph Kutzin and Howard Barnum How Health Insurance Affects the Delivery of Health Care in Developing Countries 25 868 MIchael Koenig Mortality Reductions frm Meades and Tetanus Immunization: A Review of the Evidence 32 883 Pedro L Alonso, Allan G. EIll, Patricia Malaria: The Impact ofTreated Bed-Nets on Childhood IL David, Greg Fegan, Joanna R. M. Mortality in the Gmbia Armstrong, Andreas Frandsc KL Chan, and Brian M. Greenwood 40 890 Denise Vaiflancourt, Janet Nassia, Population, Health, and Nutrition Fiscal 1991 Sector and Stacye Brown Review 43 914 J. Patrick Vaughan Health Personnel Development in Sub-Saharan Africa 59 Index xi WPS S Author Woding Paper th Page 924 Rafael Rofman How Reduced Demand for Children and Access to Family Planmng Accelerated the Fertility Decline in Colombia 64 934 Maureen A. Lewis, Margaret B. Public Hospital Costs and Quality in the Dominican Sulvetta, and Gerard KL La Forgia Republic 68 938 Nancy Birdsall and Estelle James Health, Government, and the POero The Case for the Private Sector 70 940 Karen G. Foreit Private Sector Approaches to Effective Family Planning 71 941 Rodolfo A. Bulatao and Eduard Boas Projecting the Demographic I-mpact ofAIDS 72 952 Susan Horton Unit Costs, Cost-Effectiveness, and Puancing of Nutrition Interventions 77 975 George B. Simmons, Sara Koerber, Techniques for Improving Client Relations in Family and Ruth Simmons Planring Programs 89 976 Cyntbia PQ Green Strategic Management of Family Planning Pgrams 89 987 Jose Luis Bobadilla and Crisina How the Epidemiolcgicl Transition Affects Heatlt de A. Poss Policy Issues in Three Latin American Countries 95 996 Michael H. Bemhart Strategic Management of Populaton Prqgrams 99 104 Regina MeNamara, Therese McGinn, Family Planning Progrms in SubSaharan Afica: Donald Lauro, and John Ross Case Studies fiam Ghana, Rwanda, and the Sudan 106 1007 Rodolfo A. Bulatao and Patience W. Global Estimates and Projections of iMtality Stephens by Cause, 1970-2015 107 1016 My T. Vu, Eduard Boo, and Ann Levin Europe and Central Asia Region, Middle East and North Africa Rtegion Population Projections 1992-93 Edition 111 1020 Nancy Birdsail Another Look at Population and Global Warming 112 1032 Eduard Bor, My TI Vu, and Ann Levin East Asia and Pacific Region, South Aia Region Population Projections, 1992-93 Edition 118 1033 My T. Vu, Eduard BOa, and Ann Levin Latin Amenca and the Caribbean Region (and Northerm America) Populaion Projections, 1992-93 Edition 118 1041 Mori Nag Family Plannng Success StoDries in Banladesh and lIdia 121 1042 Jane T. Bertrand and Judith E. Brown Family Planning Suess in Two Cities in Zaire 122 1044 Adam Wagataff and Howard Barum Hospital Cost Functions for Developing Countries 123 1046 J. Price Gittinger and Carol Bradford World Bank Project-Financed Research on Population, Health, and Nutrition 123 1048 George Baldwin Targets and nicators in World Bank rPopIaton Prjects 124 1052 Hoda Rashad A Reappraisal of How Oral Rehydratin Therapy Affected Mortality in Egypt 126 1053 Alex F. Zinang Development of the Zimbbwe Famnly Planng Programn 127 xli Index WPS# Author Woding Paperirde Page 1072 Brooke R. Johnson, Janie Benson, Janet Costs of Alternative Trestments for Incomplete Abortion Bradley, Auror R.,bago Ordonez, Catia Zambrano, Leonard Okoko, Leticia VAsqaez ChAvez, Paulina Quiroz, and Rhamna Rogo 135 1085 Cristino R Arro III Economic Approaches to Modeling Fertlity Determinans: A Selective Review 141 1131 Jeffrey S. Hammer Prices and Protocols in Public Health Care 164 1152 Denise Vaillancourt, Stacye Brown, Population, Health, and Nutrition Annual Operational and Others Review for Fiscal 1992 173 1158 Nancy Birdsafl and Charles Griffin Population Growth, Externalities, and Povertr 176 1161 Molly Maguire Teas Increasing Women's Partcipation in the Priary Sdhol Teadhing Force and Teacher Tainig Nepal 177 Poverty Analysis and Pollcy 925 Ngew-Choon Chia, Sadek Wahba, and A General-Equilibrium-Based Social Policy Model Join Whalley for Cbte dcIvoire 64 Poverty and Human Resources 1078 ChrListan Grootuert The Evolution of Welfare anc Poverty Under Structural Change and Eccnomic Recession in Cate d'Ivoire, 1985488 138 1079 Cbristiua Grootert How Useful are Integrated Household Survey Data for Policy-Oriented Analyses of Paverty Lesson from the C5te divoire Living Standards Survey 138 1080 Chrisian Grootaert and Ravi Eanbur A New Regional Price Inderfor Cote dlvaire Using Data from the International Comparisons Project 139 1081 Lionel Derme-y and Christisan Grootaert Correcting for Sampling Bias in the Measurement of Welfare end Poverty The Case of the Cate dIvoir Living Standards Survey 139 1146 Shaohua Chen, Gaurav Datt, Is Poverty Increasng i the Developg World? and Martin Ravallion 171 Private Sector Development. 1047 Enrique RuedaSabater andAndrew Stone Ct. dIvoire Prinvate SectorD!ynamics and Constraints 124 1105 Philippe Le Houerou and Hector Sierra Estimating Quasi-Fiscal Deficits in a Consistency Frameworic . The Case of Madagscar 152 Public Economics 863 Roy Bahl and Christine Wallicb Intergovernmental Fiscal Relations in China 30 869 Richard Bird and Chnstne Walich Financing Local Government in Hungary 33 Index 3dii WPS# Author Working Paper Tide Page 871 Dominique van de Wale The Distnrbution of the Benefits from Social Services in Indonesia, 1978487 34 887 WWiniam Jack Power Sharing and Polluton Contrd: Coordinating Policies Among Levels of Government 42 892 Antonio Estache and Sweder Evaluating the Asset-Based Minimumt Tax van Wijnbergen on Corporations: An Option-Pricing Apprech 45 902 Paul Beckerman Public Sector "Debt Distress" in Argentina, 1988-89 53 908 Dagmar RBagopal andAnwar Shah Tax Incentives, Market Power, and Corporate Investment A Rational Expectations Model Applied to Palistani andl Turkish Industries 56 919 Roberto de Rezende Roda and Fernando Fiscal and Quasi-Fiscal Deficits, Nominad and Reat Saldanha Measurement and Policy lssues 61 920 Raymond J. Kopp Econonic Incentives and Point Source Emissions: Choice of Modeling Platform 62 927 Andrew Feltenstein and Anwar Shah General Equilibrium Effects of Investment Licentives in Mexco 65 936 Andrew Lyon Taxation, Information Asymmetries, and a Firm's Financing Choices 69 945 BarbaraNunberg Managing the Civil Service: What LDCs Can Lear from Developed Country Reforms 74 1011 Robin Boadway and Anwar Shah How Tax Incentives Affect Decisions to Invest in Developing Countries 109 1015 Thomas M Selden and Michael J. Benefit Incidence Analysis in Developing Countnes Wasylenko 110 1018 Anand Rajaram Tariff and Tax Reform. Do World Bank Recommendations Integrate Revenue and Protection Objectives? 112 1029 Robert T. Deacon Controlling Tropical Deforestation: An Analysis of Alternative Policies 116 1030 Alan J. Krupnick Measuring the Effects of Urban Transportation Policies on the Environment: A Survey of Models 117 1031 RobertBacon Measuring the Possibilities of Interfuel Substitution 117 1076 Gunnar S. Eskeland A Presumptive Pigouvian Tax on Gasoline Analysis of an Air Pollution Control Progam for Mexico City 137 1082 Shantayanan Devarajan, Vinaya Swaroop, What Do Governments Buy? The Composition of Publc and Heng-fu Zou Spending and Economic Performance 140 1090 Thanos Catsa0bas Government Expenditures as a Citizen's Evaluation of Public Output. Public Chice and the Benefit Principle of Taxaton 143 1093 Dimitzi Virtas Swiss Chilampre: The Way Forward for Pension Reform? 144 idv ~~~~~~~~~~~~~~~~~~~~~Index WPS S Author Woring Paper Titl Page 1108 Thanos Catsambas Public Output and Private Decisions Conceptual Issues in the Evaluation of Government Activities and Their Implications for Fiscal Policy 154 1122 Richard Bird and Christine Wallich Fiscal Decentralization and Intergovernmental Relations in Transition Economies: Toward a Systemic Framework ofAnalysis 160 1125 Adriaan Ten Kate Industrial Development and the Environment in Mexico 161 1138 Daniel Landau The Economic Impact of MLlitary Expenditures 167 1177 Neil Bruce and Gregory KL Ellis Environmental Taxes and Policies for Developing Countries 184 1178 John Baffes and Anwar Shah Productivity of Public Spending, Sectoral Allocation Choices, and Economic Growth 185 1183 Cheih Kane and Jacques Morisset Who Would Vote for Inflation in Brazil? An Integrated Pramework Approach to Inflation and Income Distribution 187 1192 Jacues Morisset and Alejandro Izquierdo Effects of Tax Reform on Argentia's Revenues 191 1196 Jeffrey Bernstein and Anwar Shah Corporate Tax Structure and Production 193 1197 Bruno Boccara and Shantayanan Determinants of Inflation among Franc Zone Countries Devarjan in Africa 193 Social Policy and Resettlement 1100 Shelton IL Davis and Altka Wali Indigenous Territories and Tropical Forest Managment in Latin America 147 Socloeconomic Data 953 Michael Hee The TPedigree of IEC Conversion Factors for Per Capita GNP Computations for the World Baits Operational Guidelines andAtlas 78 956 Sultan Ahmad Regreson Estimates of Per Capita GDP Based on Purchasing Power Parities 80 1057 Socio-Economic Data Division, Measuring the Incomes of Economies of the Former Soviet Internaticnal Economics Department Union 128 1060 Dmitri Steinberg Economies of the Former Soviet Union An Input-Output Approach to the 1987 National Accounts 130 1124 Vikram Nehru, Eric Swa_son, A New Database on Human Capital Stockl Sources; and Ashutosh Dubey Methodology, and Results 161 1132 Andrew Feltenstein and Ximing HIa An Analysis of Repressed Inflation in Three Transitional Economies 165 1135 Zdenek Drabe, Kamil Janacek, Inflation in Czechoslovakia, 1985-91 and Zdenek Tuma 166 Index xv WPS # Author Woking Paper Tide Page 1157 Sultan Ahmad Intertmporal and Interspatial Comparisons of Income: The Meaning of Relative Prices 175 Trade Policy 801 Arvind Panagariya Unraveling the Mysteries of Chinals Foreign Trde Regime: A View from Jiangsu Province 3 808 Ann Harrison The New Trade Protection: Price Effects of Antidumnping and Countervailing Measures in the United States 6 809 Ann Harrison Openness and Growth: A Time Series, Cros-Country Analysis for Developing Countries 6 810 Frncois Bourguignon, Jaime de Melo, Poverty and Income Distribution During Adjustente and Christan Morrisson Issues and Evidence fir the OECD Project 6 818 J. Michael Finger and Sumana Dhar Do Rules Control Power? GATT Articles and Arrangements in the Uruguay Round 10 839 David G. Tarr Regional Integraton under VERs: When Trade Diversion is Unam3biguouly Beneficial 19 850 Kai M. Matin Fscal Adjustnent and the Real Exchange Rate: The Case of Bangladesh 24 873 Francois M. Ettori Measure and Interpretation of Effective Protection in the Presence of High Capital Costm Evidence frotm India 35 878 Kazi M. Matin and Bernard Wasow Adjustment and Private Investment in Kenya 37 903 Federico Changanaquf and Patrick The Economic Effects of Minimum hIport Prices Messerlin (With an Application to Uruguay) 53 915 W. Max Corden Trade Policy and Exhange Rate Issues in the Former Soviet Union 59 918 Jaime de Me1o, David Roland-Holst, Tax Evasion and Tax Reform in a Low-Income and Mona Haddad Economy: General Equilibrium Estimates for Madagascar 61 928 Nalin M. Rishor Pesticide Externalities, Comparative Advantage, and Commodity Trade: Cotton in Andhra Pradesh, India 66 951 Glenn W. Harrison, Thomas P. Piecemeal Trade Reform in Partially Liberalized Rutherford, and David G. Tar Economies: An Evaluation for Turkey 77 967 Santiago Levy and Sweder Transition Problems in Economic Reform: Agriculture van Wijnbergen in the Me3dco-U.S Free Trade Agreement 85 969 U. Ataman Aksoy and Helena Tang Imports, Exports, and Industrial Performance in India, 1970-88 86 985 Jaime de Melo, Claudio Montenegro, Regional Integration, Old and New and Arvind Panagariya 94 989 M4 Ataman Aksoy The Indian Trade Regime 96 xvi Index WPS Author Working Paper Title Page 990 M. Ataman Aksoy and Prancois M. Ettori Protection and Industrial Structure in India 97 992 Faezeh Foroutan Regional Integration in Sub-Saharan Africa: Experience and Prospects 98 1025 Kazi M. Matin Openness and Economic Performance in Sub-Ssharan Africa: Evidence from Time-Series Cross-Country Analysis 115 1035 Wendy E. Takacs How Import Protection Affects the Philippines! Motor Vehicle Industry 119 1040 Jaime de Melo and Sumana Dhar Lessons of Trade Liberalization in Latin America for Economies in Transition 121 1074 David G. Tarr How Moving to World Prices Affects the Terms of Trade in 15 Countries of the Former Soviet Union 136 1088 Riccardo Faini, Jaime de Melo, A Primer on the MFA Maze and Wendy Takacs 142 1094 Jaime de Melo, Arvind Panagariya, The New Regionalism: A Country Perspective and Dani Rodrik 144 1096 Mona Haddad How Trade Iaberalization Affected Productivity in Morocco 145 1104 Asad Alan and Sarath RajapaEtrana Trade Policy Reform in Latin America and the Canrbbean in the 1980s 152 1142 Martin Rama Rent-Seeking Trade Policy: A lime-Series Approach 169 1143 Lant Pritcbett and Geeta Sethi Tariff Rates, Tanff Revenue, and TariffReform: Some New Facts 170 1170 Avner Bar-Ilan and Anat Levy Job Search by Employed Workers: The Effects of Restrictions 181 1172 Garry Pursell and Ashok Gulati Liberalizing Indian Agriculture: An Agenda for Reform 182 1173 Thomas F. Rutherford, E. E. Rutstram, Moroccoes Pree Trade Agreement with the European and David Tarr Community: A Quantitative Assessment 182 1185 Morrie E. Morlicre and David clG Tarn Reforming Hungarian Agricultural Trade Policer A Quantitative Evaluation 188 Transition and Macro-Adjustment 805 Sergei Shatalov Privatization in the Soviet Union: The Beginnings of a Transition 4 816 Gerhard Pohl Economic Consequences of German Reunification: 12 Months After the Big Bang 9 820 Christopher J. Heady and Pradeep Taxation in Decentalizing Socialist Economies: KM.itra The Case of China 11 821 Fabrizio Coricelli and AnafRevenga Wages and Unemployment in Poland- Recent Developments and Policy Issues 11 Index , WPS Aubthor Worikng Paper rale Page 830 brim A. Elbadawi and NIader Maid Eixed Parity of the Exhange Rate and Economic Perfonnance in the CFA Zone: A Comparative Study 16 831 Ibrahim A. Elbadawi Real Overvaluation, Terms of Trade Shocks, and the Cost to Agriculture in Sub-Sabaran Africa 16 833 Daniel F Oks Stabilization and Growth Recovery in Mexico: Lessons and Dilemmas 17 838 Brian J Aitken Measuring Trade Policy Intervention: A Cross-Country Index of Relative Price Dispersion 19 - 845 Luc Everaert Inflation Stabilization in Turkey. An Application of the RMSM-X Model 22 859 Thrabhim A. Elbaawi Macroeconomic Management and the Black Market for Foreign Exchange in Sudan 28 872 Cheryl W. Gray, Rebeoca Hanson, Romania's Evolving Legal Framework for Private and Peter G. Ianachkov Sector Development 34 876 Ross Levine and David Scott Old Debts and New Beginnings: A Policy Choice in Transitional Socialist Economies 36 877 axy H. Jefferson and Wenyi Xu Assessing Gains in Efficient Production Among Chinads Industrial Enterprises 37 880 Miguel A. Kiguel Exchange Rate Policy, the Real Exchange Rate, and Inflation: Lessons from Latin America 38 881 Nita G}hei and Miguel A. Kignel Dual and Multiple Exchange Rate Systems in Developing Countries Some Empirical Evidence 39 8e2 Alfredo Thorne Issues in Reforming inancial Systems in Eastern Europe: The Case of Bulgaria 39 893 Cheryl W. Gray and Fra D. Stibla The Evolvng Legal Framework for Private Sector Activity in Slovenia 45 898 Gerard Caprio, Jr. and Ross Levine Reforming Finance in Transitional Socialist Economiesc Avoiding the path fiom Shell Money to Shell Games 4B 906 Cheryl W. Gray and Peter Ianackov Bulgarias Evlving Legal Framewoix for Private Sector Development 55 909 Janine Aron and Ibralim A. Elbadawi Parallel Markets, the Foreign Exchange Auction, and Exchange Rate Unification in Zambin 56 912 Andr4s Solimano Understanding the Investment Cycle in Adjustnent Programs: Evidence from Reforming Economies 58 931 Alex Culierman, Miguel A. Kiguel, How Much to Commit to an Exchange Rate Rule: and Nissan Liviatan Balancing Credibility and Flexibility 67 937 Evan Kraft and Milan Vodopivec How Soft is the Budget Constraint frr Yugoav Firms? 70 939 Daniel Kaufinann and Yan Wang How Moeconomic Policies Affect Project Performance in the Socal Sectors 71 xviii Index WPS# Audtor WoVoing Papor Tite Page 948 Mohua Mukhexjee Pactors Affecting Private Financial Flows to Eastern Europe, 1989-91 75 970 Alberto Alesina Political Models of Macroeconomic Policy and Fiscal Reform 86 971 Milan Vodopivec The Effects of Democratic Determination of Wages: Theory and Evidence from Self-Managed Firns 87 981 Andres Solimano After Socialism and Dirigisme - Which Way? 92 982 Brian Pinto1 Marek Bella, and Stefan Microeconomics of Transfornation in Poland: Krajewski A Survey of State Enterprise Responses 92 983 Cheryl W. Gray, Rebecca J. Hanson, Legal Reform for Hungarys Private Sector and Michael Heller 93 999 Miguel A Kiguel and Nissan Liviatan Stopping Three Big Inflations (Argentina, Brazil, and Peru) 101 1000 Ibrahim A. E1badawi, Dhaneshwar World Bank Adistment Lending and Economic Performance Ghura, and Gilbert Uwujaren in Sub-Saharan Africa in the 1980s: A Comparison with Other Low-Incone Countries 101 1001 Ibrhim A Ehladawi World Bank Adjustment Lending and Economic Performae in Sub-Saharan Africa: A Comparison of Early Adjuster., Late Adjusters, and Nonadjusters 105 1026 Paul D. MeNelis and Klaus Scbmidt- Financial Liberalization and Adjustment in Chile Hebbel and New Zealand 115 1034 David L Scott Revising inancial Sector Policy in Transitional sAialist Economes: Will Universal Banks Prove Viable? 119 1036 Sinon Commander and Fabrizio Output Decline in Hungary and Poland in 1990-91: Coricelli Structural Change and Aggregate Shocks 119 1038 Ibranim A. Elbadawi and Robert de Determinants of FExpatriate Workers Remittances Rezende Rocha in North Africa and Europe 120 1049 William Easterly, Paolo Mauro, and laus Money Demand and Seignorage-Mairaizing Inflation Scbhridt-Hebbel 125 1050 Wiliam Easterly and Sergio Rebelo Marginal Income Tax Rates and Economic Growth in Developing Countries 125 1051 Cheryl W. Gray The Legal Framework for Pnvate Sector Activityin 1the Czech and Slovak Federal Republic 126 1054 Branko MBianovic Distributional Impact of Cash and In-ind Socidal Traners in Easten Europe and Russia 127 1059 Ziya Onis and Steven B. Webb Political Economy of -olicy Reform in TurkeY in the 1980s 129 1061 Klaus Schmidt-Hebbel and Luis Serven Dynamic Response to Foreign Transers and Terms-oE-Trade Shocks in Open Economies 130 1063 Cevdet Denizer and Alan Gelb Mongolia: Privatization and System Transformatio in An Isolated Economy 131 Index ,x_ WPS. Author Working Paper rnb Page 1064 George R G. Clarke More Evidence on Income Distribution and Growth 132 1068 Sweder van Wijnbergen Enterprise Reform in Eastern Europe 133 1087 Alberto F Ades, Miguel A. Kiguel, Exchange-Rate-Based Stailization: Tales from and Nissan Liviatan Europe and Latin America 141 1098 Jean Baneth Fortress Europe and Other Myths Concerning Trade 146 1101 Brian Pinto, Marek Belka, Transforning State Enterprises in Poland: and Stefan Krajewskdi Microeconomic Evidence on Adjustment 151 1111 Cheryl W. Gray and William Jarosz Foreign Investnent Law in Central and Eastern Europe 155 1126 Milan Cvild, Evan Kraft, The Costs and Benefits of Slovenian Independence and Mfilan Vodopivec 162 1133 Ibrahim A. Elbadawi and Nader Majd Macroeeonomic Framework for an Oil-Based Economy. The Case oCBahrain 165 1134 ibrahim & Elbaadwi and Nader Majd Managing a Nonrenewable Resource: Savings and Exchange-Rate Policies in Bahrain 165 1148 Robert S. Pindyck and Andr4s Solimano Economic Instability and Aggregate Investment 172 1149 Martin Rama How Lbor Markets and linperfect Competition Affect TaiffPolicy 172 1162 Milan Vodopivec and Samo Hribar-Milic The Sloveniin Labor Market in Transition: Issues and Lessons Learned 177 1165 Branko Milanovic Social Costs of the Transition to Capitalism: Poland, 1990-91 179 1176 Branko Milanoveic Cash Socil Transfers, Direct Taxes, and Income Distribution in Late Socialism 184 1182 Cheryl W. Gray and Rebecca J. Hanson Corporate Governance in Central and Eastern Europe: Lessons from Advanced Market Economies 187 1188 Mario Marcel and Andrds Solimano Developmentalism, Socialism, and Free Market Reform: Three Decades of Income Distnbution in Chile 189 1189 Alan Gelb, Gary Jefferson, Can Communist Economies Transform Incrementaly? and Inderjit Singh China!s Experience 190 1193 Milan Vodopivec and Wayne Vroman The Armenian Labor Market in Transition: Issues and Options 192 1194 Tom Rawski How Fast IHas Chinese Industry Grown? 192 1195 Mark Schaffer The Enterprise Sector' and Emergence of the Polish Fiscal Crsis, 1990-91 193 oc Index WPS Author Working Papr Tie Page Transport 921 Cesar Queiroz and Surhid Cautam Road Infrastructure and Economic Development:. Some Diagnostic Indicators 62 926 Neil E. Moyer and Louis S. Thompson Options for Reshaping the Railway 65 950 Hans Jurgen Peters Service: The New Focus in International Manufactuing and Trade 76 986 Roy Bahl The Administration of Road User Taxes in Developing Countries 95 998 Esra Bennathan, Julie Fraser, What Determines Demand for Freight Transport? and Louis S. Thompson 100 1070 Timothy D. Hau Economic Fundamentals of Road Pricirg A Diagrammatic Analysis 134 1071 Timothy D7 Hau Congestion Charging Mechanisms for Roads: An Evaluation of Current Padice 135 1128 Hans Jrgen Peters The International Ocean Transpwort Industry in Crisis: Assessing the Reasons and Outlook 163 1137 Plilip W. Blackshaw and Louis Railway Reform in the Central and Eastern European S. Thompson Economies 167 Water and Sanitaton 879 Peter Rogers Comprehensive Water Resources Management A Conicept Paper 38 1005 Laszlo Lovei An Approach to the Economic Analysis of Water Supply Projects 106 1992 Word Development Report Background Papers 904 Nemat Shafik and Susheujit Economic Growth and Environmental Quality- Bandyopadhyay Time-Series and Cross-Country Evidence 54 942 Arik Levinson and Sudhir Shetty Efficient Environmental Regulation: Case Studies of Urban Air Pollution (Los Angeles, Meico City, Cubatao, and Ankara) 72 957 Anwar Shah and Bjorn Larsen Carbon Taxes, the Greenhouse Effect, and Developing Countries s0 959 Sheila Webb and Associates Waterborne Diseases in Peru 81 960 Edward B. Barbier and Joanne C. Burgess Agricultural Pricing and Environmental Degradation 81 961 Wilfred Beckerman Economic Development and the Environment Conflict or Complementarity? 82 Index Da WPS# Author Working Pper rtle Page 962 Margaret E. Slade Do Markets Underprice Natural-Resource Commodities? 82 963 Charles R. Blitzer, Ri S. Eckaus, Growth and Welfare Losses firm Carbon Emissions Supriya Lalin, and Alexander Meeraus Restrictions: A General Equilibrium Analysis for Eygpt 83 964 Robert E. B- Lucas Toic Releases by Manufacturing: World Patterns and Trade Policies 83 965 WiDiam Ascier Coping with the Disappointing Rates of Return on Development Projects that Affect the Environment 84 966 Judith M. Dean Trade and the Environment: A Survey of the Literature 84 968 David 0. Hall Bioniass 85 972 Robir. W. Bates and Edwin A. Moore Commercial Energy Efficiency and the Environment 87 978 Charles R. Blitzer, R. S. Eckaus, How Restricting Carbon Dioxde and Methane Supriya Lahiri, and Alexander Meeraus Emisisons Would Affect the Indian Economy 90 979 DennisAnderson Economic Growth and the Environment 91 980 Piritta Sarsa The Environment: A New Challenge to GAM 91 988 David Pearce Economic Valuation and the Natural World 96 991 Margaret E. Slade Environmental Costs of Natural Resource Commodities: Magnitude and Incidence 97 1002 Bjorn Larsen and Anwar Shah World Fossil Fuel Subsidies and Global Carbon Emissions 105 1017 Richard E. Bilsborrow Rural Poverty, Migration, and the Environment in Developing Countries: Three Case Studies in 1062 Robert E. B. Lucas, David Wheeler, and Economic Development, Environmental Regulation, and the Hemamala Hettige International MEgration of Toxc Industrial Pollution, 1960-88 131 1993 Workf Development Repon Background Papers 1150 Lant Pritchett and IAwrence H. Summers Wealthier is Healthier 172 Unclassifled 832 Richard B. Norward Sustainabty and the Economics of Assuring Assets for Future Generations 16 930 Robert Picciotto Participatoiy Development: Myths and Dilemmas 66 Volume IX Numbers 801 - 900 Policy Research Wasting Paper Series 3 801. Unraveling the Mysteries 802. Strengthening the Bank's egy papers and economic and sector work of China's Foreign Trade Regime: Population Work In the Nlneties programs. A View from Jlangsu Province Population action plans where ana- Steven W. Sinding lytical work demonstrates a need; consid- ArvindPanagariya (November 1991) oration of establishing Population Coor- (November 1991) dinators in each region to monitor and These recommendations fbr the nineties help in analytical work and preparntion ProposedreformtargetsforChina'sforeign focus on changing Bank strategies, not of action plans; preparation of regional trade. Bank policy. population overviews. *High priority to population training Panagariya describes briefly the evolution In this concise paper, wnitten for Bank for managers and lead and country econo- & China's complex foreign trade regime, management, Sinding briefly reviews the mists as well as for technical staff. paying special attention to the implemen- rationale for Bank involvement in popula- - Explicit objectives for population im- tation of national trade policies at provin- tion work. He then establishes aconceptual pact in freestanding population projects cial and city levels. This is important for framnework for determining appropriate and in population components of Popula- understanding developments in China's program approaches for reducing fertility. tion, Health and Nutrition projects; care- external sector because provinces came to Finally he suggests ways to strengthen the ful impact studies. enjoy a high degree of autonomy in the Banlesapproachtopopulatimnanalysisana Longer term 198Os. Jiangsu, one of the fistest growing program support in the 1990s. Sinding * Bankleadershipin donor coordination provinces in ChinL, experienced rapid recommends revising Bank strategy, not to increase flows and effective use of re- growth in exports. Bank policy. sources to population activities as part of AssumingthatChinawillmovetoward Therationale has shifted somewhat, but overall efforts to implement the World a market economy only gradually, the Banlks long-standing concern for Development Report 1990 strategy for re- Pnagariya proposes piecemeal reform of population and fimily planning remains ducing poverty. trade policy as most desirable for improv- compelling. The distinctionbetweenpopu- * Building a consensus for Bank loans ing efficiency and fostering competition. lation and faiily planning is important to displace bilaterial grants to large, more Among reforms he proposes: because the skills needed to deal with the mature population and family planning - At the national level, liberalizing two are different. We now know that in progms, freeing up grant funds for trade, expandingdirectexportrights, fur- most settings, family planning - while newer programs that enjoy less secure ther rationalizing the foreign exchange not a substitute for development-is the political support. retention system, extending the agency most cost-effective approach to reducing This paper - a product of the Popula- system to exports, and eliminating the fertility. Bank supportis particularlyim- tion, Health, and Nutrition Department discrepancybetween domestic and export portant in a critical set of countries (for - is part of a larger effort to reinforce prices. which Sinding provides an anlytical consensuswithinthefBankabouttherole 0 More selective targetingofsectorsfor matrix). Butinanycountry, access tofiun- of policy dialogue and population lending export and greater willingness to exit ily planning improves the lives ofthe poor in the achievement of development objec- when a target sector appears to be the in many ways. tives. Copies are available free from the wrong one. Certain elements appear to be crucial World Bank, 181BHStreetNW, Wasiing- * Allowing town and village enter- to the success of Bank programs: govern- ton, DC 20433. Please contact Otilia prises to operate as freely as possible, re- ment commitment to the program; Bank Nadora, mom S11-219, extension 31091 moving barriers to interprovincial trade support of such 'software" and recurrent (34 pages). and mobility oflabor, and encouragng the costs as training, transport, management rmiation ofindustry groups only up to the information systems, and contraceptive point that they do not acquire monopoly supplies; strengthening of existing insti- 803. Financial Regulation: power. tutions rather than development of new Changing the Rules of the Game This paper - a product of the Trade ones; involvement of private and Policy Division, Policy Research Depart- nongovernmnent organizations in the de- Millard Long and Dimiti rittas ment - is part of a larger effort in the liveryofservices; effectivemonitoringand (November 1991) Bank to understand the international evaluation systems (afthe latter, the Bank trade regimes ofeentrally planned econo- has done little to date). Financial regulation in the 1980s -w mies. Copies ae available free from the Sinding draws two main conclusions charactrized by far-reawhing changes in World Bank, 1818 H StreetNW, Washing- from reviews of Bank pezformance: (1) no the rules ofthegameinbothdeueloped and ton, DC 20433. Please contact Dawn satisfactory indicators edst to evaluate deve7opingcountrie. Threecriteria-sta- Ballantyne, room N10-023, extension Bank performance objectively, and (2) bility, efficiency, and fairness - can be 37947 (27 pages). there is scope and opportunity for the used to evaluate financial strctures and Bank to build on recent advances to im- rgulation Tradeoffs bewee them must prove its efforts in population work. be determired on a country-by-country Sinding recommends the following: basis. Immediate * Greater attention to analysis of popu- In a brief history of financial regulation, lation issues in appropriate country strt- Long and Vittas note the removal or re- 4 Policy Reserch Working PWr Sedls laxation of controls on credit and interest mote one criterion and disregcrd the oth- at times of igh oil priceLTbiswasbeauw rates in the 1980s and the growing empha- ers would not be optimal. of relatively rapid expansion ofmatmials- sis on prudential controls. Thispaper-a product oftheFinancial intensive sectorsandlagainadaptingtothe They argue that the 1980s were not a Sector Development Department - is latestmaterials-efiienttechnologies. The decade of financial deregulation but a partofalargereffortintheBanktostudy developingcountr,!'s-especallytherap- period when the rules of the game were theimpactofregulation onfinancial struc- idly industrializing countries - will on- substantiallychanged.Theydiscuss three ture. Copies are available free from the tinue to provide the main growth market criteria for evaluating financial regulation World Bank, 1818 HStreetNW, Washing- for raw materials in the 1990s. and atrcre: stability, efficiency, and ton, DC 20433. Please contact Wilai Statistical tests of alternative hypoth- fairness. Pitayatonakarn, room N9-003, extension eses suggest that the downturn haa been For forty years, financial stability was 37666 (18 pages). only pary cyclical. There is not strong not a significant concern, but today it is, evidenceto supporttheviewthatitwasa as a result of massive losses suffered by one-timeimprovementintheefficiencyof financial institutions. Financial stability 804. Global Trends In Raw raw materials use. can be enhancedhy increasing capital re- Materials Consumption The most plausible explanation, sup- quirements and strengtening financial ported by statistical evidence, is that supervision.Butthestilityof hefinan- Boum-Jong Chee materials-saving technlogic changes cial system is al affectedbyits sBtructure. (November 1991) have accelerated, probably because of Systemswith"naro'banksor"nonpar` higher energy prices. Whether those banks wonldbe exposedtofewersystemic After the 1973 oil shock, demdfor raw changes will cntinue at the acelerated risks. materias - especially base metals -de- ratewhenenergyprices arelowerremains The relationship between strnture and cined drastically. The mostplausibe ez- to be seen. Recent data suggest that the efficiency is also complex In the research planation, supported by statstical eel- rate may lready have slowed down, literatie, the issues ofeconomies ofscale &ux, appears to bethat mateals-saving which suppor amore cautiously optmis- and scope in finance remain unresolved. technolgical changes have arcelet, tic outlook for developing countries' ex- In developed countries, there is growig probaly because of higher energy pricea. ports of raw mariads tihan prevailed in concentration and a spread of universal the early 1980s. bankin& suggestig economies of both In this review of consumption of base This paper- a product ofthe Interna- scae and scope. Moreover, available evi- metals, steel, and agricultural rawmate- tional Trade Division, International Eco- dencesuggeststbtatconentmtedbanldng rials, the author focuses on the causes for nomics Department -is part ofalarger wstems tend to have lower margins and the drastic slowdown n the consumption effoirt in the Bank to understand the operating costs as well as bigher profits. growth rate after the first oil price shock. changesinraw mateials consumptionin Butin developingcountries,lapebanks Fron a range of 4 percent to 10 percent order to better assess the prospects for tend to be inefficient. Their size is the annuallyformostmetals,thegrowthrates developing countries' ezxorts of those resultofcontrolsandrestrictions on con- dedinedto lpercentto 2pereent. Whetfher materials. Copies are available free fiom petition and entry rather than superior the post1973 decline in demand for raw the World Bank, 1818 H Street NW, efficiency. Allowing universal banlkng materilsrepresentsanirreversiblestruc- Washington, DC 20433. Please contact might exacerbte the dominant position tural change is important for developing Sarah Lipscomb, room S7-062, extension of large banks, with adverse effects on countries that depend heavily on exports 33718 (25 pages). competition and efficiency. of those commodities. And views on this Fairness covers many issues, such as issue have been divergent. protectingusers offinancialcystemsfrom The fact that the decline started when 805. Prlvatizatlon In the Soviet abusivebehaviorby thefinancil institu- oil prices increased suggests that the en- Union: The Beginnings tions, creating a level playing field for ergy-saving drive, through materid sub- of a Transition competing institutions, and tacling the stitution and technological changes, and problems caused by potential conflicts of the adverse macroeconomic impact of Sergei Sbatalov interestL Fairness can be more easily higher energy prices had detrimental ef- November1991) achieved in systems with simple struc- fects on consumption of these materials. turea, butlimits on the permissible range For agncultural iaw materials, the de- Economic intiative has passed fom the of activities of different types of institu- cline basbeenmuchless pronounceLAny certer to the republics, some ofwhic havue tions might undermnme efficiency and to increase in consumption of cotton and alrady mouedfirom egislation to unpe- a lesser extent, stabflity, natural rubber thatresulted frm higher mentiho oftheir own repub icdivesture Clearly there are tradeoffs between costs of synthetic fibers and rubber must policies. In an optimistic scenario, this these three cntena for evaluating finan- have been relatively small. tend wall continm But euen under the cial regulation and structure. Long and Most of the decline in raw matris most pessimstic sezari, it is unlily Vittas suggest no general answers to the consumption occurred in the industrial that priuatiation processe identSed isw questions inherent in these tradeafis. economies. In developing countries, the this study will be stopped They contend that answers must be trend inacese in the intensity of raw ma- sought on a country-by-country basis, al- terid]sonsumptionperunitofoutputcon- Shatalov, a senior fellow at the USSR though clearly extreme solutions that pro- tinued with orly temporary interruptions Academy of Sciences, completed this pa- Policy Research Woking Paper SeLries 5 per beore the events ofAugustl991. But 806. Measuring Commerclal Bank but not vith differences in accounting his analysis of recent modes of privatiza- Efflclency: Use and Misuse conventions. ROE analysis can also shed tion in the Soviet Union is still important of Bank Operating Ratios lightontherelationshipbetweenspreads, for understanding the evolving situation. leverage, and inflationL The 'present" All-Union regime, Dimitri littas Vittasapplieshis anaysis to the perfor- Shatalov explains, was the first regime to (November 1991) mance ofbanicin OECDcountries in the implement wide-scale privatization. The 1980s. He lhos that IJL building soci- proe may take different course, beig Measuring bank efficiency is fficult be- eties, German savigs banks, and com- initiated ficm 'above" (for example, by cause there is no satisfactory definition of mercial banks in Canada, Germany, and ministries) and fiom blow, by enter- bank output. Interational comparisons the Netherlands were higly profitable prises. Recent measures of the All-Union basedon operatigcosts and nmagin are and efficient. Amencan money center authorities, he contends, had the effect of fraught with problems. These stan from banks and foreign banks in Canada were restrictingany real role in privatization to substantial differencesincapitalstructure the least prcfitable. the social and economic elite because, in aeverage% business orproduct mix, range The dat also suggest that banks in qarly 1991, monetary and price reform andquaity ofservics, inflainrates,and consolidated banking systems with high wiped out a significant part of household accounting conventions (especialy about concentration, as in Canada, the Nether- savings. the ualuation of assets, the revel of an Zoss lands, and Sweden, have lower operating Leadinginternationalcorporationsare provisioning, and the use of hidden re- costs than banks in fiagmented systems, still interested in getting a stake in such serues). Facile and uncritic use of ratis asinItEly, NorwEy,andtheUnitedStates. topSovietperformersasKAMAZ;inthose cannot subsitute for deta knowledge Theanalysishasmajorimplicationsfor few cases it will be possible to negotiate and understanding of banking structure assessingbonkperformanceindeveloping terms more advantageous than those dic- and practice countries. Given the narrower range and tatedby the dwindling value of the ruble. lower quality of their services and the The All-Union govemmenthas been ans- Measurngbank efficiencyis difficultbe- lower level of wages, their cost-asset and iour tD prevent"Wldlforeign participation cause there is no saishetory definition of cost-incomeratiosshouldbesmallerthan atanycost. That costmayprove excessive, bank output. Neither the number of ac- for banks in developed countries. But in- however, as confidence in the ruble and counts nor total assets, total loans, and flation, higherik, andopeafing ineffi- in the Soviet economy weakens, total deposits provideagood index ofout- ciencies often cause cost and oter bank In the meantime, the economic initia- put. Moreover, the value added of ban'ks ratios to be generally higher than in tive has passed from the center to the re- - given by their labor costs and profits OECD countries. publics. Some repubhics have already -measures both the output and the cost Thispaper-aproductoftheFinancial movedfromlegislationtoimpiementation of banking. Sector Development Departnent - is of their own divestiture policies. This Many analysts use accounting data on part of a larger effert in the Bank to dis- trend appears lily to continue. But one bank margins, costs, and profits as mea- seminate the results ofits research in fi- cannot exclude other scenarios, for ex- sures of bank efficiency. But the useful- nancial sector development- Copies are ample, a collapse that provides anoppor- ness of these data is undermined by sub- available free from the World Bank, 1818 tuimty for some political force to try to stantial structual and accounting differ- H Street NW, Washington, DC 20433. reverse course and restore authoritarian ences across countries, amongindividual Please contact Wilai Pltayatonakarn, rule under the slogan of'law and order. banks, and over time. Great caution and roomN9-003,extension37666(49pages). Eveninsuchacase,however,itisunlikely extensiveknowledgeoflocalbankingcon- that the processes of privatization identi- ditions are required to interpret bank ra- fied in the study will be stopped. tios. 807. MNderate inflaton This paper - a product of the Transi- Vittas uses three sets of operating ra- tion and Macro-Adjustment Division, tios to discuss the impactofdifferencesin Rudiger Dornbusch and StanlayFicher Pnoicy Research Department- is part of structure and practice an bank perfor- (November1991) s- arger effort in the Bank to study, in a mance: :Imperative mode, the reform process * Operating asset ratios (which relate lMfost episdes of modeate inflation are underwayin socalistandformerlysocial- all revenues and costs to average assets). triggered by commodity price shocks, ae st countries. Copies are available free * Operating income ratios (which re- brief anrd eldom end in higher inflation. frum the World Bank, 1818 H Street NW, late revenues and costs to gross income). Segnorageplays atmostamodest roe in Washington, DC 20433. Please contact * Operatingequityratios(whichrelate thepeonieneofmdaate infladon;such Angelica Bretana, room N11-029, exten- revenues and costs to average equity). infltions can be red mnly at a sub- -4- n 37176 (28 pages). He also uses return-on-eqLuity (ROE) stantial short-term cost to growth. analysis to highlight the effects of differ- ences in banking structure and practice. Inflation persists at moderate rates (15- ROE analysis combines two simple iden- 30 percent) in all the countries that suc- tities between profitability ratios, bank cessfufly reduced triple-digitinflation in leverage,andgrossmargins.Itcopesquite the 1980s. Several other countries-for well with the differential impact of capi- example, Colombia - have experienced tal structure, product mix, and inflation moderate inflation for prolonged periods. 6 Polky Research Working Paper Seres Dornbusch and Fischer set out types of ing duties, by measuring their impact on And is it possible to disentangle short- theories of persistent inflatiou those import prices. run from long-rnn effects without throw- emphasizing seigriorage as a source of The datasetcombinescross-sectionand ing away anumal data? govenmentfinance and those emphasiz- time series data for 1981-86, making it This paper, a background paper for the ing the costs of ending inflation, possible to control for differences across 1992 WorldDeuelopment Report, is aprod- They then examine the sources and industries and separately measure the uct of the Office of the Vice President, persistence of episodes ofmoderateinfla- effects of duties and investigations. DevelopmentEconomics. Copiesare avail- tion.Mostepisodesweretdggeredbycorn- The results suggest that for some see- able free from the World Bank, 1818 H modity price shocks and were brief. Very tors the price effecto winvestigations is as Street NW, Washington, DC 20433. few ended in higher inflation, great as imposing r. duty. Investigations Please contact the World Development Dornbusch and Pischer present case that end in duties2 have different effects Report office, room T7-101, extension studies of eightcountries,includingthree than those resvWting in no action. 31393 (34 pages). that now suffer from moderate inflation Th.: paper is a product of the Trade and four that successfully moved down to Policy DiThision, Policy Research Depart- single-digitinflationrates.Theyexanine ment. Copies are available free from the 810. Povenry and Income the roles of seigniorage, indexation and WorldBank. 1818 HStreetNW,Washing- Distribution during Adjustment: diindexaton, the exhangerate commit- ton, DC 20433. Please contact Dawn Issues and Evidence ment, and monetary and fiscal policy. Ballantyne, room N10-023, extension from the OECD Project Theevidence suggeststhatseigniorage 37947(33 pages). plays at most a modest role in the permsis- Franeos Bourignon. Jaime deMelo, tence of moderate inflation and that such and Christian Morrisson inflation canbereducedonlyat asubstan- 809. Openness and Growth: (November 19913 tial short-term cost to growth. A Time Series, Cross-Country This paper - a product of the Office of Analysls for Developing Countries Adjus}sent programs will fa when they the Vice President, DevelopmentEconom- do n thrgnLe interendce ofthe ics-is part ofalarger effort in the Bank Ann= rrison three cria of effncy, weliem and to identify fiators that inhibit the trans- November 1991) politiealfzsibiluty. These programs mast formation from stabilization to growthin be tailored to both the politdal and eo- manycountrielsresearchwasfunded Crrelatwacross opennes measures are nomic environme ofeach coumrty. by the World Bank's Research Support somenies weak, but openness dos seem Budget, RPO 675-89, aStopping 20 Per- to be postuely associaed with GDP Drawing lessons fiom country studies, cent Inflation. Copies are available free growth-the more open the ecoomy, the Bourguignon, de Melo, and Morrison from the WorldBank, 1818 HStreetNW, higher t growth. exminetheeffectsofadjustmentpolicies Wasbington, DC 20433. Please contact onthedistributionofincomeinChile.Cfte DECVP, room S9-035, extension 33766 Harrison draws togetheravarietyofmea- d'voire, Ecuador, Indonesi, Malaysia, (73 pages). sures of openness to test the assocation and Morocco. After analyzing the issues between growth and openness. that must be confironted in designing ad- Although the correlation across mea- justment programs with a foicus on pow- 808. The New Trade Protection: sures is sometimes weak, there is gener- erty,t heysynthesizet hemainconclusions Price Effects of Antidumping allyapositiveassociaonbetweenallthese of the different country studies. and Countervailing Measures measures and GDP growth. The strength With simulation exercises they explore In the United States of the association generally depends on theeffectsofthedesignoftheadjustment whetheranalystsuecross-sectionorpane packges on poverty and on the- Am Harrison data. sustaiability of the measures under- (November 1991) For industrializing countries, trade tken in these countries. These exercises policies have varied too much over time to show considerable diversity in the evolu- For some sectors the effect onimportprices make the long-run averages used in cross- tion ofincome distribution duringadjust- of izestigating antdumping cases and section estimates very meaningful. ment. They also expose the fatal flaws of countervailing measures is as great. as Inmanyrespectstheresultsaresmpr- narrowlydesigneda4justmentprograms. imposuig a duty. And investigations that inglyrbusltWhenopennessisstEatistically Adjustment programs - whether fo- end in duties have different effecqt than significant in the many specifications cused on efficiency or on welfre will those resuting in no action. Harrison explores, she always finds that fail when they do not recognize the inter- greateropennessisassociatedwithhigher dependence of the three criteria of effi- The frequent application of antidumping growth. Tests of the sensitivity of these ciency, welfare, and political feasibility. and countervailing measures in the results to country size do not change the Adjustment programs must be carefully United States in the 1980s has been de- results. packaged to fit country ci , scribed as a new form of protection. Harrisonhighlightstwoissuesinterest- taking into accountboth the political and Harrison measures the effect not only ing for future research: economic environments. of investigations (to evpluate claims of Does openness cause growth? Orisit the This paper - a prodluct of the Trade dumping or subsidies) but of the result- other way around? Policy Division, Policy Research Depart- Policy Research Working Paper SerIes 7 ment - is part of a larger effort in the Reviewing statistics compiled for se- Claessens identifies several gaps in the Bank to analyze the effects of alternative lected Latin American countries and two literature on external financing for devel- adjustment packages on poverty and on reference groups ofcountries in East Asia oping countries. Theoretical and empiri- the distribution of income. This research and northern/southern Europe, Knight cal research in three areas could help the wasfundedby the World Banles Research andWastyremphasizetheneedtoincrease World Bank and other official creditors SupportBudget, 'rade Reforms in SAIs: attention to and expenditure on education define their role in a world with .ncreased A Positive Analysis of Performance rnd and health systems in many developing capital mobility - and would be consis- Sustainability9(RPO 675-32). Copies are countries, especially in Latin America, to tent with their increased emphasis on available free from the World Bank, 1818 improve the coverage and quality of the developing the private sector. The three H Street NW, Washington, DC 20433- services they provide, areas are: Please contact Dawn Ballantyne, room The paper notes that wider access to - The difirence in country risk be- NIO-023, extension 37947 (53 pages). secondary education and greater empha- tween alternativeforms ofexternalfinanc- sison the qualityofhighereducationtead ing ("alternative financig7) and tadi- to be a distinguishing feature of the bet- tinalfinancing. Thisresearch wouldhelp 811. Comparative Resource ter performers (East Asian and northern/ assess the type and amounts of alterna- Allocations to Human Resource southern European countries). Much of tivefinancingconsistentwithan(explicit Development in Asia, Europe, East Asia's success can be attributed to or implicit) enforcement of contracts and and Latin America the region's consistent efforts to improve the institutions needed to assre the technical and higher education-particu- proper treatment of claims. Peter T. Knight and Sulaiman S. Wasty larly in research and development and in * Incentive structures for, and restric- (December 1991) engineering and other technical applica- Lions on, alternatic financing in the host tions. The Nordic countries, too, havepro- country. Research could focus on the effi- Major increases in atttionto and expen- vided thorough on-the-job training and ciencyof these sehemesfrom thecountry's ditureoneducationandhealthsystemsare establishedfirst-rateeducationalinstita- perspective, and could identify the best needed in many developing countries, es- tions, led by world-class research sden- incentive structures for attracting the pecially in Latin America, to improve tire tistsin technical fields andsocial sciences. desired amount and type of foreign capi- coverage and quality of the services they In sum, since specialized technical hu- tal. This wouldhelp countries designbet- provide Relying on trends and themes man resources take time to develop, no terpolicieson domesticregulations,taxes, emesgrgig from regionl comparisons, the country today can afford not to provide accounting, institutions, and perfbrmance paper identifies an agenda for policy re- enough financial resources to develop incentives.Research shouldaddress such form in human resource development to critical human resources. issues as the appropriateness of owner- improe a country's internationalcorpeti- This paper-a product of the National ship andcapital controls, the enforcement tiueness in the decades ahead Economic Management Division, Eco- of private-to-pivate contracts, the moni- nomnic Development Institute - is a re- toring of external private-to-private con- The quality of a country's human re- vised version of a paper presented at the tracts, the decision to allow foreign banks sources will determine its ability to com- Seminar on Planning and Evaluation of to enter a country, the design ofappropri- pete in international markets andassure Social Sectors in Latin America, held in ate financial instruments, and the appro- the well-being of its citizens in the next Rio de Janeiro, Brzil in December 1989, priateness of investment incentives. century as it does in this one. Consider- andorganizedbyEDrsHumanResources * Optimal participationmodesofiter- ingrapidlyadvancingterhnology,expand- Division. Copies are available free from national firms in developing cunWries ing global lirnks, and threats to the ecol- the World Bank 1818 H Street NW, This research couldfocuson the (optimal) ogy, it is clear that whether a society Washington, DC 20433. Please contact capital structure ofa multinational carpo- maintains or improves its competitive- Dulce Afial, room M3-045, extension ration seeking financing from domestic ness, ensues social equity,'adjusts"-or 36335(20 pages). and foreign capital markets, under the indeed survives-will ultimately depend constraint that capital in the host coun- on its success in developing its human re- tzy is mobile. Researchers could investi- sburces. Butindevisingtheir development 812. Alternative Forms of External gate how international firms should fi- strategies and public expenditure portfo- Finance: A Survey nance (and have been financing) them- lios, many developing societies - and selves andwhethertherehavebeen dhifts among them Latin American ones are Stijn Claessens in these patterns; develop contracts that proniinent-haveyettoaccord dueatten- (December 1991) deal with problems of moral hazard and iion to their most vital resource. A major sovereign risk; and discuss the multina- ;ueiswhetherLatinAmericancountties Alternatiue forms of external finance for tional corporation's intermediation role will be forced to sell cheap labor andover- deueloping countries have increased in andthepossiblerestrictionsagovernment s-ploittheirnaturalresourcestomaintain inportance in recnt year This paper shoulld impose on private-to-private f- --en cument,iaquatelivingstandards. identifies research that coaldhelp oficial nancing. CArwill these contries follow the lead of creditors define their role in a world with Currentliteratr doesnot offerofficial -.:cessful European, North American, and increased capital mobility - and wuld creditors much analytical support about w Asian countnes that have invested be consistent with their increased empha- the prefenredforms offinancialintermedia- hsavily in their human resources? sis on developing the private sector. tion or their possible support role for pri- 8 Pollcy Research Walking Paper Series vatesectorfnancng(cofinancing.guaran- about the costs of parastatals' stoeking stabiltyshoudbepursued incncertwith tees,privatization,andhow togetcomfort- operations in attempts to stabilize jute financ l refrm able adherence to private-to-private prices and incomes. claims). Official creditorsmay have trouble Aldyama and Varangis examine the Development economists hsve long ar- definingtheirroles when they don7thave a causes and consequences ofthese fluctua- gued that modem financid markets are clearideaofthe differencesbetween alter- tions and analyze pohicies that might re- important to growth and that financial nativefinancingandtraditionalfinancing, duce them. They find that price fluchta- repressionisaseriousobstsleetoprogress don!t know when one or the other is called tions for rawjute reduce farmers! welfare inmanydevelopingcountries.Butthe lib- for, or the implicit seniority status of dif- only slightly because farmers activities eralization of financal markets has been ferent claims, are typically diversified and jute's share disappointing in many countries - at Research in these three areas would in total income is small. times appearing to produce chaos rather help improve official creditors9 policy ad- Although stocking operations by the than growth, and forcing many countries- vice, their efficiency as intermediators, parastatals contribute to stabhlity in to retreat from deregulation. Now that and any activitiesassociated with private- prices and real income, they have been economic stagnation seems to persist in to-private lending. The World Bank and extremely costly and have crowded out many developing countries, many other creditor institutions are often in- private stocking. Akiyama and Varangis policymakersfiweadilemmaShould they volved in policy advice on domestic re- contend that if the parastatals had re- cling torepressedfinancial markets or try forms often aimed largely at attracting fi-ained from ad hoc stocking and if the the road to reform once again? foreign finance - either by developing privatesectorhadstockedefficiently,jute GertlerandRoseconsider theTelation- appropriate instruments or by providing prices and incomes would have been just ship between finance and growth and the enough comfort so that countries can ad- as stable - and at no eost appropriate role of government policy. here to performance requiirements on They argue that the Bangladeshi jute Manyeconomistshavestressedhowprob- projects. They cannot afford to duplicate market should be free of government in- lems of asymmetric information and con- systems that already exist and need to tervention and that Bangladesh should tractenforcementimpedethefunctioning take into account specific situstions in ecsablish a market-based credit system of financial markets in developing coun- developing countries, that allows efficient stockholdingbehav- tries. Gertler and Rose flesh these theo- Thispaper-aproductoftheDebtand ior by the private sector. ries out to make them relevant to International Finance Division, Interna- Akiyama and Varangis also found that policymaker. tional Economics Department - is part improvingtheflowofmarketinfarmation Theyexplaim thatinformation gaps and of a larger effort in the department to to farmers and greater price responsive- enforcement frictions introduce a pre- analyze alternative forms of financial ness by jute mills to raw jute purchases mnium in the cost of externa funds. Feac- flowstodevelopingcountriestodetermine would significantly improve the stability tors suc. as the borrower's financial ways of enhancingthe quantity and qual- of raw jute prices and incomes. Having health the efficiencyoffinancilinterme- ity of external resources in support of de- more information available would also diation, and the ease of enfocing private velopment. Copies are available free from make private stocking operations more financial contracts govern the size of this the World Bank, 1818 H Street NW, efficient. premium. How financal fctors contnib- Washington, DC 20433. Please contact This paper- a product of the Interna- ute to development may be understood RoseVo,room88-042,extension33722(37 tional Trade Division, International Eco- along these lines. As for financial struc- pages). nomics Department -is part of a larger tire, financia contracts and institutions effortinthedepartmenttoaddressissues ought ideally to be designed to minimize of price and income stabilization in pri- this premium. 813. Price Stabilization for Raw maxy commodities. Copies are avasilable What are the practical implications for Jute in Bangladesh free from the World Barn, 1818 H Street policymakers? Thelong-term answersare. NW, Washington, DC 20433. Please con- easiest. A largely decentalized capital TaknmasaAkiyama andPanosVarangis tact DawanGustafson,roomS7-044,exten- market is optimal. Incentive problems (December l991) sion 33714 (49 pages). may inhibit the functioning of financial markets, but the most direct way for the The costsofthepresentsystemvofprice sta- governmenttomitigatethem is to provide biizzation of raw jute by Bangcldh's 814. Finance, Growth, and Public aneffcientsystemforenfarcingcontracts. pub!icsectordonotyieldtheexpectedben- Pollcy Publicly managing credit flows is likely efits. Price stabilization could be bete only to make investments more eficient, handled by theprivate sector. In any case, Mark Gertler and Andrew Rose by caeting incentive problems. To the ex- the oss of uelfare to jucte growers fiom (December 1991) tent that some sectors merit public assis- pricefluctuations is smalL tance, tax credits or subsidies in conjunc- A thriving financial market depends not don with the private allocation ofcreditis Fluctuating pices for rawjute have been only on a prudent regulatcey regime but prefersale to directly regulaing credit viewed as contributing to economic prob- also on hauing enough credito wrthy bor- flows.Thegovernmentshouldrefrsinfrom lems in the jute subsector- Price fluctua- rowers. Policies in the real sector-mac- ative involvement in the credit business, tionswere thoughttoreduce thejutefarim- roeaononic, public finance, and trade po - excepttoactaslenderoflastreeortintimes era' welfare and there has been concern cies -tat directly stimulategrowthoand of widesprea financial crisis. PolfIcy Reseawrch Working Paper Series g Liberalization of financial markets a poor climate for growth. Well-specified nors. This process of assistance could in- alone is nota panacea inancial andreal propertyrights and enforceable contracts advertently undercut the historical pro- development must be ajoint product. Lib- are clearly economic development issues cess of rulers first becoming accountable eralization can enhance growth but suo- and should be recognized as such. The to elites for the use of their tax revenues. cessful liberalization requires a viable contentanddistributionofpropertyrights - Donors must become aware of the borrowing class; governments that slow critically affect how broad-based develop- possible effects of large sums of external liberalization whenborrower net worth is ment will be. assistance. They must push the new con- underpressureandaccelerateitwhenthe * Lack of accountability - combined cern for 'local ownership' toward a deep real economy is thriving are likely to ex- with opaque and highly discretionaryrega- commitment to develop economic policies perience more successfil financial re- latory procedures - can provide great op- together, even if the process is slow and forms. portunities for economic corruption and frustrting. This should encourage the Thispaper-aproductoftheFinancial waste. The suppression of political open- development of accountablity as a mat- Sector Development Department - is ings may ultimately affect stability, dis- ter primarily between governments and part of a larger effort in the department rupting production and commerce. The citizens. Onlyovertime cansocietiespush to study the impact of financial reform. failure to encourage grasroots participa- their governments to deliver the account- ' This research, "The Impact of Financial tion reveals itself in comparatively ability, openness, and predictability that Reform (RPO 676-13), was finded by the unsustainable projects. sustainable development requires. World Bank's Research Support Budget. * Researchtxyingtocorrelateeconomic ThispaperisaproductofthePolicyand Copies are available free from the World performance with governance variables ReviewDepartment. Copies are available Bank,1818HStreetNW,Washington,DC inevitably involves a short time frame. free from the World Bank, 1818 H Street 20433. Please contact Wilai TherecenteconomieperformanceofChile, NW, Washington, DC 20433. Please con- Pitayatonakarn, room N9-003, extension Taiwan (China), and South Korea oc- tact Zeny KTanzer, room Ng-051, exten- 37666 (48 pages). curred with little political openness, and sion 37494 (48 pages). their market systems seemed to work without pluralistic political systems. 815. Govemance and Economy: Butinthe pastfewyearsa three have 816. Economic Consequences A Review made significanttransitions towardmore of Gemnan Reuniflcation: open, competitive, participatory political 12 Months Alterthe Big Bang Deborah Eraut4iwi systems, which suggests that sustainng (December1991) (as opposedto establishing) marketbased GerhardPbli growth may require the development of a1cmber 1991) An exploration ofthe lnks between devel- political representation. With renewed opmentandgovernance-thatis, beteen interest in open political systems, we can Didthe'ig bangapproach workorwould development and accountabiEty rndud- expect a new generation of research on gradual change have been more appropri- ing institutionalpluralism andparticpa- these variables, ate? Which measures have worked and tia); openness (includingproblemssuck * Donors who wish to make "gover- which have not? as comption that result at least partly nance' the temporary trend of the 1990s from lack ofopenness);andpredidability, must understand that, as Zafar Ahmed Pohl discusses how East Germany is far- or the rule of law. putit,QO cannotmakeatreegrowfbster ing 12 months after big bang unification by pulling it from outside; it has to grow with West Germany. Were there better Brautigam reviewed the literature on from its roots? It takes generations, per- alternative courses of action on key eco- political science, development manage- haps centuries, tobuild effective bureau- nomic issues? Among Pohl's conclusions: ment, and institutional economics to give cracies. It takes not only skills but volition, * The Thigbang" approachhas worked. Bank staffa clearer understanding ofthe which comes from effective social pressure In Germany's special situation, more links between development arl gover- on the state. Donors must ask howbestto gradual approaches would not have nance - specifically accountabity (in- nurture a social desire for accountability workedbecauseitwaspoliticallyuntink- -cluding institutional pluralism anc par- and the rule of law. able to restrict east-west migration. ticipation); openness (including prolblems * Effective property rights and ae- -* The1:1conversionof&DRimarksinto such as corruption that result at least countability result firo a long-term dia- Deutschemarks was essential to keep partly from lack ofopenness% and predict- logue between governments and their migration within reasonable bounds. Us- ability, or the rule af law. private sector, not between governiments ing a lower exchange rate (such as 2:1) She fcund some support for a positive anddonors. In Europe, public ountabil- would have implied a gross salary differ- link between economic performance and ity developed through a state-society ence between west and east Germany of these variables of governance (although struggleaboutthecollectionanduseoftax 6:1 and a net (after-tax) diffirence of4:L some correlations appear stronger than revenues. Inmanyofthe world's develop- With those ratios, migration would have others). Among her findings and conclu- ingcountries, taxrevenues are dispropor- beenheavy,creatingabraindrainoneast sions: tionatelylowasaproporticnofGNP, even Germany and a housing shortage in west - Arbitrary law enforcement and fall- with low levels of per capita GNP. Thus, Germany. ure to uphold the constitution - the lav much of the dialogue about accountabil- * Thel:1currencyconversionisnotto -leadtounpredictablity,instability,and ity shifts to one between states and do- blame for the present high wages in east 10 Polcy Research Woaktng Paper Seres Germany (about 50 percent of west ting investments going. More could per- (Some expect to continue doing business Germanyas); rather, the 1991 collective hapshavebeen done togetinfrastructure there; others want to cut theirlosses and bargaining agreements set the pace. The investments going, which would have eit.) What about a ban'ls fiduciay re- high wages are only sustainable with improved employment earlier on. sponsibility to its depositors and massive financial assistance. This paper - a product of the Geneva shareholds? - More gradual unification would not Office - is part of a larger effort in the - What about other creditors of the have been an advantage; lower wages Bank to analyze the changes in the for- country, such as holders of its sovereign would have been desirable only if migra- merly centrally planned economies. Cop- bonds, or other governments or multilat- tion couldhave been held in check. Butthe ies are available freefom the World Bank, eral agencies? Will or should commercial decay of the GDR state and institutions 1818 H Street NW, Washington, DC bans be the only ones to offer Telief by was so advanced that wage restraint 20433, or from the Geneva Office. Please takinglosses? would have been impossible. contactAngelicaBretana, room N11-029, - Whatisthecountrysproposedstra- - Unificationhasmeantimportingthe extension 37176(47 pages). egyforseeldngfuturefinancingfirmpri- Federal Republic's entire economic and vate sources, directorforeign investment, legal system to east Germany - and this and international capital markets? How complex system has not been ideal for 817. How Does Brady-Type wlla debtreduction ope*-ation affect the solving the problems of a sudden transi- Commercial Debt Restructuring countrtsacesstocommerial2ndprivate tion from a command to a market Work? sector finance in the future? economy. Some temporary exemptions - How much support can be expected and transitional measures were intro- MohuaMukliezjee from multilaterl and bilateral instita- duced from the start anci others were (December M99) tions to finance a debt reduction apera- added later, as some provisions proved tion?Mukherjeesummarizsbaoadguide- unworkable (particularly the preference What happcns when, in response to a lines used by the IBRD and IM. given to reprivatization, or restitution, counhy's request ardtos agree to nego- ThisppaperisaproductoftheFInancialI which was softened in 1991). Similar le- dote to reduce the burden of outanding AdvisoryServicesGroup, Cofinancingand gal and logistical problems have been comzercial debt? FinancialAdvisoryServicesDepartment. encountered vwth such major public in- Copies are avaiable free fiom the World vestmentprojects as highways, rail links, The Brady Plan is a pragmatic approah Bank, 1818HStreetNW,Washington,DC and airpots. But the advantages of im- to debt restructuring that combines the 20433. Please contact Kamar Yousus, portingaprovenlegal systemtbroutweigh relatively recent feature of debt and debt room H9-055, extension 33102 (22pages). the mevitable transition costs. service reduction and the support of offi- Some transition measures - espe- cial creditors. Tne underlying premise of cially libor market adjustment measures those adopting the Brady Plan is that the 81& Do Rules Control Powr? and incentives to attract private invest- existing stock of debt can never be fully GATT Articles and Arrangements ment - were insufficient or had to be ex- serviced, even though the country has in the Uruguay Round tended. Some economists have arguedthat embarked on a far-reaching ajustment general employmentsubsidies wouldbhave program. J Mlchael Finger and Sumanm Dhar been better than partial unemployment To date, only a handful of countries (January 1992) benefits. But Pohl argues that general (Costa Rica, Mexico, Uruguay, and Ven- employyment subsidlies would have been ezuela)havesuccessfiulycondludedtheir Do rules conrlpower? Or apply power? applied indiscrini;nately and would have debt reduction negotiations through a Has the elabortion and applcation of perpetuatedoldinefficientsuetures.The Brady Plan with commercial creditors. GAIT'rules been an ercise in the appti- investment incentives are far more effec- Others, such as the Philippines, have en- cation or the control of economic and po- tiveincreatinghigh-productivityjobsrap- gaged in Brady-type debt reduction for lialapower? idly. In the interim, targeted employment partoftheiroutstandingcommercialdebt programs areauseful transitionmeasure. Miukhejee explains what happens Many complain - and offer evidence - * Investment subsidieshavebeencriti- whien, in response to a countrys request, th atinrecentyeas the GATTsystemhas - cized on the grounds that they tend to the creditors agree h negotiate to reduce become more power-oriented, less stable, distort allocation decisions and lead to theburdenofoutstandingconmedal debt andlessequitable-Aconeemtoreversethis uneconomically capital-intensive invest- She discusses the following questions: drift was one of the motives that brought ments. Although possible in theory, Pohl * What fictors influence the extent of the international COmmunty to agree to finds this argument doubtful in practice. debt relief that a commercial bank can undertaketheUruguayRoundiRulescon- Investment costs perjob are not particu- offer? trol power, assmned the signers of the larly high in manufacturing, and the de- * What is a good deal for the country? Punte del Este declaration, so elaborating sign of the assistance program excludes What is the preferred min (for the coun- andextandingGATTruleswould move the support of inefficient investments, try) between debt reduction and debt re- international community toward a fairer, - Were government spending and pri- scheduling? What considerations should more stabeintemational trdingsystem- vate incentives geared to productive the country take into account? Finger and Dhar contend that the op- rather than social purposes? In the first * What is a good deal for the banks? posite is true. Particularly in the 1980s, year of the union3 probably not - mostly How do banks ofvarious nations reconcile the elaboration and application of GATT because of administrative friction in get- their different interests in the country? rules has been an exercise in the applica- Policy Research Working Paper Serles 11 tion of economic and political power, not many new measures - to document the Heady and Mitra analyze the tax system in its control. GATT rules, in theory, are relationship between thefinancial system inChina,wherereformsdesignedtomove there to limit national trade restrictions. and long-run growth in a cross section of the economic system toward a market Finger and Dhar contend that in fact countries between 1960 and 1989. economy have been occurng for more tlings work the other way around: na- They consider various measures of the than a decade. tionalpracticecomesfirst,anddetermines size of the financial system, the impor- Heady and Mitra characterize the com- what the GAIT rules mean.G ats rules tance of different financial institutions, prehensivechangesinthetaxsystem that donotputlimitsonnational practices, but the financial system's allocation ofcredit, could be undertaken in the presence of provide international sanction for these the financial systemes efficiency, and the systemwide reform, especially of prices practices. Such rules are not part of the degree of financial repression. and enterprises, as wel as of more mod- solution but are part of the problem. They use graphs, correlations, and re- erate reforms that must suffice in the ' Theirsis asituation-specficargument, gressions to gauge the robustness of the absence of reforms elsewhere in the eco- say Finger and Dhar, not a generic one. parmalecrrelationbetw-eengrowthandthe nomic system. In CDnnection with tax re- Their target is not 'rules,' nor is it financialindicatDsTheyals-oexaminetwo form per se, they emphasize two impor- TGATT. Rather, it is the GAIT rules. "cbannelethroughwhichfinandalindica- tant conclusions: This paper - a product of the Trade torsmaybelinkedto growt:lthe share of * Itispoesibletosimplifysignificantly Policy Division, Policy Research Depart- GDP llocated tD investment and the effi- the rate structure for indirect taxesin the ment - is part of a larger effort in the ciency with which resources are used. presence of price controls, but a unified department to understand the economics They find that many of the financial rate for value-added tax is undesirable of the emergence of "fairness' as a stan- system indicators are significantly corre- without full decontrol of pnces. dardforregulatinginternatonarade,its lated with growth through both invest- * The state's role as owner of enter- implicahonsforthecontinuedopennessof ment and efficiency. Moreover, many of prisesmusthetreatedseparatelyfromits t'he international trading system, andits these partial correlations remain strong role as tax collectar.Allenterprisesshould ontinued fiuctioning as an important after controlling for initial conditions, paystatutoryprofitstaxes.Negotiation(of vehicle for development. This researh dummy varibles for Africa and Latin the kind that characterizes the contrc was funded by the Baks Research Sup- America, and measures of monetary, fis- responsibility system) shouldbe confined portBudget, RegulatiosAginstUnfair cal, and trade performance to the payments to government from af- limportsEffectsonDevelopingCountriee King and Levine's analysis suggests ter-tax profits. Those payments could be (RPO 675-52). The paper was presented thatitisempiricallyimportanttoidentif3r set to balance incentives in enterprises at the Conference On Analytical and Ne- which financial intermediaries are doing with the need for the state to earn a re- gotiatrin Issues in the Global Tradig theintermediationandtowhomthefinan- turn on assets historically provided free System, held Octber 31-November 1, dal system isaflocatingcreditratherthan to those enterprises. 1991,atthe UniversityoTfchiganatAnn simply using proxies for the overall size The mode of analysis that Heady and Arbor. Copies of this paper are available of the financial system, as has been com- M&itadevelopinthispapercanbeapplied free firom the World Bank, 1818 H Street mon in past studies. to a wider range of economies -whether NW, Washington, DC 20433. Please con- This paper-aproduct ofthe Finanil emerging fiom a socialist past or not - tactNellieArtis,roomN1O-013,extension Sector Development Department - is that are progressing at va7ing speeds in 38010 ( 51 pages). part of a larger effort in the department the interlinked areas of taxreform, price to study the relationsbip between finan- reform, and enterpris reform. cial and economic development. This re- This paper-a product ofthe Country 819. Flnancial Indicators searchwasfimdedbytheBanlesResearch Operations Division, Country L-!part- and Growth in a Cross Section Support Budget, 'How Do National Poli- ment I, Asia Regional Office -is paart of of Countries cies AffectLong-Run Growthr(RPO676- a larger Bank study on revenue mobiliza- 66). Copies oftbis paperare available free tion in China. Copies are available free Robert G. King and Ros Ievine from the World Bank, 1818 H Street NW, from the World Bank, 1818 1 Street NW, (January L992) Washington, DC 20433. Please contact Washington, DC 20433. Please contact Wilai Pitaystonakarm, room N9-003, ex- Dakshi Sebastian, room D9-073, exten- Financil indicators may be inked to tension 37666 (50 pages). sion 80423 (33 pages). growththroigh two. czannelsinparnicz- lar: the share of GDP allocated to invest- ment and the efficiency with which re- 820. Taxation in Decentralizing 821. Wages and Unemployment sources are usedL It is empiricaly impor- SocialISt Economies: In Poland: Recent Developments tant to identijr which financal intm- The Case of China and Policy Issues diris re doig the intermedtion and to whom thefumcial system is allocating Christopher J. Heady and Pradeep K. Mitra Fabrizio Corloelli and AnD Rvenga creadit rth han simply using proxies for (Januawy 1992) (January 192) the oveall size ofthe financia systemn as has been common in past studiea The notred pae oftaxreformniChuina Unemployment has icreased dnmat- depends on progress in prie and enter- callywithstabilization. maiynbecauseof KingandLevine use existingmeasuresof prisereform, highirghting the need to view ageneralzedcontraction in output, rather the financial system - and construct the problem in a systemzwide perspective. thanasectomirestru ringoramassive 12 PolIcy Research Working Paper Series sheddingof la bor.Recd wages felisharply, of this paper are available free fiom the does not affect the qualitative results. and the wage policy has become a detifte World Bank, 1818 HStreetNW, Washing- Only the size of the optimum scheme to political issue Oneprescriptionforreduc- ton, DC 20433. Please contact PRDTM, be used under various circumstances ijg the drawbacks in current wage poicty room N11-021, extension 39175 ( 45 would change. is to replace that policy with ageneralized pages). Ttis paper - a joint product of the agreementon the wagepath, with aynchro- Country Operations 2 Division, Country nized sir-month contrcts. Such an agree- Department II and the Infrastructure and ment might be seen as a cunsensual agree- 822. PatemalIsm Energy Division, Technical Department, ment -a social pact'-rather than as a and the Alleviation of Poverty Latin America and the Canbbean Re- punitiuc tax. gional Office-is partofalargereffortin Nancy Jesunm-Clements the Bank to understand the effectiveness Coricefli and Revenga review recent de- (January 1992) of different poverty alleviation schemes velopments in wages, employment, and Copiesofthepaperareavailablefireefrom unemployment in Poland and discuss Pan ofthe reason for using pre s subsidies the World Bank, 1818 H Street NW, some of the main risks Poland faces in to redistribute income to the poor, rather Washington, DC 20433. Please contact sustaining its stabilizaton effort They than the mare efficient direct cash trans- PresiaBetancourt,roomI8-131,extension find that Arm, is to prod uce "happier"taxpayen. 37703 (40 pages). o Unemployment has increased dra- matically with stabilization, but this in- Typically the tools available for redistri- crease cannotbesaidtoreflectwidespread bution are price subsidies (in their ex- 823. How Private EnteprilSe economic adjustment and restructuring treme form, in-kind transfers) and direct Organized AgriCultural Markets throughout the Polish economy. Contrary cash trasfers. Conventional economic in Kenya to predictions made prior to the January theoryindicates that the efficiencyloss is 1990 progrm, employment has declined minimized if cash tansfers are used in- Steven K Jaffee nealy uniformly across allsectors, mainly stead of price subsidies. Butin almost all (January 1991) as aresultofa generalized contracon in economies, including advanced econo- output, rather than as aresult of sectoral mies, price subsidies are implemented - Does the lberalzation ofAfrican markets restructuring or massive shedding of la- and cash transfers, the more efficient al- increase ompetition in appivte market? bor. ternative, are seldom useui Kenya's experience wih hor irwtural ex- * Wages showedasignificantdegree of Jesurun-Clements argues that taxpay- ports calls into questin the assumption downward flenxbility - in real terms - ers enjoy the poorer citizen's specific con- that leralizing Afic's markets will at the beginning of the year, when firms sumption package (food, housing, educa- bring about competiivw decentral,Ed faced a severe supply shack coupled with tion) more than improving the poorer citi- private market strwcture - or that Ar- very tight credit. But from March on, zes' general econonic welfare. Her objec- cans wi benefit fro trade when it des wages increased faster than prices, prob- tive is to identifr tne conditions under expand. ably contributing to the persistence of whidh price subsidies represent a more inflation, efficient way of alleviating poverty than Does liberalization of agricultural nar- The wage policy still in force in Poland cash payments, given taxpayers paternal- kets and an expanded role for the private at the end of 1991 maintains a few unde- istic preferences. sector result in a competitive market sirable features. The monthly indexation Sheconcludes thatwhen the taxpayers' structure in Afiica? Jaffee empirically andthe possibility ofcarryingforwardthe prevalent behavior is paternalism, and investigates the organization and devel- unused margins are among the policy's taxpayers have more weightin society, the opment of a dynamic African export-oi- main drawbacks; another is the link be- option for redistribution would be to tar- ented sector - Kenya's horticiltural ex- tween wages and profitability. get price subsidies to the poor. This brings ports - in which the private sector has The cuTrent wage policy could be re- about a greater improvement in overall long had a dominant role. placed by a generaized agreement on the sccial welfare and "happier" taxpayers Jaffeehighlights the sector's impressive wage path, with synchronized six-month than any other policy. With this solution, patternofgrowthoverthe pasttwo decades contracts. The wage path should be re- the poor are somewhat better off, even and examines the (ownership) character- lated to expected inflation and though they wouid raher receive cash istics of participating private firms, the economywide productivity. This scheme transfers, which would represent the competitive pattem among those firms, would also have the advantage of being same financial cost to the economy. andthe institutional meansbyhwich they based sn a consensual agreement - a When the rich are typically altruistic, procure raw materials for processing and 'social pact"'-instead of being perceived there is no distortion in the price system. export. as being imposed as a punitive tax. The preferences of each individual are He finds that despite the Kenyan This paper - a product of the Transi- preserved and the best policy for the government's direct investments in pro- tion and Mlacro-Ajustment Division, economy as a whole and for each indi- cessing and trading activities and its ap- Policy Research Department- is part of vidual agency is undoubtedly the use of plication of regulations and targeted sup- a larger effort in the department to ana- cash transfes port measures to strengthen the role of lyze macroeconomic developments and Increasing tfhe number of goods, or al- KenyanAfiicansinthehoaticulturaltrade, policies in transitional econom-ies. Copies lowing the Tich to enjoysubsidized prices, most of this trade remains controdled by Policy Research Working Paper Serdes 13 foreign-owned acopanies or members of 824. Back-of-the-Envelope 825 The Empty Opportunity: Local Kenya!s small minority Asian and Euro- Estimates of Environmental Control of Secondary Schools pean communities. Damage Costs In Mexico and Student Achievement Various foreign and local investments In the Philippines have incorporated Kenyan Africans (as Serio Maugulis shareholders, employees, or suppliers of (January L991) Marline BE. Lockheed and QinghuaZhao raw materials), or have stimulated the (January 1991) suppliers toinvestinhorticulturalproduc- Dewloping countries cannot afford an in- tion or trade - but the basic patterns of depth study of euery environmental iss Dn alone des not producE ownershinp ad control pose potential po- Policymakers must begiuenrokgh, back- local contrul ofachaool Schools mustalso litical problems, as the sector is now the of-the-enuelopCestimatesothe emnomic be given rsoure, motivated students, 'fastest-growing component of Kenyan costs of uarious environmental probems edzated and eperieced teaches, and agriculture and trade. Concerns are grow- if they are to rank the issues and actHre control over teahers and schoowl mnange- ing about who is benefiting from this ea- is one such estimate -for Mexic mert. .panLng trade. Much of Kenya's horticultural tade is For developing countries, budget con- LockheedandZhaouseamultilevelmodelI based on contracted or vertically inte- straints help set the agenda on mitigat- to enmine: grated supply arrangements for raw ma- ing environmental damage, one of the * Differencesinachievementandatti- terials, rather than open market ties be- indelible marks of our era. And political tbdes among grade 9 mathematics and tween producers and processorsfexport- considerations often dictate the measures scence students in 213 national govern- ers. Open market procurement of raw taken -There are no firm analytical formu- ment, private, and local schools in the materials would probably entail high las to help even environmentally con- Philippines. transaction costs and risk but theimpor- scious policymacersrank needs andrem- * Differences among these types of tance of integrated, contract-based lirnks edies. schools in social composition, available between producers and marketers cals AdevelopingcountrysuchasMexico- resources, classroom arderliness, aca- intoquestiontheoften-xpressedlassmnp- thefocus ofthis paper-cannot aford an demic emphasis, and school decsion- tion that liberalizingAfrica'smarketswill in-depth study of every environmental maling. produce competitive, decentralized pri- issue. Policymakers need to be provided * Possible reasons for differences in vate market structures. with rough, Mack-of-the-envelopes esti- acdhievement. Various forms of centralized private mates of the economic costs of various Theyfoundthat-holdingconstantfir control may indeed be preferable to cen- environmental problems This allows age, gender, and SOcoecOnomic status - trlized public control, but Kenya's expe- them torank the issues and act. students attending the three types of nence with horticultural exports suggests InthispaperMargulis applied existing schools differed significantly. that when an African country such as methods to estimate the costs stemming Students in local schoos cored lower Kenya privatizes agricultural processng from differentenvironmental problemsin in achievement (1.25 points lower in sci- and (export) marketing the government Mexico. Although the examples are frm ence and 1.61 pointslower in mathemat- must find a better way to monitor and Mexico, the method can be useul in other ics) and had less positive attitudes than control dominantfirms, to get companies developing countries as well. studentsingovermentschools. Students to involve smallholder farmers in raw Margulisshowshowereativeuse ofU.S in private schools outperformed students matensl procurement operations, and to and other data can help provide simple in government schools (0.88 pointshigher improve the frmerse bargaining position estimatesofthehlilycostsofsoleroson, in mathematics). These differences were with centralized contractingfinns. airpollution,Tnining of underground wa- attnbutable lwgely to the effects of sta- - This paper - a product of the Agricul- ters, and estimates ofthe health effects of dent selection. trn]l Policies Division, Agriculture and water and solid waste pollution, lack of Lockheed and Zhaofoundt'hatpolicies Rural DevelopmentDepartment-ispart sanitation, and the ingestion of food con- for centrally planned decentralization do of a larger effort in the department to taminated by polluted irrigation. The as- not necessarly change what goes on in assess the division of responsibilities b- srumptionsunderlyingallcalculationsare schools. Local shools were not managed tween the public sector and the private conservative. Some environmental dan- as private schools. Local schools were sectorin the provision of agricultural ser- age issues, such as loss of biodiversity, given an empty opportunity there was vicesand in agricultural marketingactivi- weretoocomplextopermitquantificaton. noting for local control to control local ties. Copies are available free from the This paper - a product of the Agricul- schoolsbhadfewresources-fewerofthem World Bank, 1818 HStreetNW, Washing- ture Operations Division, Country De- bad laboratories and their teachers were ton, DC 20433. Please contact Cicely partment H, Latin America and the Car- less educated and experienced than those Spooner, room N8.039, extension 32116 ibbean Regional Office -is partofalarger in private schools. (44 pages). effort in the Bank to define a strategy for By con t managers of private theenvironmentinMexico. Copiesofthis scls had significant resources over paper are available free frem the World wbich to exercise control. Teachers were Bank, 1818HStreetNW,Washington,DC better educated and experienced, and 20433. Please contact Sandra Vallimont, planned their instruction. Students were room I8-155, extension 37791(29 pages). motivateandecompletedtheirhomework 14 Policy Research Worting Paper series and assignments. And managers of pri- employs R large part of the urban labor multilateral trade ngotiations as the vate schools exercised significant control force, and if demand for the goods pro- Tokyo Round. In Bradl and Mexico, an over teaching and school wanagement. duced in the informal sector is price-in- FTA would liberalize important trade This paper - a prodret of the Educa- elastic. ariersaffectmgtheirexporb ButErman ton and Social Policy Department - is Fisabeinls model, however, does not af- and Yeats estimate that overall, ful PTA part of a larger effort in ihe department fect the case for cuts in minimum wages preferences would raise Latin American to understand the education sector, with onthegroundsofefficiency.Reducingthe exports only 8 or 9 percent particular reference to improving school minimum wage does increase jobs and Estimates made with a partial equlib- effectiveness. Copies are available free output in the formal sector rium trade projection model suggest that from the World Bank, 18.18 H StreetNW, This paper - a product of the Popula- a U.S. FTA withCMexiC would gready in- Washington, DC 20433. Pleasa contact tion and Human Resources Operations fiuenceMexioo?stradewithotbercounties, CynthiaCristobal,roomS6-035,extension Division, Counitry Department 1, Latin even if those counties alo have an PTA 33640 (37 pages). America and the Caribben Regional Of- with the United States. An exclusive FTA fice-waspartofhlszbein'sPh.D.disser- between Mexico and the United States tation at the University of California at would cause Meicod's exports to incraase 826. Do Workers In the Informal Berkeley. Copies are available free from about $1.6bfllionannuallyandwoulddir- Sector Benefit from Cuts the World Bank 1818 H Street NW, place about $28 miion in exports from In the Minimum Wage? Washington, DC 20433. Please contact other Latin American countries (and al- Patricia Trapsn, room 17-183, extension most half a bfllon dollars of trade wiLh Ariel?iszbein 31947(46 pages). countriesin therestofthe worldwouldbe (January 1992) diverted).Thenumberandcountrycompo- tiaonofFTAstheUnitedStatsegstiates The paper analyzes the effect a change in 827. Free Trade Agreements with TatinAmericawlgreatlyeffecthow the minimum wage has on the earning of with the United States: much these agreements are vwrith. workers in the informal sector who are Whatrs In It for Latin Amerlca? Potentialtadegainsfom LatinAmen- supposedy7 nt coered by minimum wage cam FTAs with the United States will be legislation. The standard view is that re- ReF Erzan and AlexanderYet erbly reduced unless narllel ac- during the minmum wage, which ui- (Januay Ly92) tion is taken to remove or reduce US. crases employment in the formal sector, nontariff barriers Nontariff baiers are reduaes the eective supply of hlbor to the FaptforBrazilandMexco, mosLatin particularly importantforcountries such infobrmalsector, increasing the wge in the Anericacountriesstandtogain essfrom as Uruguy, which have a heavy concen- infonnal swtor. free trde ageent (PTAs) wih the tration of textile and clothing exports. United States than the United Sttes Ermn and Yeats estmate that the value But Fiszbein argues thatthe effect of the stands to gain from FTAs withi therL The of an ETAinsuch acas mightbe reduced minimum wage on earnings in the infor- main incentive for the Latn American by as much as a half without liberaliza- mal sector does not depend exclusively on countries to form PTs with the United tion e! nontariff barriers. its effect on labor mobility between the State may be to attract investmert or to Still, even apreferential elimination of formal and informal sector. Demand for halt the spread of new trade resrictions. U.S. nontariff barrierswould not induce goodsalsolinksthetwosectors-andthis Latin American countries d probably a *nsatic short-runjump in trade, except demand is seldom factoed into theoreti- standtogainsgiflcarznt long-termeonrt in Brzil andMexco. The main incentive cal discussions. benefits from reduced trade bars for the Latin American countries to form Based on a general equilibriuT. ap- among themseves. PTAs with the United States may be to proach, Fiszbein builds a dual economy attract investment (an issue this study model in which the two sectors are linked Unlike earlier analysts, whohave focused does not address) or possibly to halt the notonlyt hroughthelabormarketbutalso on U.S. objectives; Erzan and Yeats focus spread of new trade restrictions. This ig- through the goods market. In this frame- here on what 11 Latin American countries nores the probably large long-term ben- work, reducing the minimum wage affects (Argentna, Bolivia, Brazil, Clue, Colom- efitstobegainedin the exptsectorfrom informal sector earnings both through bia, Ecuador, Mexico, Paraguay, Peru, reduced trade barriers among the Latin dhangesinlaborprodactivityandebanges Uruguay, and Venezuela) stand to gain American countries. in relative prices. Once these two factors from a preferential removal of U.S. trade ErzanandYeats do notformaly project are considered, aminimum wage cutculd barriers -thats from the development the potential PTA-induced expansion of resultiareducinginformal sectorwages, of a free trade area (PTA) arrangement. US. exports, but do make some detailed even if formal sector employment in- (For lak of data, they do not address the comparisons of the levels of tariff and creases. consequences of an ETA among Latin nontariffproteclionintheU.S.andLatin If workers in the formal sector are the Americacountries.) American markets. Those comparisons main buyers of the goods produced in the They find that the United States islim- suggest that the US. trde gain - par- informal sector, and theirinoome elastic- itedinitsabilitytoextendsignificantETA ticularly for highly protected transport ity of demandis relativelylarge, workers preferences tomostLatinAmericancoun- and machinery products - are likely to in the informal sector could be hurt by a tries because of the existing Generalized be considerably greater than those for cut in the minimum wage. They could System of Preferences and the cuts in Latin Americagin the US. market. Their similarly be hurt if the informal sector import duties negotiatedin such previous analysis also accents the potential dan- Polky Research Working Paper Serdes 15 gers associated withindependentnegotia- andlabormarkets thataffeetthe efficient markets, Chuppe andAtlinconclude that tion of FTAs. Agreements that extend use of resources in skills development. securities markets can facilitate the effi- preferences to US. products below tariffs Structural adjustment programs that cient aUlocation of an economy's resources paidby othercountiiesin theregion would address these distortions expand incen- and canfostercompetition in thefinancial have a serious negative impact on trade tives for private training and for more sector by providing an alternative to gov- among Latin American countries. efficient use of public resources in skills ernmentdirectedfundingorasupplement Finally, Erzan and Yeats note that a development. to private fimding through the banking successful conclusion of the Uruguay This paper - a product of the Educe- systems.Forsecuritiesmarketstoallocate Round could greatly affect their projec- tion and Social Policy Department - is resources to their most productive uses, tions. If the Round results in sizable cuts part of a larger effort in the departnent they conclude, regulation should be con- in MFN and applied tariffs, the potential to improve policies for the financing and fined to that needed to correct the market .FTA-induced expansion of Latin Ameri- provision of vocational education and failuresthatariseinunregulatedmarketa can exports would be lower than their tmining. Copies ofthis paperen available This has several importantimplications current estimates. Butanysuchmultilat- free from the Waod Bank, 1818 H Street * Itismoredesirabletoallowtheumar- erally negotiated reductions would have NW, Washington, DC 20433. Please con- ket to set prices than to have direct gov- 'the general effect of creating trade in this tact Cynthia Cristobal, room S6-035, ex- ernment intervention in the pricing and and other regions- tension 33640(29 pages). selection of issues. But market-based This paper - a product of the Interna- prices depend on investors having access tional Trade Division, International Eco- to reliable financial information, which nomics Department -is part of a larger 829. Regulation of Securities m3ans standardizedaccountingrulesand effort in the department to analyze and Markets: Some Recent Trends clear cdisclsure requirements mustbein predict structural changesin trade andto and Their implications places amarketmovesfrromgovernment identifrfactorsaffecting developingcoun- for Emerging Markets control to market-based pricing. Market tries' exports. Copies of the paper are trading systems must be supervised to availablefreefrom theWorldBank 1818 TerTy IL Chuppe andlEchael Atldn prevent market manipulations and in- H Street NW, Washington, DC 20433. (January 192) sidertr3dinghasedonprivilegedinforma- Please contact Jean Jacobson, room S7- tion. Governments are better employed 035, extension 33710 ( 66 pages). The trend toward the &berlzation ofif- educating investors about the nsks and nancal markets is partofageneralrecog- rewards ofownmngmarketable secuities nition that free markets normany work than in trying to determine the prices of 828. How the Macroeconomic betr than government controlt Regzla- those securities. Environment Affects Human toiy systems shouid be developed in lght * Restrictions on entry into the finan- Resource Development of the mtarket failures that make them cial services sectorare appropriate to the neessay and shwudd provide the last extent that they are concerned with capi- Arxv Van Adams, Robert GoldLirb, possible opportunity forrent extrco& tal adequacyand measurable eompetence and Tereuxe Kelly any singLe intrestgroup. - the goal being to correct possible mar- (January 1992) ket failures. In recent years there has been a trend * Restricting foreign ownership of An outward orientation of Me macroeco- toward liberaling financial markets in shares is not justified by economic theo- nomic environment encourages more effi- developed and emerging securities mar- zies of regulation. Markets can develop cient development of human resources. kets. In the United States, the Securities more easily if foreign institutions are al- Structural adjustmentprograms that ad- Act Amendments of 1975 emphasized lowed to invest at the same time that do- dress distDrtions in domestic capital and competition in the provision of financial mestic institutions are encouraged to de- labor markets expand incentives for pri- servicesbyderegulatingcommissionrates velop. The Korean market has developed vate training and the more efficient use of on stock transactions andbyfosterhigthe despite an interventionist regime in public resources in skills development. development of a national market system charge of stock market development, but in securities Ldon'sso-dledbigbang' there is no evidence that entry barriers Do inward-focused development strate- series of major reforms in 1986 deregu- faced by new providers of financial ser- giesreducecompetitioninfactormarkets lated commission rates, put a new trad- vices have done mare than incrwea the and incentives for more efficient skills ing system on the stock exchange, and profits of aexisting providers- development? Do outward-focused devel- allowed foreign financial service firms to * Developing countries eager for their opment strategies improve them? participate more in the U.K.s domestic developing markets to be a link to the Adams Goldfarb, and Kelly compared securities market. Changes in the US world captal market cannot afford to ig- vocational educationandtrmningsystems were far-reaching in a short period, so nore the trend toward an international in six developing countries in the 1980s. Chuppe and Atkin could examine their harmonizing of regulatory structures. They found that an outward orientation effects on the market - particularly on Therehasbeenatendencyinrecentyears encourages more efficient developmentof competition. Theyfoundthatthebig bang to strengthen government oversight of human resources. made London more competitive as a glo- markets, with an appropriate delegation Protectionist trade regimes that shelter bal financial center. of regulatory responibility to stock ex- producers from global competition pro- After examining trends in US., U.K, changesorotherself-regulatingorganiza- duce price distortions in domestic capital Japanese, Korean, and several emerging tions. 16 PolIcy ResearCh Working Paper Series - In countries moving from centrally failed in the long run to distinguish itself The first issue is the extent to which planned to market economies, the basic in terms of economic growth. policy-induced distortions influence the building blocks for a securities markets Elbadawi and Msd usn a modified-on- structure of incentives for agriculture must be established, along with appropri- trol-group approach to compare changes (with direct distortions inducedbypolicies ate regulatory safeguards- Private prop- in macroeconomic indicators in the CFA aimed directly at agriculture distin- erty rights must be defined, adequate ac- countries with those in countries else- guishedfiamindirectpoliciesaimedatthe countingsystems established,andspecial- where in Sub-Saharan Africa and similar economy's macroeconomicmanagement). ized institutions develo ed to act as bro- low-income developing countries. They The second issue is how these distor- ker, dealer, and investment banker. control for initial conditions, changing tions effect agriculture's growth, given This paper - a product of the Econom- exogenous internal and world environ- other growth findamentals. ics Departmnent of the International Fi- ment, ar.d policy stance. Preliminary analysisofevidencein Sub- nance Corporation -is part of a planned Their approach allows fora formal test- Saharan Africa links the observed de- research series on the performance of capi- ing of whether zone membership is aran- dines in agriculture andthe general wors- tal marketsandtheir roleinprovidingrisk dom choice. The implication of random- ening of economic conditions to economic capital to t,e corporate sector in India and ness(thatthere isnoselectionbias)isthat distortions. A more rigorous analysis, the Republic of Korea. The research is the CFA-zone economies wouldhave per- using data from the Sudan -an African funded by the World Bank's Research formed the same as the rest of Sub-Sa- country with a sizable agricutural Support Budget, Stock Market Develop- haran Africa, for example, if there had economy - strongly supports the predic- ment and Corporate Finance" (RPO 675- been no zone. Their results show the as- tions of Easterly's endogenous growth 84). Copies of this paper are available free sumption of randomness to be valid only model (1990), which posits the deleterious from the WorldBank, 1818 H Street NW, for GDP growth and inflation. For other effects ofeeonomic distortions ongrowth. Washington, DC 20433. Please contact indicators (the ratios of savings, invest- This paper - a product of the Transi- Faye Harbottle, room K5-167, extension ment, and exports to GDP), the decision tion and Macro-Adjustment Division, 39616 (40 pages). toparticipatein the zone isassumedtobe Policy Research Department -is partof endogenous and is related to the expecta- alarger effort in the department to study tion of improved economic performance. the linkages between agriculture and 830. Fixed Parity of the Exchange Therefore,in estimatingthe zone's effects macroeconomic policy in Sub-Saharan Rate and Economic Performance on those three indicators. Elbadawi and Africa. Copies of the paper are available In the CFA Zone: A Comparative Majd corrected for the ensuing "sanple free from the World Bank, 1818 H Street Study selectivity" bias by estimating the status NW, Washington, DC 20433. Please con- indicator (participation versus tactAnnaMaranon,roomN11-042,exten- Ihrahim Elbadawi and Nader Majd nonparticipation) with a probit model. sion 39074 (66 pages). (January 1992) This paper - a product of the Trnsi- tion and Macro-Adjustment Division, Economic performance in the CPA (franc) Policy Research Department -is part of 832. SUstalnablilty and the zonewas weakertan in non-CFAcountries alarger effort in the department to study Economics of Assuring Assets for in the ate 1980s for erports, inuestmn, macroecnomicadjustmentandeconoemic Future Generations savings, and outputgrowth. The CFAfared performance in the CPA zone. Copies are betteronlyin inflation.Andin the long run, available free from the World Bank, 1818 Richard B. Nogaard while it performed better for exports, sav- H Street NW, Washington, DC 20433. (January 1992) ings, and investment, it failed todihstiguish Please contact Anna Maranon, room Nil- itselfin terms of economic growth. 042, extension 39074 (4G pages). Economists can participate more eflic- tivelyindecisionmahingaboutfuturegen- Elbadawi and Majd compare economic erations' rights to natural and produced performance in the CFA(franc) zone with 831. Real Oveivaluatlon, Terms assets if they use economic analysis to the economiic perfonnance in similar coun- of Trade Shocks, and the Cost to comp(ement other types ofanalysis rather triesoutside the CFAzone in recentyears. Agriculture In Sub-Saharan Africa thanasume that economic reasonig is a The results of their model estimates sieve through wich otherfwms ofreason- indicate that the competitive position for Ibrahim A. Elbadawi ing mustpass Emphasis skozddbeplaced CPA members was weaker in the second (January 1992) on how markets would work efficiently if halfof the 1980s than in the first half and they were striuing to meet curent prefer- weaker than in non-CPA countries - in The observed decli ne ofagrscuture and the ences where one ofthosepreferences is the terms ofoutputgrowth as well asthe per- general worsening ofeconomic conditions colectiue desire to maintain sufficient formance of exports, investment, and sav- in Sub-Saharan Africa are linked te eco- natwul and hwnmn-produced assets, in- ings. The exception was domestic infla- nomic distortions, which limit growth. euding knowledge; to sustain welfare in tion: the CFA fared better on that front the next generation- Resultsforalonger-term comparison (of Startingfrom the premise thatagriculture the 1970s and the 1980s) are somewhat shouldbe pivotal in the structural trans- Norgaard arguesthatthe discourse on the mixed. The CFA zone performed better formation and economic development of sustainability of development is about than the others in exports, domestic sav- Sub-Saharan Africa, Elbadawi addresses assuring the rights of future generations ings and investnent, and inflation-but two related issues. to sufficient natural and produced assets Policy Research Workcing Paper Series 17 through formal and informal institutiono. Economists' traditional emphasis on (the Pact) shows that the right combina- The theoretical models in resource and efficiency, which takes the existing distri- tion of orthodox and "heterodox" policies environmental economics have not ex- bution of assets as a given, has limited (for example, income policies) can meet, plored how different distributions of rights their ability to perceive and respond to the and has met, both objectives. across generations affect the efficient al- challenge of sustainability, contends Ok shows that although many ortho- location of resources and environmental Norgaard. Accepting the distribution of dox adjustments - especially of fiscal services. Both in theory and practice, income also justifies the use of data gen- policy and domestic debt management- economists have effectively assumedthat erated by markets, thereby giving eco- were begun before the Pact, considerable current generations hold all rights and nomic reasoningempirical grounding and further adjusting was needed before it should efficiently exploit them. scaling. could succeed. To make the stabilization Through the use ofgeneral equilibrium Economists can participate more effec- crediblerequiredsignificantlytighterfis- * overlapping generation models developed tively in the diverse social decisionmaldng cal policy and a lengtherning of the with RichardHowarth, Norgaard demon- areas in which intergenerational equity maturities of domestic debtbetween 1988 strates how assuring the rights of future decisions are being made if they use eco- and 1990. generations - or otherwise caring for nomicanalysis tocomplementothertypes A key factor behind high real interest them through asset transfers - affects of analysis rather than assume that eco- rates duning the recent Mexican stabili- the efficientallocation of resourcesandthe nomic reasoning is a sieve through which zation plan was the initially low credibil- price paths of resources over time. other forms of reasoning must pass. ity of the fixed - and later the In Norgaard's general equilibriummod- For the operations ofdevelopmentagen- preannounced- exchange rate. While it els, the rate of interest is endogenous, cies, addressing issues of sustainability is difficultto assesswhatestablishescred- taking on different values with different would shift the emphasis from project ibility, we can hypothesize about the fac- distributions of rights or levels of caring analysis toward country and policy analy- tors that may hamper it. Crucial among and showingan intertemporal path rather sis and toward increased country dia- them is the consistency of the mscroeco- than aconstantrate. He thus supportsthe logue. Por projects, emphasis should be nomic policy framework, where fiscal position that it is inappropriate to lower placed notonlyonanalyzingefficiencybut poliey plays a key role. Domestic debt the rate of interest in favor of future gen- on analyzing how projects affect the for- management also mattersas the probabil- erations but shows that when the rights mation, maintenance, and transfer of as- ity of a successful run on the peso in- of future generations are protected, the sets to future generations. A more global creases with the amount of government rate of interest is lower. It is the protec- view of the issues should incorporate liabilities that could, in a given period, be tion ofthe rights of future generations that knowledge from the natural sciences and exchanged for foreign reserves. For ex- assures that a lower rate of interest does more information than is generally pro- ample, if the average maturity of domes- notresultin excessive transformations of vided by markets. tie debt is low, as it was in Mexico at the natural environments because of the in- This paper is a product of the Office of b6ginning of the stabilization plan, this creased availability ofcapital for develop- the Regional Vice President, Asia Re- probability is high-and thus also shows ment. gional Office. Copies ofthe paperare avail- up in high interest premia between peso- Economists may not have formally ad- able free from the World Bank, 1818 H denominated and dollar-denominated dressed the rights of future generations Street NW, Washington, DC 20433. debt. because they have tended to assume that Please contact Jae Shin Yang, room E10- The Pact succeeded instabilizingprices technology will offset resource scarcity. 031, extension 81418 (74 pages). without a recession, but a few loose ends Technological optimism may or may not remain: be appropriate: itis certainly contested in * The sharp decline in private savings the discourse on sustainability, but it is 833. Stabilization and Gicwth which has not been fully offset by higher not inherent to economic rea:oning. Recovery In Mexico: Lessons publicsaving,causesmanytoquestionthe There has been an implicit assumption and DilemMas sustainabilityof the recent economic re- that the institutional mechanisms affect- covery. In particular, it makes Mexico ing the maintenance of transfer of assets Daniel F. Oks more vulnerable to volatile private capi- -to future generations are working opti- (Januazy 1992) tal flows. mally and are unaffected by the general * The continued real appreciation of development process or particul devel- The right combination of orthodox an-. the peso risks bringing a slowdown orre- opment decisions. Analyses to date have heteroxd polcies can bring inflation cession over the medium term- ordyaddressedmarket distortionsandt he down and induce sustained economic re- In the shortterm, Mexicomay nothave internalizationofexternalities.Newtech- covery in Mexio - and has done SQ But other options than further tightening its nologies have increased people's abllity to a few oose ends remain. a sharp declne fiscal and monetary policies. Over the use resources and degrade ecosystems. in private sauings and the continuing ap- medium term, however, areal peso depre- Developmententamlschangngecommunity preciation of the peso. ciation appears necessazy so that extra relations and enteringnational andinter- output from new investment can be ab- national markets. There have onlybeen a Before 1988, "orthodot policies (fiscal sorbed. few analyses of whether institutions, to discipline and tightmoney) failed tobring This paper is a product of Country De- protect the rights of future generations, inflation down and induce a sustained partmentll, Coimuty OperationsDivision have evolved in consonance withnew tech- economic recovery. The Mexican stabili- 1, Latin Amenca and the Canrbbean Re- nologies and social organizationms zationplanannouncedinDecemberl987 gional Office. Copies are available free 18 Polky Resewrch Working Paper Series from the World Bank, 181B 11 Street NW, debt-creating, interest-sensitive flows to ataei with the fund, frictions in the Washington, DC 20433. Please contact developing countries, in terms of long- economy, or the borrowing constraint is Lily Franchini, room 18-165, extension term sustainable growth. relaxed. 38835 (23 pages). This paper - a product of the Interna- This paper-a product of the Debt and tional Economnic Analysis and Prospects International Finance Division, Internzs- Division, International Economics De- tional Economics Department -is part 834. Scenarlos or Growth pertnent-waspreparedasbackground ofalargereffortin the departmenttocon- In the 1990s tothe report, Global Economic Prospects tribute to a Bankwide work program on and the Developing Countries, published issues related to developing country man- Shahrokch Fardoust and Jian-Ping Zhor in May 1991. Copies of this paper are agement of eternal risk, including cur- (January 1992) available free from the World Bank, 1818 rencyandexchangewmtriskmanagement, H Street NW, Washington, DC 20433. currency reserve nmanageent, and com- - The long-tern economic prospects for de- Please contactJacquelyn Queen, room S8- modity price risk management Copies of veloping countries will bc affected by 035, extension 33740 ( 39 pages). thepaperareavailablefreefiomtheWcrld changes in the international economic Bank,1818HStreetNW,Washington,DC ernironment but depend udimatelyon the 20433. Pleas contact Rose Vo, room 88- success orf jilure oftheir domesticpolkies. 835. Commodity StablIzation 072, extension 33722 (36 pages). Funds Using two macroeconomic models (the Banlks GEWCFM and the International Patricia Arrau and Stiju Claessens 836. Sources of Income Inequality Monenary Fund!z MULTIMOD) and re- (January 1992) In Rural Pakistan: sults from the OECD's IlNTRLINK A DecomposHion Analysis model, Pardoust and Zhou simulate glo- The optimal me for deposits in and with- bal outcomes in the 1990s under several drawals firom a commodity stabilizaton Richardfl Adams, Jr. and arold Alderman scenarios, allowing for the impact ofi Jfund keep thefudsmall-less than one (January 19992) * Changes in industrial countries' fi- month's exporta For the windfiagain oil nancial and macroeconomic conditions. exporters recaed asaresult ofthePersan 7hatsomepeopleownmorelandthanoth- * Changesintheinternational oil mar- Gulferisis - about fowu months of aver- eras is not the ma .n source ofagicultural Iket. ageexports-theoptionaldepktionperiod income inequalLvinruralPakistan. Tfiat * Cniangesin developing countries' do- is about four years. In the long run, the some people receive higherprofits cadre- mestic policies under vaxying assump- exporter's flind shouZd be sumll, s4nifl- turns to laboron thei cukluationthando dions about the world economy and trad- canly less than one month of oil exports. others is Reducing inequalty might re- ing environment. quireprovidirg more training in manage- Theyfind thatanincrease in the growth Commodity stabilization fimds are hard- rid and tehnical skills. rate in industrial countries has an unam- currency savings to protect against a fall biguouslypositive effecton the growthrate in income from commodity exports in the Usingpanel data from a three-year study in developing countries, but that the meg- presence of borrowing constraints. of 727 households, Adams and Alderman njitudeofrtheimpactdependslargelyonthe Arrau and Claessens develop the opti- identify the sources dincome inequality level ofrealinternationalinterestrates To mal rules for deposits in and withdraw- in rural Pakistan. an extent, low real interest rates together alsfrom suchafhndby using abenchmark First, theydecompose total rura income with continuing finanil flows to the de- model of precautionazy savings with l- among five sources: agricultural, live- velopingcountriescouldcuslhinthenega- quidity constraints. stock, rental, nonfirm, and trnsfer in- tive impact on developing countries of the Theyshow that the optimal stabilization come. This decomposition shows that ag- recession in industial countries, fund is smal. For the Chilean Copper Sta- ricultwal income contnbutes most to in- The author? simulations reinforce the bilization Fund, they snow that the acta equality in total rural income. argument tfhat developing countries' do- accumulation of foreign assets bas been Next, they decampose the sources of mestic policiesplayacrucialrole in deter- much larger than the benchmak model inequality in agricultural income. This mining long-run growth, inflation, and requires. Ovelongperiods, the copperfimd leads to the srprisingflnding that ineq- interestrates. Theyfind, for example, that should contain less than one month's ex- nitable ownerslip ofland is not the main if external conditions remain unchanged, ports. source of inequality in agricultural in- reasonable improvements in domestic They also use the model to find the op- come. Income from retums to labor and policies (specified in the paper) can in- timal depletion of the windfall gain oil crop profits contribute most to this area crease developing countries' average exporters received as a result of the Per- of inequality- growth by about 1.5 percentage points a uinGulfcrisis-amountingtoaboutfour One way to reduce rural income in- year. monthsof averageexports.Theyfindthat equality might be to find more ways to The simulation results show that as such awindfall gain should be depleted in narrow the disparities between abilities, world oil prices become more volatile, so about four years. In the long run, an oail perhapsbyteaclhigmoreman rialand do world inflation, interest, and GDP exportr shouldkeepasmall fund, signifi- technical skills to agriculturists. growth rates. The results also show the cantly less t han one month of oil exports. Acording to Adams and Alderman, superiority of non-debt-creating flows (for But higher-than-predicted funds can be policymakersconcemedaboutinequality example, foreign direct investment) to justified if there are externalities associ- in rural Pakistan would also be well ad- Policy Research Working Paper SerIes 19 vised to pay more attention to livestock. developmenL Copies of the paper are are greater than incentives for import Income from livestock apparently de- available free from the World Bank, 1818 substitution. The two may be related but creases the inequalities in incone. H Street, NW, Washington, DC 20433. a heavily interventionist policy could be This paper - a product of the Agricul- Please contact Selina Khan, room S6-228, outwardly oriented. tural Policies Division, Agriculture and extension 33651(29 pages). And a country could impose trade poli- Rural Development Department-is part cies that raise the average incentive to of a larger effort in the department to export, while increasing the dispersion of monitor the impactofagricultural policies 838. Measuring Trade Policy incentives within the export and import on poverty. Copies of this paper are avail- Intervention: A Cross-Country sectors - so that when such a country able free from the World Bank 1818 H Index of Relative Price Dlspersion liberalizes,trademightreturntoits origi- Street NW, Washington, DC 20433 nal pattern but with incentives inwardly Please contact Cicely Spooner, room N8- Brian J. Aitken oriented. 039, extension 32116 (34 pages). (January 1992) The index of relative price dispersion that Aitken develops has the advantage Not orny is it hazardous to charaterize an thatitis objective, measures intervention 837. Manpower Planning inward-oriented counny as intentian- inbotlhexprtsandimports,iscomparable In a Market Economy with Labor ist and can outuard-oriented country as across countries, and is independent of Market Signals liberaL but the claracerizaton is simply fluctuations in echne rates caused by wrong for developing countries. Whether macroeconomic mismanagement. Unlike Arvl Van Adams, Joln Mliddleton, acounr yintervenes does not telthe whole average tariffs andmeasures of nontariff and Adrian Ziderman stry about its -ade policy, and misses an barriersandpricelevels, the relative price (January 1992) essential aspect of interenti which dispersion index measures incentive is- goods are fauored by subsidies and which tordons within categories of goods. As countries moue from centraZly planned are protected by tariffs The Leamer index looks directly at the to market economies, manpower planners effectsoftradepohcyntrventonbutthe must abardon oldtechniquesforforecast- In the debate about the relationship be- theoretical assumptions required to cal- ing manpower requirements and learn to tween trade pohliy and growth, vanous culate the pattern of trade in the absence analyze signals firom the labor markeL measuresfortradeinterventionhavebeen of distortion are questionable. Such as- used Aitken presents a new measure smptions are nessary when alca- The movement from centrally planned to based on a countrys relative price struc- lating relative price dispersion, as world market economies will not eliminate the ture and the structure of relative world prices are directly observable. need for manpower planning. Rather, it prices. This measure, he arg, conforms This paper - a product of the Transi- will substantially change the roles man- more closely than existingmeasurestothe tion and Macro-Adjustment Division, power planners play and the techniques concept of trade intervention. Policy Research Department-is part of they use. The relationship between aopenneser a lrger effort in the department to esti- Manpowerplannersmustbecome a- and trade liberization is more compli- matepoicymxeasuesrelevantforgrowth- lysts of the labor market. In a market cated than is often believed Whether a The research was fumded by the Banks economy, they will be asked for inforna- countryintervenes doesnottell the whole Research Support Budget, 'How Do Na- tion: storyaboutitstrade policy,andmissesan tional Polices Affect Long-Ran Growth? * To guide private decisions about essential aspect of intervention: which (RPO 676-66). Copies of the paper are training. goods are fivored by subsidies and which available free from the WorldBank, 1818 * Toimprovethemanagementoftrain- are protected by tariffs. Indonesia and H Street NW, Washingtocn DC 20433- ing systems. Peru, for example, have comparable mea- Please contactRebeccaMartin,room Nil- * To identify impediments to competi- sures ofintervention, but therelative pice 053, extension 39065 (48 pages). tive labor markets. of equipmentisveryhighin Peranclvery - To help rationalize public invest- low in Indonesia; consumer nondurables mentsin education and training- appear to flow freely in Ian America, 839. Reglonal Integmtlon under Adams, Middleton, andZidermanintro- while prices for these goods in Japan and VERS: When Trade Diversion duce techniques for manpower planning Koreaareinexpicablybigh.Understand- IS Unambiguously Beneficial that adknowledge the dynanic nature of ing differences in the growth experience marketeconomies.Theyrejecttheideaof afthese countries clearlyrequires a more David G. Tar forecastingmanpowerrequirements, pro- subtleviewoftradepolicythan outwarc' (January 1992) posing instead to use signals fiom the la- and 'inward orientation, and a more in- bormarketpickedupbymonitoringmove- formed understanding of the nature of The cvation of a North American free ments in wages and employment and intervention. trzie area and other studing bloc ikely evaluating training programs. The debate has been confused by the to resultintnzde diversion in sectors where This paper - a product of the Educa- failure to distinguishbetween tradeinter- potection is exeised through voluntay tion and Social Policy Department - is vention and outward orientation. Trade eapart mesaint (VERs). Such tndediuer- part of a larger effort in the department intervention implies policies that distort sionvwil benelttheimporigowuntry but to study the operation of labor markets the flow or pattern of trade; outward ori- will hurt eporting countris outide the and their impact on human resources entation impliesinoentives to export that trading blot 20 Policy Research Working Paper Seres Tarrargues thattrade diversionbasedon They conclude that some countries suc- guidance can be given to other countries, taiff preferences can be welfare-reducing cessfully absorbed the external shock of more analysis is needed on how changes because there is a tradeoff between im- the 1980s by: inmarriagebehaviorwerebroughtabout proved resource allocation and a loss in * Minimizing the effects of the exter- in TunisuL The cross-sectional analysis terms of trade - where the latter loss nal shockby combining external and do- usedinthispapercouldnotaddressissues equalsthelosttariffrevenueoftheimport- mestic debt strategies. of what determined the age of marriage. ing country. * Adjusting their fiscal deficits. Asecondmajorfacorinfertilitydecline With trade diversion based on rent- * Experiencing a positive external in Tunisia was the increased use of con- transferring quotas such as voluntary shock. traception. The main focus of this paper export restraints (VEERs), however, there * Fostering growth by stimulating ex- is what determines the practice of contra- is no such tradeod. On the contrary, not port growth and developing domestic fi- ception. The general increase in the use only does the importing country improve nancial markets. ofcontraception was the result ofa stmng itsresourceallocationbutitalsoimproves No single country fully implemented family planning program as well as in- its terms of trade. So for the importing this strategy, those most successful in creases in education over time. The fan- country, trade diversion under VERs is doing so were Morocco, Portugal, and flyplanningprograminTunisiais consid- unambiguously beneficial. Turkey. ered one of the best in the world. For exporting countries outside the re- Their experience contrasts with that of There has been a substantial program gional trading bloc, however, there is an some Latin American countries that ex- to improve the access of the rural, poor, unambiguous loss. They continue to sell perienced a similar external shock but and least educated population groups to thesameVER-corstrainedquantityinthe failedtoundertakefiscalad,justmentand fiamily planming- Although in the last 10 importingcountrybutatareducedprice financed most of their deficit through years contraceptive use incenased the Therefore they unambiguously lose on money finance - thus experiencing high most among the least educated women, their trade in VER-constrsined products inflation levels and overturdesing their thesegroupsarestlllservedlessweflthan from the creation of a regional tlading private sector. In some respects, Yugosla- themoreprivileged.Weknowtbisbecause bloc. via had the same experience. the uneducated women have one chlud This paper - a product of the Trade This paper - a product of the Private more, on average, than they say they Policy Division, Policy Research Depart- Sector Development and Finance Group, want. ment - is part of a larger effort in the Technical Department, Europe and Cen- Otiher countries studying their own de- department to assess the effects of re- tral Asia and Middle East and North Af- mographic tranition should study the gional trade integration. The research was rica Regions -is part of ECA/MNAs re- history of the fertility decline in Tunisia. funded by the Banlks Research Support gional study on external debt and infla- Cross-sectional analysis of what deter- Budget, 'The Impact of EC 1992 and Re- tion Copies ofthepaperare available free mines contraceptive use and fertility as gional Integrationon SelectedMediterra- from the World Bank, 1818H StreetNW, carried out in this paper can be used to nean Countries" (RPO 675-64). Copies of Washington, DC 20433. Please contact guide Tunisia itself on where it might this paper are available free from the Luz Hovsepian, room H9-065, extension most profitably expand its activities to World Bank, 1818 H StreetNW, Washing- 37297 (68 pages). increase contrceptive use and thus fer- ton, DC 20433. Please contact Dawn tility decline. allantyne, room NIO-023, extension The results in this paper show the cen- 37947 ( 7 pages). 841. How Access to Contraception tralroleofmortalitydeclineandaccessto Affects Fertility and Contraceptive eontraception in this process. Health fa- Use In Tunisia cilities, especally clinics, and good water 840. Pubilc Sector Debt, Fiscal are important in reducing mortality, Deficits, and Economic Susan Cohane and David KL Guiky whichin turn increases the motivation to Adjustment: A Comparative Study (January 1992) restrict fertility and the likelihood that of Six EMENA Countries people ill act on that motivation. What were the importa factors in The eflfcts lag, however. Access to Aliedo E. Thorne and Azita Dastghelh Tisiasfertiity dci Wettereducat irn health facilities at age 20 matters more (January 1992) for women and more acoess zofamilyplan- than eurrent access in affecting motiva- ning and contraception and to all the tion.Thus, along-termprogram tofurther Whiy did some highly indebted Lati thingsthatcontibutetomoralitydeclne reduce mortality is important. Hospitals Ameican countres experwice high bfa- - inuding health care facilities fepe- and doctors in rural areas appear to play gion as a result of the external shcui ofthe cially clinics) and good water. less clear a role than clinics, but further 1980s, white other countries managed to analysis of what determines mortality - absorb the shock and resume grouwth To a great extent, fertility decline in Ta- especially in rurl areas - would be mdsia can be explained by the rise in the neededtodesignaproperhealthstrategy. Thorne and Dastgheib analyzed the expe- age at which women marry, probably be- The structural model Coclrane and r.enre of six countries in the EMENA re- cause they are better educated and be- Guilkey use is designed to distinguish gion (Algeria, Morocco, Pakistan, Portu- cause social legislation has given them exogenous from endogenous variables- gal, Turkey, and Yugoslavia), and com- more rights This legislation has ranged to separate such community variables as pared it with the experiences of Latin from the abolition of polygamy to in- access to family planning from the chan- American countries. reased rights in the work force. Before nels through which they operate. One of Policy Research Woraing Paper Seles 21 the most importantfindings is the impor- lending, so policymakers in South Asia developing countries tends to reinforce a tance of access to family planning and should pursue policies and nondistortion- dassicalthemeofdevelopmenteconomics: health facilities to the motivation to re- ary incentive systems conducive to the the importance of human capital and fi- duce fertility and to act on that motiva- infusion offoreign direct investment flows. nancial markets. tion by using contraception. Many people Husain and Jun's major findings are This paper - a product of the Country in the field have dismissed the measures consistentwith theBaks emphasisonan Opertons Division, Eastern Africa De- of motivation used in this study, but the increasinglyimportant role for the private partment, Africa Regional Office and in- authors found them particularly impor- sector - and direct investment flows - tiatedwhiletheauthorwasinDivisionII, tant. in development A focus on foreign direct Country Policy, Industry and Finance, This paper - a product of the Popula- investment is appropriate, given current Operations Evaluation Department - is tion, Health, and Nutrition Department constraintsonexternalfinancing,partieu- part of a review of cross-country experi- - is part of a larger effort in the depart- larly through traditional bank credits. ence with long-term growth. Copies are ment to study ways to improve family This paper-a product of the Debt and available free from the World Bank, 1818 planning. This research wasfundedby the International Finance Division, Interna- H Street NW, Washington, DC 20433. Bankls Research Support Budget, ślm- tional Economics Department - is part PleasecontactAfsarNokhostirooomJ- pediments to Contraceptive Use and Fer- of a larger effort in the department to 281, extension 34150 (30 pages). tility Decline" (RPO 675-72). Copies are analyze the trends and determinants of available free from the World Bank, 1818 capital flows to developingcountries. Cop- H Street NW, Washington, DC 20433. ies ofthepaperareavaflablefreefiom the 844. Heterogenelty, Distribution, Please contact Otlia Nadoas, room S11- World Bank, 1818 HStreetNW, Washing- and Cooperation In Common 219, extension 31091(58 pages). ton, DC 20433. Pleae contact Rose Vo, Prptrty Resource Management room 88-042, extension 33722(50 pages) RaiKanWbur 842. CapItal Flows to South Asian (Janumry 1992) and ASEAHI Countries: Trends, 843. How Financial Markets Affect Determinants, and Policy Long-Run Growth: The more heterogeneus agent ore along Implications A Cross-Country Study relevant dimenswns, the less liky coop- erativeagreementsartocomeaboutAnd Taat Husai and KwangW. Jun Bjaz Ghani eisting agreems are more ikely to (January 1992) (January 1992) break downas agroup becomes more het- erogenus. Foreign direct investment has been more Acounry with a more developedfinancial influentzal than other types of resource system tends to grow faster because it can Ianburconsiderstheroleofgrouphetero- flows in shaping economic growth in make more efficient use ofresources. Poiy gmneityin thesuessorfailureofeommon ASEAN countries South Asian re/ormn that fastes fnancial deueopment property resource management He ar- polkymakers can also facilitate the inf it- also fosters a beter growth rate for real guesthatcooperativeagreementsareless sion of foreign direct investment flows if GD. lkely to come about when agents am theypursu,epoiies andnondistortionary highly heterogeneous along relevant di- incentiue systems similar to those of Empirical studies on new growth theory mensions-andcexistingagreementsare ASS/iN counties. have tended to ignore financial policy's more likely to break down as a group be- role in development. Ghani provides evi- comes more heterogeneous. Husain and Jun compare the experiences dence that the initial level of financial Kanbur crystallizes his argument in of selected Asian countries in attractg developmentispositively associatedwith simple numerical examples and ius- different forms of ecternal financing and a counkys later GDP growth rate, after tratesbyreferencetocase studiesoncom- examine how that financing has contrib- controlling for the effect of the starling mon propertyresource mnagement-in uted to growth.They carry out the analy- value of human capital and the invest- particul, cases involving fisheries and sis for two subgroups-South Asian and ment rate. irngation systems. More work is needed ASEAN countries-with distinctly differ- A country that starts with a more de- to substantiate Kianburs argument, but ent dominant forms of capital flows. veloped financial system tends to grow hisanailysissofar supports the argument After reviewing recent trends in finan- faster because it can make more efficient that equity and efficiency complement cial flows to individual countries, Husain use of resources. It can do so through sev- rather than oppose each other. and Jun perform a statistical analysis of eral channels, includingbetterevaluation This paper-aproductofthe Research the effects of foreign capital flows on the andmonitoiingoffirms,lowertfansaction Advisory Staff, Office dthe Vice Presi- macroeconomic performance ofdeveloping costs for financial intermediation, and dent, Development Econonmcs - is a countries in the region. They find that externalities geneated from information background paper for the WorldDevelop- foreign directinvestment has been amore collected and processed in financial mar- ment Report 1992 on enviromnent Cop- sgnificantpositivefactorthan othertypes kets. ies areavalablefreefrom the World Bank, ofresource flowsin shapingthe economic Policy reform that fosters financial de- 1818 H Street NW, Washington; DC growth of ASEAN countries. Substantial velopment also has a sigmficant positve 20433. Please contactthe World Develop- increases in ODA flows are unlikely, and effect on the growthrateofreal GDP. The ment Report office, room T7-101, exten- so is the resumption of significant bank empirical evidence Ghani presents for 50 sion 31393 (25 pages). 22 Policy Rsearch Woddng Paper Series 845. Inflation Stabilization This paper - a product of the Country Traditionally,programdesign dedsions In Turkey: An Application Operations Division, Country Depart- havebeenbasedonassumptionsaboutthe of the RMSM-X Model ment I, Europe and Central Asia Region potential impactofalternativestrategies, - is part of a larger effort in the Region with little explicit consideration of their Luc Evcraert toenhanceitsmacroeconomicmonitoring costs. The workshop aimed to lay the (January 1992) capabilities. Copies ofthe paperareavail- groundwork for incorporating cost data able free from the World Bank, 1818 H into the program designI But lack of Addingestimatedbeauwioralequations to Street NW, Washington, DC 20433. knowledge on the effectiveness of inter- the standard RIVSM-X model allows it to Please contact Suzanne Zamora, room H5- ventions is nearly as great an obstacle to simulate the short-run consequences of 105, extension 36071(51 pages). sound program design.Amuch improved inflation stabilization, information base in both areas is urgently needed. The model Everaert presents is an exten- 846. Incorporating Cost Cost-effectiveness information is also sion of the simple RMSM-X model devel- and Cost-Effectiveness Analysis essential to ensure that additional re- oped to improve the Country Operations Into the Development of Safe sourcesare allocated to SafeMotherhood Divisionrs macroeconomicmonitoringand Motherhood Programs by illustrating that a relatively small in- modelingcapabilities.AAddingeconometri- vestment can bring about significant ri- cally estimated behavioral equations and Lry Fory, Dians KL Measham, ductionsinmaternalmorttlityarimprove the use oflaggedcrelationships makes the and Anne G. Tinker other key indicator Safe Motherhood model fit for short-run simulations while January 132) competes with other better established maintaining an essentially recursive sectoral interests, including Child Sur- structureandthuskeepingcomputationEl A relatively smil inuestent can reduce vival, which reguarly uses cost-effective- Costs at a minimum. matuerna mortalty and morbdity. To ness figures as advocacy and fundraisg First, Everaert reviews the theoretical ac7iee the greatest impact on maternal tools. framework of an inlation stailization healh uesources must be allocated This paper - a product of the Popula- program. n the absence ofpricerigidities, soundly within and to Safe Motherhood tion, Health, and Nutrition Department a reduction in inflation simply implies programas - synthesizes the results of a workshop finding a replacement for revenue lost on the costs and cost-effectiveness of Safe from a decline in the inflation rate. In Little information is available on the ac- Motherthoodprograms.The workshop was reality, backward-looking nominal con- tual costs of implementng Safe Mother- held at the World Bank, April 8-9, 1991 tracts and credibility problems induce hoodprograms, oronhow these costs vary Copiesofthe paper arevailable free from short-run costs, maling a fall in the eco- in different settings. Nor is there a con- the World Bank, 1818 H Street NW, noniic growth rate an inevitable part of sensus on the precise gral, content, and Washington, DC 20433. Please contact inflation stabilization. The theoreticel structureofSafeMotherhoodprograms- Otilia Nadora, room S11-219, extension frameworkyields the specificationofafew due largely to a paucity ofinformation on 31091(37 pages). key behavioral equations to be imple- the relative effectiveness of individual merted in the model. health interventions; ofdifferentlevelsof Next, Everaert shows in detail how this the health system; and of non-health sec- 847. Coping with the Legacies theoretical framework is implemented in torinterventions Itis difficultto measure of Subsidized Mortgage Credit theRMSM-Xmodelbyspecifygdemand the impact of interventions on mortaity, In Hungary andsupplysidesofall mrkets-Anecono- and debate continues on the appropriate- metricallyestimatedshort-runpriceequa- ness of various intermediate or process Silviu BR Sapan and [aic Chiquier tion plays a key role. indicatorsasproxiesformaternaloutcome (Jaaaay 1992) Everaeressimulationresultsshowthat measures. evenifacredibleprogramisimplemented, Participants at a recent World Bank Likemanysocialistcountriesin at least two years of negaiive per capita workshop onSafeMotherhoodagreedthat Hungarv must find a way to reduce the growth a' neededtolbringinfladiondown it is essential to develop a better under- fiscal burden impticit in the subsidied fromitscurrentlevelstobelow 10 percent standing of the cost-effectiveness of Safe housing loan porto/io inherited from the a year. The accompanying fiscal effort is Motherhood interventions to design pro- pre-1989 regime The paper discusses df- great the equivalent of a 40 percent in- grams and allocate the limited resources ferent ways of dealing with this portibo crease in direct tax revenues if no other available in a way that maxmizes their dunng the twanion toward a more effi- expenditure or revenue measures are impact on maternal health status. ient and equitable systez. taken. Scenanios that do not incorporate At its simplest, a costing methodology strong fiscal action do not succeed in per- would provide guidelines for estimating Sagari and Chiquier examine alternatives manently lowering inflation and lead to the costs of prospective programs, once for dealing with the initial conditions of lower per capita GDP at the end of the designed. When combined with informa- housing finance facing countries malking decade than does the scenario of fiscal tion on effectiveness, it could be used tD the transition to a market economy and stabilization. Inflation in the Turkish con- give planners an indication of the poten- moving toward a more efficientand equi- text is costly because it reduces not only tial results achievable through a variety table system. thelevelofproductiveinvestmentbutalso of program options1 subject to the re- The authors focus on the problem of its efficiency. sources at their disposal. restu ing the stockof housing loans Policy Research Working Paper Series 23 that exist at the time a new regime is clined. In 1973, the EC shifted fiom being returningtohistoricalyieldswouldreduce implemented. Almost without exception a net importer to being a net exporter. wheat production and exports substan- the stock of housing loans is yielding Developing countries, on the whole, are tially more than coarse grains. heavily subsidized rates, and its market heavy grain importers. Under scenario 1, developing countries' valueissignificantlybelow itsbook value. The EC's Project 1992 will abolish in- netimportcostsforgrains fallslightlyand Hungary makes an interesting case ternal trade barriers to facilitate the importsrise,inresponsetolowerprices.By study. The mortgage portfolio inherited movement ofgoods, persons, services, and 2000, the cost of grain imports for al de- from pastregimes-and the nature ofthe capital between member countries. One veloping countries falls US$153 (constant measures adopted to deal with the fiscal aspect of the program is elimination of 1985 dollars); Asian and Middle Eastern andinstitutional problemsresultingfrom border taxes and subsidies (called MCAs) developingcountriessavethe most Under the old regimes-makes especially clear on agricultural commodities. Coupled scenario 2 the return to hisborical yie.da the perverse implications of housing fi- withinternal pressurestoreduceagricul- increases developing countries cost for nance systems based on across-the-board tural budget expenditures, the EC-1992 grain imports by an estimated US$906 subsidized interest rates. program has affected agricutural policy million (constant 1985 dollars). Sagari and Chiquier propose a geDeral by weakening the role of the price inter- Exchange rate variations in member approach to finding options to reduce the vention system. An example was the 1988 countries have also affect;ed the level of fiscal burden implicit in the subsidized adoption of a common agricultural policy protection of EC agriculture. Under cur- housing loan portfolio inherited from the (CAP)reformpackagecalled'stabilizers" rent macroeconomic policies, large price pre-1989 regime- They identify medha- to limit market price supports. cuts would be necessary to bring produc- nisms to reduce the interest subsidy em- Using an econometric model, Ingco and tion in line with demand. Such price cuts bodied in thatportfolio as well as medha- Mitchell show the stainlizers and the are not politicaDy feasible, so policies de- nisms to spread the associated losses elimination oftheMCAstolhavealimited signed to remove land and farmers from amongthosebenefitingfromthe subsidies effecton world grainprices andtrade. The grain production are Slky to be more as well as among other parties. Clearly stabilizers depress the ECUintervention important. But land set-aside schemes any "residuaP subsidy must be absorbed price, but their effect on production is will not significantly affect production by the government and ultmately by the minimnal ascutsin nomnal ECUinterven- without much hinger compensation pay- populationin the form ofincreased taxa- dion prices are partly offset by adjust- ments than are now contemplated. tion or decreased availability of public ments in green exchange rates when This paper-a product of the Interna- services. MCAs are eliminated. In general, the new tional Trade Division, International Eco- The problemis complexandno obvious, arrangements to remove MCAs involve nomics Department-is part ofa larger easily implementable solutions emerge. revaluingthegreenratesincountrieswith effort in the department to understand Butdelayingaction couldhardlyimprove positive MCAs and devaluing them in how developing countries are affected by the situation. countries with negative MCAs. The effect policy reformasin the industial countries. This paper is a product of the Financial wouldbeagradual increase in grain prices Copies oftbispaperare avallablefree fom Sector Development Department. Copies in France, Greece, Ireland, Italy, and the the World Bank, 1818 H Street NW, ar available free from the World Bank, United Kingdom -more so than in coun- Washington, DC 20433. Please contact 1818 H Street NW, Washington, DC tries with strong currencies, such as Cer- Pauline Kolkila, room S7-040, extension 20433. Please contact Melalou Guirbo, many and the Netherlands. 33716 (37 pages). rom J9-235, extension 35015 (26 pages). Baseline projections indicate that total EC10 grain production will continue in- creasing as average yields increase 2 per- 849. Flmaclai Structures 848. How EC 1992 and Reforms cent to 2.5 percent a year. Eliminating and Economic Development of the Common Agricultural Policy MCAs andcotinuing stblizers Cscenaio Would Affect Developing 1) would slightly increase grain produc- Ros levine Countries' Grain Trade taon above baseline as member countriese (Febnrary 1992) exchange rate policies adjust Total EC10 Merlinda D). Ingm and Donald 0. MltchelI grain production will increase 2 percent a This paper conasucts a modl that cap- (Febnmazy 1392) yearoverbaselinein 1995-2000, butelimi- tures the two-way nature of the relation- nating the CAP and returning to a pre- ship between financial and economic de- How stabilizers, price cuts, and the elimi- CAP growth path for yields (scenario 2) velopment - and allouw soieties at dif- nation Cfborder tazes and subsidies &waud would produce a decline in grain produc- ferenet leves afecnomic devopment and affect EC grain production and develop- tiOn-with total ECIO wheat production with di7 ent polices to choose dijfWent uag counties'grain btade 27 percent below baseline in 2000. finanal servioe Under scenario 1, eliminating MCAs The European Community (EC) is a ma- causes a slight decline in world wheat and Levine constructs a model that captures jor grain producer, accounting for about coarse grain prices. By 2000, real wheat the two-way nature of the relationship 12percentofworldproductionin 1989-90. prices fal 1 percent and corn prices 0.62 between financidl and economic develop- EC grain exports (mainly lower-quality percentbelow baseline.Underscenario2, meat - and allows societies at different feed wheat) increased significantly over prices rise substantially. Wheat prices levels of economic development and with the last three decades, and grain imports increase (by 6.49 percent) more than differentpoliciestochoose differentfinan- (nainly higher-quality bread wheat) de- coarse grain prices (218 percent) because ciel services. 24 PolHcy Researcm Working Paper Sedes In thismodel, various typesoffinancial shift the blanuce ofgouernment spending on the sustainability of trade reform in contracts and institutions arise in re- toward nontradabl .As a result, the real structural adjustment loans (RPO 675- sponse to the economic environment. In- exchange rate tends toappreciate-which 32). The paper was presented at Bank centivesforfinancial structurestoemerge could undermine theeffectiuenessofsimnut- seminars held in August and October are generated by liquidity and productiv- taneous trade liberaization. 1991. Copies of the paper are available ity risk, the costs ofgatheringinformation free from the World Bank, 1818 H Street and mobilizing resources, and the costs of Matin examines the effect of fiscal ad- NW, Washington, DC 20433. Please con- financial transactions. The emergence justrnent on the real exchange rate. He tact Dawn Ballantyne, room N10-023, and development of financial arrange- argues that the direction and extent of extension 37947 (42 pages)- ments in response to the economic envi- thateffect depend on the way fiscal adjust- ronment can alter investment decisions ment is carried out. If a fiscal deficit is and per capita growth rates - while the reduced mainly by reducing total govern- 851. Sources of World Bank level ofper capitaincome helps determine ment spending, the effect on the real ex- Estimates of Current Mortalyt the types offinancial services a particular change rate depends on whether the ad- Rates society chooses to develop and use. justmuentis achieved through proportion- Levine not only recondles more empiri- ate cuts in boLh capital and current spend- Eduard Boa, My T.Vu. cal regularities than past theoretical stud- ing or through disproportionately greater and Patience W. Stephens ies have done, but highlights the role of cuts in capital spending.A disproportion- (Febmary 1992) public policies on financial activities. ately high cut in capital spending affects Policy has important implications for the the composition of government spending Sources ofd heinfan rtality rate and Lie rate ofeconomic growth, thelevel offinan- between tradables and nantradables. expectancy at birth for each of the 186 cial development, and the types of insti- Matin extends the dependent-economy countriw for which the Population and tutions providing financial services. model of the real exchange rate, incorpo- Human Resourcs Departnent of the Levine's model also predicts that per rating both the level and composition of WorlBank nmaes demographic estimates capitagrowthratesshouildberelatedtothe government spending. He then estimates and projections. tvpes offinancial services provided by the the model for Bangladesh, a country that financial sector. Thus, the most common reducedtotal governmentspendingin the Bos,Vu,andStephens discuss thesources empirical measure of financial develop- face of growing current expenditures. of estimates of the infant mortality rate ment - the overall size of the financial Bangladesh's fiscal adjustment involved andlife expectancyatbirthforeachofthe system - may not appropriately capture an unsustainably large decline in capital 186 countries for which the Population fiundamental features offinancial develop- spending as a share of total spending. andHumanlResourcesDepartmentofthe ment. Econometric estimates ofthe model for World Bank makes demographic esti- Thispaper-aproductofthe linancial Bangladesh show that the propensity to mates and projections. Sector Development Department - is spend on nontradables is greater for gov- The intention is to tve some back- part of a larger effort in the departnent ernmentspendingthanforprivatespend- ground on the derivation ofmortality es- to study the relationship between finan- ing and greater for the government's cur- timates and projections usedin the Banks cial and economic development. This re- rent spending than for its capital spend- demographic estimates and projections, so search was funded by the Bas Research ing. This result is highly robust across people who use the data knowhow recent Support Budget, "How Do National Poli- different measures of the real exchange and reliable they may be. cies Affect Long-Run Growthr(RPO 676- rate and across different methods of esti- Bos, Vu, and Stephens discuss mortal- 66). Copies of the paper are avaiable free mation. Thus as Bangladesh's fiscal ad- ity projection methodology and list the from the World Bank, 1818 H Street NW, justment shifted government spending sources and assumptions used in con- Washington, DC 20433. Please contact toward nontradables, the real exchange strcting estimates for individual coun- Wilai Pitayatonakkarn, room N9-003, ex- rate tended to appreciate. tries-Theyalsoplantoissueacompanion tension 37666(39 pages). Matinemphasizestwoimnportantimpli- paperonthe sources offertility estimates. cations of such fiscal adjustment for de- The first section of the paper provides veloping countries like Bangladesh: an overview of the sources of data, dis- 850. Fiscal Adjustment - When fiscal adjustment involves cussestheirnature,andexplainsthepro- and the Real Exchange Rate: unsustainably heavy cuts in capital jectionmethodologyused toarriveatcur- The Case of Bangladesh spending (a trend that is now being re- rent estimates. versedin Bangladesh), appreciation ofthe In the secondsection, the authors docu- Kazi A Matin real exchange rate misaigns that rate, mentmortalitydata sourcesforeachcoun- (February 1992) causing a misallocation of resources. try, organized by region. * When disproportionate cuts in capi- This paper - a product of the Popula- How cuts in government spending affct tal spending occur at the same time as tion, Health, and Nutrition Department thereal exchangerate depends on whether trade liberalization, apprecition of the - is part of a larger effortin the depart- a gouernment achieves fiscal adjustment real exchange rate undermines the effec- ment to construct and document indica- through proportionate cuts in capital and tiveness of trade liberalization. tors of human resources development. current spending or through dispropor- This paper - a product of the Trade Copiesofthepaperareavailablefreefrom tionte cuts in capital spending. Dispro- Policy Division, Policy Research Depat- the World Bank, 1818 H Street NW, por,donate cuts in cepitUal spending may ment-ispartofalargerresearchproject Washington, DC 20433. Please contact Polcy Research Worklng Paper Series 25 Otilia Nadora, room S1l-219, extension tives that encorae providers to behave ofthe baing system falls). But in devel- 31091 (23 pages). in a manner consistent with social goals. oping economies, banks may possess lim- This is adcieved most easily with direct ited information about only a few large insurance, where the goals of the insurer firms, and the potential for destroying 852. How Health Insurance Affects and the provider are identical, but third- much information capital is great. Partly the Delivery of Health Care party payers can also take an active role. for this reason, some countnes - espe- In Developing Countries Problemspromotingefficientandequi- cially very poor ones with undiversified table delivery of health services are mag- financial systems -have difficulty with Joseph Kutzin and Howard Barnum nifiedcwhen an insurer serves merely as a financial reform. (Februay 1992) financial conduit forreimbursingprovid- Caprio argues that policy adviso ers. Goals of efficiency and equity can be shoudbedrcnmspectinforecastingrapid The goal of delvering health services< i- moreeffectivelypromoted byaninsurance posta-juatmentrecovery, and structural ściently and eq:itably can be more efiyc- institution that actively organizes con- adjustment and financial reform pro- rively promoted by an insurance tnstfu- sumers entry into the health system and gramsshouldconsidertheexteattowwhich Lion that actiuely organizes consumers' removes the financial incentives that en- bank relationshiips are going to be dis- entry into the health system and removes courage providers to increase the volume rupted, either by failing banks or by the the financial incentives that encourage and cost of services. destruction ofinformation. prouids to increase the volume and ost This paper - a product of the Popula- The accepted wisdom is that financial of serviceu tion, Halth, and Nutrition Department reform should not precede aU sectw - is part of a larger effort in the depart- adjustment, or banks will get in trouble To aleviate financial crises, many devel- ment to develop efficient and equitable by lending at disequlibrium prices. But oping countries are considering health health sectorpricingand insurance strat- postponingallfinandialrefbrmuntilstruc- insurance as an option for increasing egies. Copies of the paper are availale tural adjustment is complete is equilly available resources in the ]- alth sector. free from the World Bank, 1818 H Street dangerous: unless the finanil sector is Butbesidesaffectingrevenues,insurance NW, Washington, DC 20433. Please con- prepared, investors will not have enough also affects how efficiently and equitably tact OtiliaNador, room S11-219, exten- capital to invest, even given credible pro- health services are delivered. sion 31091(20 pages). grams. To understand bow insurance affects One potential form ofpreparation is an the deliveryofhealth services, Kutzin and extension service for the financial sector, Barnum stuLdied systemsin Brazi, China, 853 Polity Uncertainty, to give firms accounftng training and to Korea, and Zaire. They lookedat the fol- Informatlon Asymmetries, help auditing firms get started. Partial lowing characteistics of insurance pro- and Financial Intermedlatlon guarantees to younger firms in, say, the grams the system for reimbusingprovid- export sector (after devalution) might en, the servicescovered, the insurer'srole, Gerard Caprio help ofCsetsomeoftheisk assodated with the extent to which beneficiaries help (Februmay 992) lending to new clients. The period of un- cover costs, and the proportion of the popu- certaintyshould persistforonlyalimited lation covered by insurance. Poticy aduisors should be circumspect in time -at most, two to three years after Kutzin and Barnum use the following forecasting rapid post-austment recowu- structual adjustnent; a asunset" period indicators for efficiency and equity in the ery, and structural adjustment andfinan- shouldbefrmlyimposedonanysubsidies. deliveryofhealth servioes: cotescalation, cadrefrmprogramsswhould consider the Alternatively, governments could give resource allocation, the use of specific extent to which bank relationships wil be an investment ttx credit on information medical technologies, andequityofaccess disrupted, either byfailing banks or by the capital Becasinfmasionis dificultto to services, destruction of informauion- measure, the credit would be equal to - Theycondludethatinsurersmusttake some maill proportion ofloans made. In anactiverolein estabishinginstiautiaal Financial refonn is often aocmpamiedby effect, this would amount to the govern- mechanisms (such as contraca obliga- other changes, including structural ad- menttempormybuyingdowntheratefor tions) that encourage health serce pro- justment; the success of the combined beneficiaries. Even alter such ataxeredit viders to mmake efficient and equitabe experiment depends on the extent and program expires, bank spreads could be decisions aboutresourceallocadonIneen- efficiency of subsequent investments. expeted to be sizable, since lending to tives to providers are important because Entrepreneurs' judgments about invest- newer firms is more costly than lending they determine the supply ofservices and ingin a post-reform world (often affect;ed to a few lae enterprisesL But as these can also tremendously affect demand. bythecostsofentryandexitandtheprob- new firms grow, spreads shoulld decline. As examples fiom Brazil, China, and a}bilitythatareformawillbe reversed) are The best candidates for reform - in Korea show, providers can incrase the important but so are bankl consider- bothrealandfinancialsectors-arecoun- use of curative services so much that alions ofthe sunk costs ofinvestments in tries with more diversified banking sys- health care costs escalate rapidly, re- both physical capital and information tems. These are more likelyin well-diver- source allocationinthe sectoris distorted, development. siflied economies, with norecent history of medical technologies are inappropriately In industrial economies in normal severe financial repression. Countries used, andaccess to service is inequitable. times, information costs are low, baziks that have tightly limited residents' abil- To correct these distortons, a public in- have ampleinformation, and information ity to hold foreign assets may face a port- surance institution should create incen- is rarely destroyed (as when a large part folioadjustmentastheyease capitalcon- 26 Policy Research Working Paper Series trols under reforn, since they are in effect Aliyama uses a model to calculate the citamn debtors; debt relief and the 'debSt introducinganotherpotLentiallylower-risk optimal tax and to evaluate the effect of Laffer curve"; the role of official lenders; asset. Countries that have had relatively the tax and otherfihtors on welfare. Simu- and debt buybachs. open capital markets will be better off lation results show that the optimal level sincetheydonothave pent-up demandfor of the export tax depends on how farmers The troublesome debts of mar develop- such assets. and government form their expectations ing countries have spawned much litera- Well-capitalized banking systems will of fature prices. He found that the tax is ture on why countries borrow, on what naturally tend to fare betterunderreform, indeterminatewhen thegovernmentdoes debt contributes to growth, on why coun- even though ample financial capital may not know how farmers form their expec- tries repay, and on how to deal with exist- not lead banks to lend aggressively in the tations and when farmers' expectations ing debt. Eaton provides an analytical face of greater uncertainty (such as sub- are independent ofrecent prices or taxes. primer on the following aspects of sover- stantiallyreducedinformation). Clear sig- The government can only impose an 'es- eign debt: nals fiomreforming governmentson where timatedcoptimal taxbecause the taxto be * The basic accounting concepts asso- policiesareheadedwillhelpbothentrepre- imposed depends on the governmentes ciated with debt and some data, particu- neurs and their financiers. Without these expectations ofworldprices.VWhether the larly about the net resource transfers as- signals, baniks will not be sure where to tax is optimal or not depends on whether saciated with external borrowing. concentrate their investmentin gathering thegovernment'sexpectationsaremetby * The mechanics of debt and growth information, and periods of loan retrench- reality. To impose arealistic tax, the gov- impliedin the Hrrod-Daoarand two-gap ment are more hlkely to be prolonged. ernment needs to know the farmers' ex- gowth models. Eaton points outhow this This paper-aproductoftheFinancial pectations and the prospects for world analysis canyield misleadingconclusions Sector Development Department - is prices of a particular perennial. about the sustainability of debt and the part of a larger effort in the department Alcyama's numerical example shows deterninants of solvency. to study the process of financial reform. that national welfare is notvery sensitive * Debt as a component of an optimiz- This research was fimded by the Banlks to the tax rate. But the tax does signifi- ing model of borrowing in a competitive ResearchSupportBudget,"Thelmpactof cantly affect the distribution of benefits loan market, when the borrower faces an Finanal Reform' (RPO 676-13). Copies between farmers and government-and intrtemnporal budget constrainL of the paper are available free frm the signifcantlyaffectslong-termproduction. * Debt as a component of recent mod- World Bank, 1818 I Street NW, Washing- The numerical example also shows quan- elsofendogenousgrowth.Eatancocludes ton, DC 20433. Please contact Wilai titatively how much interest rates, ex- that what debt contrbutes to growth de- Pitayetonakan, room N9-003, extension changerates, andmarketingand produc- pends greatly on the source of growth. 37666 (26 pages). tion costs affect welfare and, in the long * Problemsadisingfimrosovereignrsk, run, the perennial subsector. including problems of liquidity, enforce- Aldyama conrludes that in imposing an ment, and revenue-raising to finance re- 854. Is There a Case for an Optimal export tax on perenniads, a government payment (and the attendant pmblem of Export Tax on Perennial Crops? should give less consideration to the taoes capital flight)- optimalityandmore to how the tax affects * Incentives to repay. Maintaining ac- TnkamasaAldysma welfare distrbutionandlong-termproduc- cess to credit markets can by itslf be a (Febmzuy 1992) tion. reason to repay enough to sustain sub- This paper-a product of the Interna- stantial debt levels. In imposing an export tax on perennial tional Trade Division, International Eco- * Optionsavailabletoacreditorwhose crops, a gouernvent should gie less con- nomics Department - is part of a larger debtor is unwilling to meet current debt- siderationto thetax's optimality and more effort in the department to analyze and service obligations. to how the tax affects the perenni's long- evaluate trade polidesin developingoGun- * Debtbuybacks.Eatonconcludesthat term production and the distribution of tries Copies ofthe paperareavailable free in the absence of any efficiency cost im- welfare from the WorldBarn, 1818 HStreetNW, posedbyoutstandingdebt(so thattheonly Washington, DC, 20433. Please contact implications of the form and extent ofre- The idea of an optimal export tax on a Grace flogon, room S7-033, extension paymentareforthedistibutionofsmuplus conmodity is based on the assumption 33732 (39 pages). betweenborrowerandlender),howmuch that by imposing a tax, a country can abuybackbenefitstheborrowerdepends improvre its welfare (the sum of producer on how much buying back debt reduces surplus and government revenues) when 855. Sovereign Debt: A Primer what is available for repayment later. itfacesa downward-slopingdemandcurve Eaton also concludes that if there are for the commodity. The ideais thought to Joathan Eaton eficiency losses assodated with debt (a be particularly relevant to producers with (Febnuary 1992) "debt overhang'), debt forgiveness can large world market shares for primary benefitboth .adebtornationanditscredi- commoditiesforwhich the price-elasticity Aswveyofanalysesoffarrod-Domarand tors Contrary to claims in the literature, ofdemand is low. An export tax is consid- tua-gap models of debt and growth; opti- this outcome does not require that a re- ered necessary because the scattered mizing models of borrowng; solveuncy. duction in the face value of debt raise its f1rmers' expected marginal revenue is debt, and endrgenous growth; soveign market value (a 'debt Laffer curve"), and higher than the marginal revenue of the risk; incentives to repay; the role of sanc- the debtor benefits even though the buy- country as a whole. tions nd repziation in dealng with reml- back raises the market pice of the debt Policy Research Working Paper SerIes 27 The efficiency argument for buybacks is improve efficiency and reduce poverly. ciency and pmfitabiity, it i difficult to inconsistent with the case for lengthening Other policy-based factors that can af- assess industfy prjbrmaea the debt's matrity. fect women's participation in the work This paper-a product oftheDebt and force include the availability of family TheU.S.lifeinsuranceindustrycomprises International Finance Division, Interna- planning services and child- carefcilitie& more than 1,200 activecompanies with an tional Economics Department - is part Women's participation in the labor force impressive record of innovation. Annual of a larger effort in the department to can also be affected by improving family premiums for life insurance and annuity understand the relationship of external law and tax regulations that create hard- products amount to about 5 percent of borrowingto economic development. Cop- ships for women, especiaslyin the Carib- GNP and total assets to 26 percent of iesofthe paperareavailable freefrom the bean, whereinternal and overseas migra- GNP. World Bank, 1818 HStreetNW, Washing- tion are common (women as urban domes- ife insurance companies are major ton, DC 20433. Please contact Rose Vo, tic servants and men as industial work- participantsinUS.capitalmarkets.They 'room S8-042, extension 33722(83 pages). ers abroad), where visiting partnerships investina lltypesofbonds, mortageloans are common, and where women are often and mortgage-backed securities, and cor- thrown into a vicious cycle of poverty and porate equities. Theyhold aboutone-third 856. Latin American Women's an inability to work. of all corporate bonds and about 15 per- Eamings anid Participation Psacharopoulos and Tzannatos found cent of mortgage-backed secrities. Con- In the Labor Force that the same marnal investment (one servafive policies and regulations keep additional yearofedalion) yieldshigher their holdings in corporate equities down George Psachazvpoulas and Zafiris Tzanatos returns for women than for men; and that to only 3 percent of all corporate equities (Fcbniary 1992) the most cost-effective approach is to - and to about 9 percent of their total emphasize increased pnmary education assets (compared with 38 percent for cor- Despite worsened economic condions for poorly educated women rather than porate bonds and 13 percent for gover- since the 1970s, wormen's participation in more public tertiary education for more ment bonds)- thelaborforce has ir reasedsignificantly advantaged women. Indescrbingthecbcaraceristicsofprod- sincethe 1950Os-possib(ybecausewomen In all of the countries studied, women ucts that Iffe insurance companies offer, haue benefited disproportionately from are rewarded less than men and gender Wright highlights how fiscal incentives expansionofthlepublicsector. Soundpub- differencesinhuman capital endowments promote long-term financial savings. He tc policy on education, faimay planng, accoimtfor an average of about a third of notes that although federal tax laws are childoare, and tans - as wel as publc the observed difference in earnings - complex, their guiding principle is to fa- efforts to increase women's job opportuni- primafacie evidenceof dscrimnation.On vor insurance protection and saving for ties - is nost liey to imprcue womenIs the other hand, women appear to be re retirement, while discouraging the abuse (and hence children's) welfare, warded more proportionate to their hu- of tax privileges for short-term invest- m.an capital endowments than men are ment. Using historical census data and the lat- This maybe because theybenefit dispro- Insurance regulation is fragmented estihouseholdsurveysrePsachrapoulosand portionately from expansion of the public among state authaoities, but coordinated Tzannatos investigate changes in female sector. throughtheNationalAssociatioofhsur- employmentinLatinAmerica,thefiactors This paper - a product of the Human ance Cmisones (NAIC). New York that determine womenfs participation in Resources Divisicn, Latin America Tech- state rules are ifluential because compa- the labor force, and the reasons forthe gap nical Department - is a summary of a nies based elsewhere that want to operate between men's and women's earnings, larger LAC study funded largely by the in New York must comply with New York Psacharopoulos and Tzannatos find, to Narwegian Trust ncLd. Copies of the pa- rules. their surprise, that despite worsened per are available free from the World Regulation emphasizes prudence and economic conditions since the 1970s, Bank, 1818 HStreetNW, Washington, DC solvency- There are nominimumrequire- women's participation in the labor force 20433 PleasecontactLilsanaLongo,room mentsforinvestingingovernmentbonds has increased significantly since the S13-055, extension 37786 (38 pages). or"bigh-priorityfsectors, buttigintmaxi- 1950s. One explanation may be that mum limits are often imposed on differ- women - especially educated urban entassets, esedllyholdngsofcorpate women, mostofwhom probablycomefrom 857. The Lfe insurance Industry equities, and on agent' commissions. In themiddleandupperclasses-benefited In the United States: An Analysis recent years, regulations have empha- disproportionately from expansion of the of Economic and Regulatory sized the 'rudent mar? rule and have public sector. The factors that have most - Issues relied on solvency monitoring - includ- affected women's decisions to join the ing the use of valuation reserves for in- workforcehavebeen(aftercontrollingfor Kenneth L Wright vestment assets - to ensure insurance age) education and family conditions -(February 1992) companies' safety. (whetherthe womanismarried, isahead Wright undescores the lak ofsatisfic- of household, or has children). Creating In the complex, highly developed Us tife torymeasuresofefficiencyandprofitabil- opportunities for women's education and insumneceindusty, reguation emphasizes ity, which is explained by the long-term employment when sueh factors are absent prudenceandaoe5and doesnotinhibit nature of the contracts, differencesin the because of market failures (of which dis- competition and innovation. But because use of mortalityytables anddiscountrates, crimination may be only one cause) will there are no satisfaotyr measures of effi- and differences in the valuation of assets 28 Policy Reserch Woating Paper Series and the treatment of unrealized capital Thestructureofacountry'sfinancial 859. Macroeconomic Management gains. This hampers an objective assess- system depends greatly on the organiza- and the Black Market for Foreign ment of the industnys perfornance and tion of the countxy's pension system. Exchange In Sudan raises problems for insurance taxation. * Contractual savings do not increase Wright also reviews some public policy the rate of saving but shift the composi- Ibrahim A. Elbadawi issues that affect life insurance compa- tion of total savings toward long-term fi- (Febnmary 1992) nies, including nontaxation of the compa- nancial assets. ides' investment inconme, life insurer sol- - TheTole ofcontractual savings insti- High exchange rate premiums make con- vency, state versus federal regulation, tutionsin securities markets reflects his- trolling inflation more dwicult and hurt guarantee funds and moral hazard issues, torical traditions and differences in regu- both official exports and tax revenuefi om investment regulation and safety, ac- laton. Despite theirgreatpotential, they fjreign tra A high premium alo acel- counting standards for asset valuation, are important players in the equity mar- erates capital fight and links between banks and insurance ketsofonlyafew-imostlyAnglo-Ameri- companies. can - countries. And they have played Elbadawi uses a simple general equilib- Thispaper-aproductoftheFinanciaI only a limited part in stimulating the rium model to derive a forward-looldng Sector Development Department - is growth of emerging securities markets, linear solution for the premium on the part of a larger effart in the department even in countries such as Chule, Korea, black malrket for foreign exchange in Su- to study policies that promote financial Malaysia, and Singapore, where conktac- dan. sector development Copies of the paper tual savings institutions have accumu- His solution accounts for the long-run are available free from the World Bank, lated substantial long-term financial re- findamentals of the premium that oper- 1818 H Street NW, Wasibington, DC sources. ate through the cuent account balance 20433. Please contact Wilai * Investment regulations must aim at Italso accounts for the short-run determi- Pitayatonakarn, room N9-003, extension ensuring the safety and profitabiity of nants of the asset market. Estimates 37666 (47 pages). contractual savings. Encouraginginvest- based an Sudanese data broadly corrobo- ment prudence and developing effective rate the moders predictions. supervision should be basic objectives of Elbadawi's tfhesis is that successful ex- 858. Contractual Savings public policy, cbange rate unification and subsequent and Emerging Securitles Markets - Contractualsavingsinstitutionscan integraion of the paralel markiet into haveagreatimpactonsecuntiesmnakets. Sudaseregulareconomy w require deep Diaiitri Vittas They can completely transform the fune- fiscal reform and liberalization of kade (February 1992) tioningofsecuritiesmarkets, facltatethe and exchange rate policies tailored to the pivatization process, promote the disr- pace of nomic reform. Contractual savuings institutions - pen- sionofcorporate ownership, andimprove His results show that controllinginfla- sion finds and life insurance companie corporte efficiency. tion becomes more difficult under high- -aregrowing in seueral devdopng coun- Pension funds and life insuranoe comn- premiumnregimesand thathigherpremi- tries. Thei- contribution in the 1980s to the panies are growing in several developing ums hurtofficial exports and taxrevenue impressiueperformnueofemerginstock countries. Their contribution to the per- from foreign trade- Ahigh premium also markets has been limited But the increas- formance of emerging stock markets has tends to accelerate capital flght. ing emphasis on fiancial liberalation been limited because investment regula- This paper - a product of the Transi- anddevelopmentoafthepriuatesectorsug- tions have favored government bonds- tion and Macro-Adjustment Division, gests that their roe and impact will in- Their potential impacton equitymarkets Policy Research Department -is part of crease substantially. has remained largely unrealized, but the alargerdepartmental researchpiojecton growing emphasis onfinancialhlberaliza- the nacroeconomic implications of mil- Contractual savings institutions - pen- tion and development ofthe private sec- tiple exchange markets in developing0 sion funds and life insurance companies torsuggestthattheirroleandimpactwil countries. Copies of the paper are avail- - have long been important institutions increase substatially. able free fom the World Bank, 1818 H in severa] developingcountries.But, with This paper-aproductoftheFinancidl Steet NW, Washington, DC 20433. (88 notable exceptions, they have been weak Sector Development Department - was pages). Please contact Anna Maranon, and underdeveloped. Some of this is at- prepared for indlusion in a book on the room Nll-042, extension 39074. tributabletolowlevelsofincomein devel- world's emergingstockmarkets, editedby opingcountriesandsomeofitto thenega- Antoine Van Agtmael. Copies of the pa- tive impact ofrepressive regulations and per are available free from the World 80. The Restrictiveness the existence ofpay-as-you-go modal secu- Banlk, 1818 HStreetNW ,WasingtonDC Of the MultiFibre Arrangement rity systems. 20433. Please contact Wi on Eastem European Trade Vittas briefly reviews the size of con- Pitayatonakarn, room N9-003, extension tractual savings institutions in selected 37666 (20 pages). Refik Ezan and ChristopherHolm developed and developing countries and (Febhumy 1992) assesses theirrole in the development of the financial sector - especially in the Easte Europen textle and clothing development of secrities markets. He exportshavefaedresrictiueMPAquotas stresses five points: in theEurp an Cemmunityand exessie Policy Research Working Paper Series 29 tariffu in the United States. Eastern Eu- 861. Private Saving in Mexico, cliueinpnvgateavingappearslmimpor- ropeanexports in this sectorseemto betoo 1980-90 tant t1han it did before. diversified and capital-intensive. This * Most vanations in private saving situation should improu withpreferential Patricio Arma and Daniel Oks between 1980 and 1990 are ascribable to treatment in OECD markets or the relax- (Febrary 1992) fluctuations in disposable income.Dispos- ation of MFA quotas. able income fluctuated considerablymore By conuentional measures, private saving than did private consumption. Erzan and Holmes found that the Multi- declinedsharplyinMeiwin 1987-90. The * The sharp drop in private saving in F'ibre Arrangement (MFA) restrained the picture changes when data are corrected. 1990 was prompted primarilybyadecline trade of Eastern European countries as Thesmallerdeclineinprivatesaidngthat in disposableincome and, less o,by fast- much as it restrained the trade of other results is due mostly to a reduction inpri- growing consumption. suppliers, such as the East Asians. In the vate interest income fiom domestic and * Onlyaquarteroftheincreaseincon- 'United States, the MF'A quotas were foreign assets. sumption in 1988-90 was attnibutable to rarely an effective restraint; there, the increased consumption of dumbles - high non-MFN (most-favored nation) tar- Between 1987 and 1990, Mexico's current whichgrew almosttbreetimesfasterthan tiffs were considerably more important accountandtradebalancedeterioratedby consumptionofotheritemsbutreeents barriers than the MFA quotas. more than US$10 billion. Higher invest- only a smal share (about 11 percent) of Historically, Eastern Europe has not ment accounts orfly partly for this deterio- total consumption. been favorably treated in terms ofquota ration;norcanitbeattributedtothepub- * Fluctuations in the real exchange growth in the EC and U.S. markets - lic sector. By conventional (unadjusted) rate played an important role in the evo- oftenquitethecontray.ButECandUS. measures of private saving - the total lution of public saving because that ex- treatment oftthese countries has already investment not financed by public or for- change rate ifluences the real interast changed since their reform and can be eign savings-private saving did decline service on foreign debt. Real peso devalu- expected to become even more favorable. sharply between 1987 and 1990. ations in 1982 and 1985-86 hurt public Eastern Europe's exports oftextiles and But that diagnosis does not hold true finances and real peso appreciationlater clothing have tended to be more capital- when private, public, and foeign savinp g helped them. Strong real peso apprecia- intensive and less specialized than those are corrected (as they are here) to account tioninl988and,toalesserextent,in 1990 of other major suppliers, including Asia's for shiftsinportfolio compositionfromfor- reduced real income from priLvate foreign newly industrialized economies. Erzan eign to domestic assets, for the effects of assets, reducig private saving in those andHolmesarguethatEasternEurope's inflation on foreign and domesticinterest years. expansion of relatively labor-intensive income (the inlation tax), for fluctuations Thispaper-ajointproluctftheDebt products has probably been inhibited by in the real exchange rate, and for other andIntemational Finance Diision, liter- quotas and by the weak adjustment factos national Economics Department, and mechanisms irherent in a centrally Arau and Oks providemoreinformaion Country Operation Division, Country planned economic system. about the components of private saving Depxtmentl,LatinAmericaandtheCar- If so, given market reforms in Eastern than most studies do, addressing such ibbean - is part of a larger effort in the Europe, exports of labor-intensive textiles questionsas thefollowing-Isconsumption Banktoidentifyeterna andintern fc- and clothing should expand more than mareimpartanttban disposableincomein tors bat affectsavings andinvestmentin proportionately and the degree ofspecial- explaining changes in private saving? developing countries. Copies of the pper ization should increase ifthe MPAis abol- What components ofconsumption and dis- are available free from the Wold Bank, ished or its grip on Eastern Europes ex- posable income matter the most? If for 1818HStreetNW,WashingtonDC20438 ports is relaxed in the EC. example, the bulk of consumption growth Please contact Rose V% room SB-042, ex- Putting aside questions ofthe composi- is accountedforby durable consumption in tension 33722 (47 pages). tion of exports, Erzan and Holmes expect the wake of trade liberalization, the mea- considerable expansion of textile and sureddeclineinpnvatesavingneednotbe clothing exports because they make up a cause for cncern as it would be fora once- 862. Higher Education In Egpt large part of labor-intensive manuthe- and-for-all stock adjustment in durable tures, where Eastern Europe's compare- goods. On the other hand, if the main fac- Alan R Bicads tive advantage lies in the near future. tDr behind the recent decline in private (Febxeiray 1992) This paper - a product of the Interna- saving is disposable income (rather than tional Trade Division, International Eco- consumption), itis useful toiden1itr which Educztio n inEgypt must incr eas people's nomics Department - is part of a larger component of disposale income acunts ability to respond quiky and efiutvdy effort in the department to assess the im- for the dedine. If, for example, the decline to changing technoogical and market op- pact of the Multi-Fibre Arrangement on in disposable income stems from a reduc- portuniies Egypt is thereflre stbilzing developing countries and to evaluate the tion in the domestic public debt service, university eurmlntet, boosting non-uni- effects of changesinEastern Europe. Cop- there maybe less cause for concern than if uersity technical institutes, andpromoting ies ofthe paper are available free from the it stems from non-interest income. interdisciplinary programs that stress WorldBank, 1818 H StreetNW,Washing- The following are among the conclu- problem-aolig and apptid workL ton,DC20433.PleasecontactGracellogon, sions of Arrau and Oks: room S7-033, extension 33732(33 pages). - When conventional measures ofpri- Egypts policy on higher educaion, vate saving are corrected, the recent de- Rich sargues,musttakeaccountofthe 30 Policy Research Working Paper Serles realities of declining goverunent budgets 863. Intergovernmental FIscal best meets this latter objective. A re- and employment and increasing reliance Relations In China formed system must also underpin price on the private sector, which must become and enterprise reform - and should be more competitive internationally. Educa- Roy Bahl and Christine Wnllich designed so as not to require major tion in Egypt must increase Egyptians' (February 1992) recalibration or adjustments while such ability to cope with economic disequilibria: reforms are taking place. torespondquicklyandceffectively to chang- Is therea%est'waytodividefiscal respon- Bahl and Wallich also conclude that ing technological and market opportuni- sibilities between China's central and lo- reform of the relationship of central and ties. cal gouernments in China's three-tiered local governments should be supple- The Government ofEgyptes strategy for fiscal system? mented by an improved system of financ- achievingthisgoal is to stabilize the num- ing local capital expenditures through ber of university students and raise the The choice of the "rightfiscal relationship borrowing, a system of benefit charges, qualityof instruction. This fundamentally between central, provincial, and local gov- and improved financial planning and tat sound strategy, pursued since the mid- ernments depends on how a government administration. 1980s, has required considerable courage weighs the benefits of decentralized eno- This paper - a product of the Public of policyrakers. nomic development policies against the Economics Division, Policy Research De; Policymakers are struggling to correct costs afhavingless effective central fiscal partnent-is part of a larger effort in the a longtime, inequitable misallocation of management. department to explore intergovernmental educational resources - including an Three strong forces justify more fiscal fiscal relations in developingand formerly overenrolled university system combined centralization in China'shighly decentral- socilist economies. Copies are available with a persistently high rate of illiteracy. ized fiscal system at the present time: free from the World Bank, 1818 H Street The Nasser regime greatly expanded * Bouts of inflation and recurrent fis- NW, Washington, DC 20433. Please con- higher education and guaranteed jobs to cal deficits canbe seen as callingformore tactCarlinaJones,room NI0-063,exten- universitygraduates. As aresultofrapidly central control over the budget. sion 37699 (February 1992, 58 pages). growingemrollmentin the l970sand.980s, * Reform of an economic system relies the quality of education deteriorated sen- heavily on the use of tax policy as an al- ously Classesaretoobigandresourcesare locativeinstrumenttoinfluence economic 864. Pr1vatzatlon of Natural scarce for anything but professonal sala- decisions. Local control of the implemen- Monopoly Public Enterprlses: res (which remain low), so learrnng tation ofthe tax system can and probably The Regulation Issue amounts to little more than memorization has compromised some objectives of the and repetition. The system does not foster central governments tax policy. Gaining Ralph Bradburd the developmentofsynthesizing, problem- tighter control over the Tevenue system (April 199M2) solving, or creative thinlingabilities.And wil probalyrequirereducingif notelimi- with tertiary institutions overenrolled, natinglocal government discretion in pro- On balace, it is not obuious that develop- acadenicsuccessrequirestheuseoftutors, viding special tax concessions. ing counties wil obtain any significant whosefees arebeyondthereachofstudents - If the center wants to move ahead inprovements inallocative efJCiWZyfrJ5m of modest means, with price reform and to encourage enter- regulating natural monopolies after pri- The Government is trying to improve prise reform, it needs a more centrally uadtiotin. Thissuggests thatgreateron- conditionsbystabilizinguniversiLy enroU- controlledrevenue sharingorassignment siderationmust begiventootherobjeciues ments,expandingtherole oftwo- andfour- system thatreduces the dislocatingeffects ofregulation including dstributional cort- year technical institutes, increasing the of such reforms. cews and the creation ofoonfidence in the use ofpedagogical materials in university Centralizing the fiscal system neverthe- stabiity of the environment far business. instruction, and promoting several inno- less reduces the potential forvestingmore vative interdisciplinary programs that budgetarydecisionmaaingpowersinlocaIl Many developing countriesare consider' stress problem-solving and applied work. governments and can erode local and pro- ing the privatization of public enterprise The job guaranteehas effectively been vincial governments'incentives for rais- natural monopolies - monopolies in suspended since the early 1980s, but stu- ing revenues, another goal of system re- charge of electricity, natural gas, water dents have responded slowly to changing form. Moreover, there are major problems and sewer, and telephone services. signals from the labor market because withintroducingfiscalcentralizationina If there is not already an apparatus for being a university graduate is socially country with a heterogeneous population regulating private monopolies, these prestigious and presumed to increase of 1 billion and relatively little tradition countries fahe a difficult choice: whether one's chances of marrying well. of central government fiscal administra- to continu lettinginefficient public enter- This paper - a product of the Educa- tion. prises operate, to create a regulatory ap- tion and Social Policy Department - is Bahl and Wallich conclude that a re- paratus, or to replace public monopolies part of a larger effort in the department formed system of intergovernmental fi- with unregulated private monopolies. to build a knowledge base on higher edu- nance must meet the center's needs for Improving allocative efficiency, though cation issues and reforms. Copies of the stabilization and the provinces! needs for notthe only objective ofregulation, is car- paper are available free from the World revenue and equalized spending capacity. tainly animportant one, and one that has Bk, 1818 HStreetNWWashington, DC They argue that such equalization should received a great deal of attention fiom 20433. Please contact Cynthia Cristobal, be based on objective indicators of need econoxmsts- In theory, regulEting private room S6-035, extension 33640 (40 pages). and that a formula-based grant system naturalmonopoliescanimprovesalocative PoIIcy Research Working Paper Series 31 efficiency. In practice, sometimes it does, 865. Food Security and Health 866. Regulatory and Institutional and sometimes it does not. So Bradburd Security: Explaining the Levels Impacts of Securities Market tried . answer two questions: of Nutrilon In Pakistan Computerization o Howgreat would theefficiencylosses be, if any, if a public natural monopoly Hrarld Alderman and Marito Garcia Robert Pardy were privatizedand allowed tofunction as (February 1992) (Febnrary 1992) an unregulated entity? - How much could performance be ex- Nutrition depends ongondhealth, includ- A guide to reguatory best practice in the pected to improve if the privatized natu- ing reduced infection, as wll as on ad- computerization of securities markets. ral monopoly operated as a regulated equate food supplies. Giuing mothers a firm? primary education may be a more impar- Advances in infornation technology have . Bradburd argues that the deadweight tantfactorin nutriton than raising house- brought new ways of structuring, operat- losses from monopoly pricing by unregu- hold food intake. ing, and supervising securities markets. lated privatized natural monopolies are The Bank's policy advice in institutional likely to be modest and may well be out- Most influential studies of malnutrition reform ofsecurities markets shouldreflect weighed by improvements in technical and public policy have focused on energy awareness ofthe opportunities and prob- efficiency. He also argues that regulation availability and consumption, tending to lems this presents. is not costless and may well foster static equate hunger with malnutrition. But As a guide to best practice, Pardy pro- and dynamic efficiencylossesgreaterthan recent studies have explored how other vides basic operational and policy tools the deadweight monopoly losses it is in- factors - notably infection and levels of that take account of the importance of tended to prevent. matemal education - affect nutrition, information technology in two securities ButBradburdalso notesthatreduction Alderman and Garcia's study of nutri- marketfunctions-tradingandclearance ofallocativeinefficiencyis only one ofsev- tion levelsin Pakistan showsthatraising and settlement. eral objectivesofregulation. Irthecase for householdfoodconsumption,forexample, Pardy suggests that information tech- regulation on efficiency grounds is weak, has less impact on nutritional levels than nology systems - even though they may then much greater attention mustbe paid raising a mother's education does. They notdiffergreatlyfrom manual systemsin to how these other objectives can best be found that educating mothers to at least their performance of securities market achieved. the primarylevel tends to reduce the level functions -pose new techniedl problems Historically, achieving distnrbutional ofebild stunting (along-term indicator of for market supervisors and can affect the equity has been an important objective of cild nutrition) 16.5 percent, or roughly rights and abligation of market partici- regulation. We have verylittle systematic 10 times the impact achieved by increas- pants. knowledge about the actual distributional ing per capita income 10 percent. (The He provides policy principles that take consequencesofprivatizationandderegu- impact of education is not immediately these factors into aount, to guide the lation, so more research is needed realized; the diffusion ofknowledge about planning, evaluation, and supervision of Another objective of regulation can be good hygiene and child care associated tmadingandclearanceandsettlementsys- to help create confidence in the stability with learning has a cumulative effect.) tems that include aninformationtechnol- of the environment in which business ac- Alderman and Garcia found that in og component. tivities take place. If enterprises are pri- Pakistsn,foodsecuityaloneisnotenough Pardy explains how the processes and vatized and unregulated in an environ- to improve children's nutritional status. functions of a securities market can be ment in which property rights are not There may be welfare justifications for performed in avaiiety of ways, induding secure, management is likely to take an various food policies, but in rmal Paki- hybrid and tandem systems, using both extremely short-run view of profit maxi- stan, especially, itis equally important to manual and information technology ap- aization. The implicit 'take the money improve health and reduce infection. proaches. Information technology, espe- and run policies will yield all the unde- This paper - a product of the Agricul- cially in hybrid and tandem systems, has sirable deadweightlossesofmonopolyand tral Policies Division, Agriculture and already spread far in emerging markets none of the benefit of efficiency and im- RuralDevelopmentDepartment-is part andits spreadislikelyto accelerateinthe proved service. of a larger effort in the department to 1990s. This paper -a product of the Fnnce study the impacts offoodsecurity policies. He gives examples from emergingmar- andPrivateSectorDevelopmentDivision, Copies ofthe paper are available free from kets (some of which have wold-class sys- Policy Research Departnent-is part of the World Bank, 1818 H Street NW, tems) and from developed markets (in a larger effort in the department to ana- Washington, DC 20433. Please contact some of which the systems are not as ad- lyze the relations between privatization Cicely Spooner, room N8-039, extension vanced). and regulation. Copies of the paper are 30464 (48 pages). Highly sophisticated information tech- available free fiom the World Bank, 1818 nology systems are not always necessary H Street NW, Washington, DC 20433. or desirable, but the well-planned use of Please contact Daniele Evans, room N9- information technology can improve a 057, extension 37496 ( 44 pages). security markee?sefficiency,fairness, and stability. Clarity of objectives, good plan- ning, and a clear grasp of operational implications are important in effectively evaluatingproposalsfor developingsocu- 32 PolIcy Research Working Paper Serles rities markets with an information tech- Theyalsoprovideadetailedassessment 8M8. MortaIlty Reductions nology component. of the structure and performance of the from Measles and Tetanus This paper-aproductoftheFEinancial system, its impact on financial sector de- Immunizatlon: A Review Sector Development Department - is velopment, and the role of regulation and of the Evidence part of a larger effort in the departnent supervision. to explore ways to promote the develop- Vittas and Iglesias emphasize the Michael Koenig ment of sound securities markets. Copies draconian rules that have been imposed (March 1991) are available free from the World Bank, to protect the interests of pension fund 1818 H Street NW, Washington, DC members.Theseincludesuchrulesassone Tetanus and measles account for more 20433. PleasecontactFSD,room N6-037, account per worker" and 'one pension than 2$ milion diildhood deaths annu- extension 37664(69 pages.) fund per APP,' as well as tight limits on ally-andimmunizationpgrgmnmscould investment assets. The main objective of significantly reduce those nunber With - investment rules has been to ensure that tetanus vaccinations, two doses may be 867. The Rationale pension funds Ere invested safely and necessary. and Performance of Personal profitably. As the system has matured, Pension Plans in Chile some rules have been relaxed. The rules In recent years, tetanus and measles are have also provided for effective supervi- estimated to account for more than 2.5 Dimitni Vittas and Augusto Iglesias son and for information disclosure both million childhood deaths annually; (Februay 1992) to the authorities and to members. measles alone may accountformore than Pension funds have proved major 2 million such deaths. Koenig reviews The Chileanpersonalpensionplas intro- sources of long-tern finance and have empirical evidence on the most efifcive duced in 1981 represent a sucessful re- made a significant contribution to the and feasible strategies for measles and formofaftnancialUy insoluentpublicpen- privatization of public utilities. But their tetanus vaccination programs. sion systenm They show that radical pen- role in encouraging a dispersion of corpo- Koenigfoundthattetanusandmeasles sion reform is feasible and can ouercome rate ownership has been more limited immunization programs could signifi- adverse initial conditions suchas high fis- because of the reluctance of corporations cantly reduce deaths among children up cal costs of transition, the absence ofuweU- to abidebythestrictgovemanceralesthat totheageof4inmanydevelopingsettings. developed financial markets, and weak aim to protect the interests of pension Vaccinations had a pronounced effect in regulation and supervisionm funds as minority shareholders. reducing childhood deaths from measles The Chilean experience shows that -with benefits sustainedovertime, and Many developing countries, especialy in there is a positive dynamic interaction with the greatestbenefits accruing to the Iatin Ameiica and Eastern Europe have between pension fincds and securities most disadvantaged children. He found unfunded pay-as-you-go public pension marketssolongasastrongregulatoryand litle supportfor the existence ofareplace- systems that face growing financial pres- supervisory mechanism is in place. It has ment mortality effect sures. These emanate from a weak link also shown that itis feasible to finance the Studies on maternal immunization between contributions and benefits, from costs of transition from an unfinded to a against tetanus showedagreatreduction widespread evasion, and from an aging funded system. in the number of neonatal deaths, but population. But the prospects of personal pension considerable uncertainty about the num- Proposalsfor radical pensionreformrre plans in different countries must be as- ber of doses needed and how long the im- oflen inhibited by concerns about the fis- sessed case-by-case to ensure that their munity lasted. Recent evidence suggests cal cost of transition from an unfunded to introduction does not undermine pro- that giving the mother two doses of teta- a funded system, the absence of well-de- gramsofmarroeonecstabilizationand nustoxoidmayconfersignificantlevelsof velopedfinancial systems, andwealcregu- isaccompaniedbyextensiveregulatoryre- protection against neonatal death from lation and supervision. form. tetanus for 15 years or more. Evidence on Chile successfully reformed its public This paper-aproduct ofthe Finaneial the impact of a single dose is less conclu- pension system in 1981 whenitintroduced Sector Development Department - is sive. agovrnnmentmandatedandregulated,but part of a larger effort in the department This paper - a product of the Popula- privately managed system. Based on indi- to study contractual savings institutions. tion, Health, and Nutrition Department vidual capitalization accounts operatedby Copies are available free from the World -is part of a larger effort m the depart- specalizedfinancial institutions-known Bank, 1818H Street NWWashington, DC ment to assess disease control priorities as Administradoras de Fondos de 20433 Please contact Wilai in developing countries. Copies of the pa- Pensiones or AFPs - the system has pro- Pitayatonakarn, room N9-003, extension per are available free from the World vided considerable scope for competition 37666(38 pages). Bank, 1818HStreetNW,Washington, DC and efficiency within a well-regulated en- 20433.PleasecontactOtaliaNadora,room vimonment S11-219, extension 31091(35 pages). Vittas and Iglesias analyze the rationale of the Chilean pension system and exam- me in detail the rules and provisions re- garding coverage, contribution rates, pen- sionbenefits, and investment regulations. Policy Research Worklng Paper Serfes 33 869. Financing Local Government if the grant is fixed to some national tax should be. It might also help explain why In Hungary source and distributed in accord with a growth rates differ among countriea known formula so they are not totally at Richard Bird and Christine Wallich the mercy ofa discretionary central policy. Policy formulation in most countries is (March 1992) They make a case for at least limited complicated by the role of the externSa conditionality -forrequiring that grant economic environment, especially during Further reform of Hungary's new system funds should be spent, for example, on a periods of great external shocks. for financing local government should special priority area such as education or McCarthyandDhareshwarexaminehow strengthen local own-source revenues and health, or by requiring that local govern- individual countries were affectedby, and should revise the normative grant, simpli- ments receiving such grants should pro- responded to, extemal shocks. They apply fying it and making allowances for lOCal vide basic services at a minimum level of an enhanced version of an earlier meth- governments'revenue-raising capacity. quality.Andtheyinsiston theimportance odology for estimating the effect of three of changing the formula for distribution kinds of shock: terms of trade, variations Hungary has undertaken bold, far-rang- of the normative grant - adding a third in global demand, and changes in the in- ingreform of its system offinancinglocal elementtothoseofpercapitaequalization terest rate. They discuss the magnitude government. This reform, in the context andneed that some explicit aBowance be of these shocks and country responses to of national fiscal reforn, implies signifi- made for the revenue-raising capacity of them in Brazil, breland, and Korea and cant shifts in the spendingresponsibilities local governments. present numerical results for some other and revenue authorities of local govern- The options theyTecommendhave three countries mentsas well asintheirpoliticalreIations important effects. First, to varying de- McCarthy and Dhareshwar find that with the central government. grees, grant funds will be shifted fiom the magnitude ofexternal shocks may be The new system of local governmenthas high-tax capacity to low-tax capacity re- greater than previously recognized. For both political and economic merit: it in- cipients. Second, all recipients, whatever large industrial OECD countries, such as volves Hungarians with their local govern- their tax capacity, will be stimulated to tax Germany, it is not unusual for external ments in a positive way and can make thatcapacityattheassumedratebecause shocks to equal 2 percent of GDP in any government more efficient by subjecting if they do not do so the grant they receive one year. And such shocks range as high it to the scrutiny of local officials and vot- will be reduced precisely by the amount as 10 percent ormore in some developing ers. But because the system is new, there they fall below the assumed rate. And fi- countries, particularly those that depend are still lessons to be learned and some nally, any recipient that levies higher heavilyonalargetradeshareinaommodi- serious decisions to be made. taxes than assumed by the tax capacity ties.Thesizeandcomponentsoftheshock The new system of local government elementgets tokeep all ihe extrarevenues depend on such factors as the country's financetries both tofieelocal authorities -thatis,isnot"taxed"byhavingitsgrant openness to trade, the composition of its from the heavy hand ofcentral control (by reduced. (Inotherwords,themarginaltax imports and exports, and its level of ex- ending central control overlocal spending, rate is zero.) ternal debt. whether from central or local revenues) This paper - a product of the Public The authors slso found that countries and to make them more responsible (by Economics Division, Policy Research De- differed greatly in their responses to ex- providingnewsourcesoflocallycontrolled partment-is part ofalargereffortinthe ternal shocks. Some rely on additional revenues). But new local taxes are so in- department to deepen analysis of local external financing, some place more em- adequate that this well-intentioned ecx- govenmment finance and phasis on export promotion, and others periment could end in disaster. Some re- intergovernmental relations. Copiesofthe favor import substitution. Among indus- gions may fail to provide adequate basic paper are available free from the World trial OECD countries, for example, Ger- services(especiallytothepoor).Somemay Bank, 1818 H Street NW, Washington, DC many addressed unfavorable external make increased demands on an already 20433. Please contact CarlinaJones, room shocks by combining a pro-export bias hard-pressed central government. And lo- N10-063, extension 37754 (87 pcges). with tightening of domestic demand, its caI governments mightfeel increased pres- balance of payments soon began to im- sure to exploit enterprise and housing prove. The United States, on the other ownership and to engage in unwise entre- 870. Economic Shocks hand, allowed its export share to deterio- preneudial activities to raise revenues. and the Global Environment rate and relied more on extemal financ- Bird and Wallich outline changes made ing- with unfavorable consequences for in the system oflocal finance, assess their F. Desmorid McCarthy its current account implications, and identify areas that need and Ashok Dhareshwar Among developing countries, easy ac- furtherreform.They describe theso-called (March 1992) cess to external financing often provided normative grant from the central to local an easy short-term option for governments, for example, as being Countiestendtoreactrasthoughfawrable policymakers - especially in countries largely discretionary, completely uncon- external shocks arepermanent and unfa- with a strong anti-export bias where po- J:tional, and calculated according to a vorable external shocks are temporary. litical expediency precluded any sigrifi- ąEstribution frcnula geared to both This tendency-together-with the magni- cant curtailment ofdomestic spending. A equalization' and 'need-' tude and diversity in effect of extenal policy of leaning on extenal financing Bird and Wallich argue that local gov- shocks-cmplicate adempts tgetprieS often created external balance problems -nments can budget with more certainty right and to determinie what right prices in the medium term. 34 Polky Research Worlkng Paper Series McCarthy and Dhareshwar conclude health spending. In the education sector, 872. Romanla's Evolving Legal that the magnitude and composition of subsidiestoprimaryandtoalesserextent Framework for Private Sector external shocks should be part of anv lower secondaiyeducationaremostlikely Development explanation of why growth rates differ toreachpoorerhouseholdsandraisetheir among countries. Some countries tend to living stanr"ards. Education is a poten- Cheryl W. Gray, Rebecca J. Hanson. view favorable shocks as permanent and tiallyimportantconduitforreachingrela- andPeter G. Ianachkov unfavorable shocks as temporary. This tively isolated rural households. (March 1992) asymmetry ofresponse, together with the In the late 1980s, enrollments remained magnitude of the shocks, complicates at- higher for urban than for rural areas, for Romania started almost from scratch in temptsto getthe pricesright-andceven male than for female children, andfor the 1990 to build a legal framewiork for a to determine what the right price is. Outer Islands than for Java. But rates of market economy and has made substan- In formulating economic policy, improvement in enrollments during the tict progress. To bring that fiamework to' McCarthy and Dhareshwar argue, last decade have been higher for rural, life, institutions must enforce the laws and policymakers must adequately consider female, and poorercluldren than fortheir be able to resolue any disputes that arise, external shocks, because of their major urban, male, andrichercounterparts.The the pubic must acept that the laws are impact on economies. They do not answer results indicate that rising living stan- binding, and the aws must be fiUed in the question:-Which policyinstramentsare dards played a part in raising enrollment with detailed regulations and infividual the correct response in which situations? (especially for boys and in higher educa- case practiee This takes time. But they do offer insights that may be of tion). B-t other factrs were substantially use to policymakers facing these issues. more important - notably public policy As the economies of Central and Eastern This paper - a product of the Interna- aimed at increasing the number of pri- Europe move fom central planning and tional Economic Analysis and Prospects mary schools and teachers and at lower- state ownership to market-driven devel- Division, International Economics De- ing the costs of having children attend opmentofprivate sector activity, they are partnent-ispartofalargereffortinthe elementary school. Education subsidies undertakingcomprehensive dhange in the departmenttoanalyze global linkages.An effectivelyreach the poorfortworeasons: "ruesofthe game'-thelegal framework earlierversionofthispaperwaspresented poor families have more children, and for economic activity. at the Global Economic Prospects Semi- richer fanilies self-select their cheidren At a minimum, markets require a sys- nar SeBes at the World Bank in Novem- into private schools. ten of property rights and rules for ex- ber 1991. Copiesofthepaperareavailable In the health sector, subsidies to basic changing those rights. In practice, prop- free from the World Bank, 1818 H Street pdmary health care provide the best av- erty rights in most countries are defined NW, Washington, DC 20433. Please con- enue for reacing the poor, but they are by the constitution and by-laws regulat- tact Mila Divino, room S8-037, extension far from ideal as an instnument for doing ing the ownership and use of real, per- 33739 (55 pages). so. Although primary health care centers sonal, and intangible property, as well as weremore widelyusedin rurl areas and shares in going concerns. Company, for- by poorer groups in 1987 than they were eign investment and bankruptcy laws, 871. The Distribution in 1978, rich and poor nowappear equally among others, govern entry into and ext of the Benefits from Social likely to seek treatment in these fachities. from productive activities. General rules Services In Indonesia, 1978-87 So,publicsubsidiestoprimawyhealthcare ofmarketexchangearelaidoutincontract centers are not as pro-poor as is generally and competition law, while more specific Dominique van de Wale believed, although they are more so in rules of market exchange in particular March 1992) urban than in rural areas. Making them sectors may be governedbymore detaled more pro-pca would require price dis- sector-specific laws and regulations. Changes in the pattes of use and in the crimination,anditisunclearhowfeasible Gray, Hanson, and Inaehkov analyze incidence of subsidies in the health and that is in rural areas, the evolving legal framework for private educationsectors since the lte 1970s have This paper - a product of the Public sector development in Romania. The Ro- been markedlypm-poor In the late 1980s, Economics Division, Policy Research De- manian government has worked inten- public spending in education was gener- partment-ispartofalargereffortin the sivelyin the last two years to create ale- ally well-targeted; health sector subsidies department to understand and improve gal framework for a market economy. were not the relationship between public expendi- Many gaps remain in current laws, and tures andpovertyalleviation. Itisa prod- problems still exist,but the efforthasbeen Indonesia has made great progress in the uct of research project MThe Analysis of impressive given the starting point. In past 15 years in giving the poor more ac- Public Expenditures Incidence: Under- some Central and Eastern European cess to privately provided goods such as standing and Characterizing Incidence at countries (including Hungary and Po- food, clothing, andhousing. Van de Walle One Point in Time and Over Time" (RPO land), privte property and private mar- analyzes how much progress has been 676-42) funded by the Barns Research kets were suppressed but not extin- made in improving their aess to two Support Budget Copies of the paper are guishedcduring40ye.rsofsocialism.But publicly provided social services, educa- available free hfam the World Bank, 1818 Roimaniastartedvirtualyfiomscratchin tion End health care. H Street NW, Washington, DC 20433. 1990 to build a market economy and the She finds that given existing patterns Please contactCarlinaJones, roomNiG- legal framework required for it. It has of use, education spending is more effi- 063, extension 37754 (67 pages). adopted not only a new constitution but cient at directlyreaching the poor than is also extensive new legislation covering -3i.cy Research Working Paper SerIes 35 .! andintellectual property, companies, structure when the domesticprice ofcapi- even damaging - if India does not first - Jfnreigninvestment.Ithasrevivedthe tal goods differs substantialy from the reduce protection oncapitalgoods. When C-War civil code as a basis for contract internationalprice lnparticular, reform- warranted,thenominalprotectionratefor - -, and is moving to modernize its bank- ing India's trade policies and reducing its capital goods should be slashedto the low- *-tcy code. The only area surveyed in protection rates would be meaningless - est possible level above the shadow pre- l little legal reform has occurred is even damagig - if India does not first mium for foreign exchange. - imonopoly law. reduce its highprotection ncapitalgoods. This paper-a product of the Industry Challengesremaininbothlawandprac- and Finance Operations Division, Coun- The broad principles of private own- A sriking feature of India's protective tryDepartmentIV(India),AsiaRegional Hi., free market exchange, and equal structure has been high tariffs and pro- Office-is derived from Policy Research -Atment of public and private finns are tectionon caiital goods, whichlimit indus- Working Paper 433 (August L990), which ..-.1 recognized and have been largely tialcompetitivenessandexport potential, was part ofalarger effort in the depart- '-eved, atleastonpaper.Butatendency and distort industrial incentives as indi- ment to undertake a comprehensive re- =.zd centralized, bureaucrtic control cated in 'effective protection rates' view of Indias trade regime and policies -.-xns -for example, in excessive Te- (EPUs). and to make recommendations for liber- _- ements for approval and uneconomic Thedisortionsintroducedbyhighcapi- alization ofits trade poicies. Copies ofthe 11i- s on certain activities. Moreover, tal and investment costs resulting from paper are availae free from the World ,lementation will clearly take a long high levels ofprotection were correctedin Baik, 1818H.StreetNW, Washington,DC a-probably considerably longrer than Indis!sanalysisby introducingthe notion 20433. Please contact Francois Ettori, -`ieotherreformingcountries -becw3se of 'correctedc effective protection rate? Toom H4-085, extension 32340 (24pages). -eislittleornoinstixtionalfiramework (CEPRs). In theory, EPRs computed on anforcement and dispute resolution. the basis of value added ne of deprecia- By themselves, laws are merely paper. tion could be made immune from capital 874. The Trade Restricteness --galfameworkcomestolifeonlywhen cost distortions, provided that depreda- Index: An Appilcaton to Mexican d and administrative institutions can tion allowances arecomputedon econami- Agriculture -rce the laws and readily resolve the cally meaningful grounds and that EPRs ' iutes theyinevitablyspur-andwhen based on net value added are available. James E_ Anderson and GeoffreyBannister public accepts that the laws are bind- Butin India asin many developing coun- (March 3l92) Moreover,thelawsarebyrnatureonly tries, available EPRs are based on gross neworks. Their content must be filled value added. The need to account for the App lyina new trade reJtrictiveew inde with detailed regulations and indi- substantial capital cost distortions led to to polcy reform in Mexican agricudture calcsepractice.Developingabodyof the use of a substitute tool, the CEPR. shows substantial trde lberalizaon slation and case practice takes time. The paper provides a brief refresher, between 1987 and 1989, atributadle rowing concepts from industrial mar- and geometrical interpretations, an the maily to changes in maize polic. economies-helpedby legal exchange definition ofEPR anditslimitedinterpre- grams and legal technical assistance tation as a measure of the scope for inef- To measure domestic distortions in agri- a abroad - could speed the process. ficiencyor extraprofitresultingfrom pro- culture, analysts have used producer and This paper-aproductoftheTransition tection. It introduces the notions and for- consumersubsidy equivaients CPSEs and 1 Macro-Adjustmnent Division, Policy mulaefortheCEPRandthe"neteffective CSEs), as well as the familiar trade- earchDejartment, andthe Europe and protection rateN(NEPR). The relevance of weighted averages of tariffs and tariff tral Asia Division, Legal Department these notions and their magnitude are equivalents of quotas. Al these indices Is part ofa larger effort in the Bank to testedonasampleof60 industrial projects lack a theoretical foundationL 'erstand the process of legal reform in in India. Anderson and Bannister apply a new - -asitional economies. Copies are avail- The paper confirms the finding in a concept, the trade restrictiveness index, fr ee from the World Bank, 1818 H previousBank reviewofIndia'sindustrial to an evaluation of Mexican agricultural -etNW, Washington, DC 20433. Please sectorthateffective protective rates aver- reform. They assess a significant reform .act Angelica Bretana, room N11-029, aged about 40 percent in the sector, with episode to demonstrate the feasbility of -nsion 37176 ( 27 pages). large variations between the industial the method and its advantages over stan- subsectors and within each subsector. dard techniques. Using NEPRs, the paper shows that on Anderson and Bannister set out the 1. Measure and Interpretation average the amount ofeffective protection theoretical structure ofindex numnbers for Effective Protectlon available from indas protective strucure distorted trading economies in earUer :he Presene of High Capital isjust enough to compensate for the high papers. They develop anindexnunberfor sts: Evidence from India cost ofinvestment that results from heavy tade disLtotions:theumform tariff, which protection of capital goods. Most projects is equivalent in trade restrictiveness to ucois K Ettori have, in effect, negative NEPRs, so they the actual differentiated structure oftar- rch 1992) areatadisadvantage comparedctoforeign ifs and quotas. To extend the index to competitors. domestic distortions, they draw on the traditional measure of effective pro- Finally, the paper argues that reform- well-known equivalence between a tariff -an based ongrcis valu added doa nt ing India's trade policies and reducingits and an equal level ofproducer subsidy aad y refiect the incentives ofthe protection protection rates would be meaningless - consumertax(whenimportedanddome.- 36 Policy Reseawch Working Paper Series tiCally produced goods are perfect mubsid- The implications ofthe consistentindex Instead, they have merely channeled gov- tutes). of the change in consumer policy are dia- ernment-supplied funds to rural barrow- The trade restrictiveness index for do- metrically opposed to the implications of ers. Making exteral funds continuously mestic distortions is defined as the uni- the CSE over the five-year period. Using available at below-market interest rates form tariffequivalent ofthe consumption the trade restrictiveness index thus hasnotobligedruralfinancialinsttutions and production diatortions. It is, in turn, makes a great practical and a theoretical to operate under constraints of financial a combisation of two subindices: the con- difference. viability. That - together with the lack sistent producer subsidy equivalent This paper - a product of the Interna- ofcmpetitionandlnimitedaccountability (CPSE) and the consistent consumer sub- tional Trade Division, International Eco- -has led to bad loans, inefficient opera- sidyequinvlent(CCSE).Theseare defined nomics Department - is part of a larger tions, patronage, and irregularities. as the uniform subsidy rates that am effort in the department to contribute to Arrangements suh as lending groups equivalent in trade restrictiveness to the the analysis of trade policies. It is funded and credit cooperatives could reduce botlh actual differentiated subsidy or tax struc- by the Bank's Research Support Budget, transaction costsandtherisksinvolvedin ture. They are counterparts to the PSE Phe Cost-of-Protection Index,RPO 676- lendingtosmaUfarmersiSuccessfugroup andCSE.The differencebetweenthecon- 49. Copies of the paper are available free lending programs have shown the impar- sistent and conventional subindices is in from the World Bank, 1818 H Street NW, tance of such factrs ashomogeneous ber- the method of aggregation. Consistent Washington, DC 20433. Please contact rowng groups that are jointly liable and aggregation is based on the use of 'mar- Grace eogon, room S7-033, extension themselvesassumesomeofthemanageriaI ginal welfare weightt as opposed to pro- 33732 (51 pages). and superisry responsibilities. Factors duction and consumption share weights. attributed to the sucss ofcreditcoopera- In Mexico, from 1985 to 1989, the tar- tivesindludebottom-upinstutional devel- getproducer and consmer price policies 875. Rural Finance In Developing opment, extensive trining at all levels, for major crops reveal many simultaneous Countries reliance on mobilized savings and equity increases and decreases in implicit subsi- contnrbutions raTer than external funds, dies or taxes. The trade restrictiveness JacobYaron pmadentexpansionofcooperativeactivities, indexprividesaconsistentaggregationof (March 1992) stict xnonitoiing and audting, and ad- these polieies. From 1985 to 1987, domes- equate incentives to staff and cientsL tic policy on the whole was equivalent to Tareged ditwithoutinstitn-build- For a rural financal institution to be- anincreaseintraderestrictivenes Inthe iwgnrurdtinancialiuions is almost comev e, state or donorsuppmotshould next two years, trade loosened always a recipeforprolonged dependence focusoninstitation-buildinganddevelop- The net effect of policies in tradabe on donr or state fmids and bailouts. mentTargetedreditwithoutinstitation- agricultural goods over the five-year pe- buildingis almost always a recip for pro- riod is a s5gnificant reduction in trade The establishment offormal agricultural longeddependenceon donororrsttefiunds restrictiveness. Restoring the trade re- credit systems in most developing coun- andbalouts.Atentiontoinsbtion-build- strictiveness to its 1985 level requires a triesinrecentcdecadeshasbeenmotivated ing often mikes the difference between a uniform 31-percenttradetaxsurcehpon by the beliefthatwidespread shotages of rural financial isttution that canbe self- 1989 prices. Moreover, therestrictiveness short- and long-term finance have ar- sustaining after a few years of support impliedbythel989leves,comparedwith rested agricultural growth and develop- duringitsstartupperiodlandone thatcon- free trade, was equivaIent to a 17 percent ment. Thelack ofaffordable formal credit tinues to depend on public support. advalarem trade ta Thus, the liberaliza- has been blamed for delaying, if not pre- This paper -a product of the Agricul- tion of the 1985-89 period caried Mexi- venting, the timely adoption of new pro- tural Policies Division, Agriculture and can agriulture more thanlhalfwaytofree duciontechnologyandintensivewnonlabor RuralDevelopmentDepartment-ispart trade. inputs. of a larger effort in the department to Onevirtueef theindexisthatthesources Commerciallendinginstitutionsgener- -define appropriate modes of Bank activi- of liberalzationcan be detailed. Uberaliza- ally focus on large-scale farmers and ig- ties in the area ofrural finance. Copies of tion is attributable mainly to changes in nore small-scale farmers because of the the paper are available free fiom the maize policy, despite substantial changes significant cost of processing and servic- World Bank, 1818 HStreetNW, Washing- in oterproducerandceonsumerpricepoli- ing unsecured smal loans and the preva- ton, DC 20433. Please contact Cicely cies.Reducigthesubsidyforfertilizeruse lent belief that small entrepreneurs rep- Spooner, room N8-039, extension 32116, was relatively uimportant resentagreaterrisk thanlarge ones.The or through electronic mmai (25 pages). ThestandardPSEandCSEindexmeth- shortage of strong formal credit markets ods are not directly comparable to the has caused informal creditinstitutions to traderestrictivenessiudex,astheydonot flourish in many developing countnes. 876- Old Debts and New aggregate consamerandproducerdistor- These informal institutions disburse Beginnings: A Policy Choice In tions.ThePSEandCSEindicesare,how- funds rapidly, and the transaction costs Transitional Socialist Economies ever, comparable to the consistent for borrowers are low. subindices CPSE and CCSE. The rates of Mny specialized agricultural credit ROS Levine and DaLvid Scot chne of these two types of indices are institutions have suffered from design March 1992) only weeldy positively assoiated, differ in deficiencies. Theyoften were not expected sign in aquarter ofthe cases, andin most to function as true financial intermediar- Should enSeprises that receiued bank cases differ widely in magnitude. ies that mobilize deposits to make loans - loa under socialism reain those liabi i- Policy Research War*Ing Paper Serles 37 ties when thegouenmentprivatizes them? This paper-aproduct of theFinancial enterprises to improve efficiency and that Or should the government take responsi- Secto Development Deprtment - is pemt the owners ofindividual factors to bility forthe debts offormerly state-owned part of a larger effort in the department seek the highest returns. enterprises? to study financial reform in transitional Using panel data for 226 industrial Gouernments should seriously consider socialist economies. Copies of the paper enterprises, Jefrerson andXu report evi- assuming theseenterprisedebtsbcauseof are avalable free from the World Bank, dence that returns on investments in la- thepotetialyreat gains inefficency that 1818 H Street NW, Wasbington, DC bor capital, and materials became more wil result and the relatiuely low fiscal 20433. Please contact Wilai equal between 1980 and 1989. Such a costs. Pitayatonakmrn, rom N9-003, extension pattern of convergence canbe the product 37666 (27 pages). of diTrenttctors, but the cnsistencyof Levine and Scott examine the decision the pattern -even among large and me- policymakers in transitional socialist dium-seentepisesattheheartof state economies must make: how to define the 877. Assessing Gains In Efficient planning - suggests that greater epo- asset and liaility structure of state- Production Among China's stre tomarkets and stronger profit-seek- owned enterprises and banks as they are Industrial Enterprlses ingbehavior are motivating gains in pro- privatized- ductive efficieny. They conclude that the many loans is- Guy H. Jefferson and Wenyi Xu This paper-aproductofthe Socialist sued by state-owned banks to state-owned March 1992) Economies Reform Unit, Policy Research enterprises under socialism are impeding Department-is an output of ajoint re- the transition to thiving market econo- Chias program of gradul and partial search project on TIndustrial Reform and mies. The heavy stock of debts is slowing reform has substantaly improued ew- Productivity in Chinese Enterprises theprizationofenterprisesandbaL%s, nomic pe4brmance Despite lingerng (RPO 675-38), undertaken by the World hindering the efficient operaton offirms market rigidiies, bargaining, patronage, Bank, Brandeis University, and the Uni- --d the financial sector, encouragng ad softbudgetcowtintas,ndtherphenom- versityofPittsburgh,in coaboration with :governmentintervention, andreduc- mna that sheld state-owned industrial the Institute of Ecnamics (CASS), the ggovernment credilblity. enterprises fiom externalpressure, inds- Economic Management Research Insti- In practice, governments often assume trI managers are econoaizig more on tute (System Reform Commission), the -:merpnse debts to banks on a case-by- labos; capitl, and materias. Rural Economic Research Center (Minis- : se basis so they can sell enterprises to try of Agriculture) and the Institute of privatesector.LevineandScottargue A central obective of economic reform is Quantitati-ve and Technical Economics :Ata more comprehensive, explicitappli- to reduce the productive inefficiency- (CASS). -ion ofsuchapolicywouldimprove effi- bothtechicalandalocative-thatarose The project-whichis part ofa larger -cy by depolitcizing and speeding up under regimes in which markets and investigation of the relationship between - pnvatization process, improving the material incentives played a Iimited role. industial reform and productivity in for- --lilityandprofitEbilityofnewlyprivat- Jefferson andc Xu formulate an approach merly socalistonomiesunderthedirec- : d enterprises, increase government for measuing gains in productive effi- tion of L J. Singh, principal economist in dibility, and improving the efficie-ncy ciency. the Trasition and Macro-Adjustment lhe financial sector. Applying that approach to Chinese in- Divison - is supported with funds pro- Transitional socialist economies have dustry, they evaluate the progress be- vided byt he WorldBank, theHermyLuce yet privatzed major banks. Levine tween 1980 and 1989 among Chinas lare Foundation, and the National Science --: Scott explain that privatizing banks andmedium-size state-ownedenterprises Foundation. Copies ofthe paper are avail- -l tend tomakefinancial intermediation in equalizing factor productivity across able free firm the World Bank, 1818 H re efficient and speed up the economic enterprises. In the early stages ofreform, Street NW, Washington, DC 20433. nsition. They contend that govern- returns on factor investments varied Please contact Angelica Bretana, room nts are unlikely to succeed in privatiz- greatly. Estimated to returns on invest- N11-029, extension 37176 (21 pages). ; major banks unless the government ments in equipment in 120 state-owned amnes responsibility for a significant steel enterprises varied from a low of 6 t of bank cdaims on enterprises. They percent in 1985 to a high of 162 percent, 878. Adjustment and Private ,ue that the operation and restrctur- for example. Total factor productivity in invesuneit In Kenya ,of state-owned banks will also be im- the most efficient mnill was 37 times wed if the government assumes enter- greater than in the least efficient mill. Kazi llL Matin and Bernard Wasaw se debts. The differences were partly the resut rch 1992) They find thatthe fiscal implications of of central planning-includingadminis- govemmentexpic3tlyasmicglenter- tered prices; restrictions on the flow of Kenya's failure to implment adjustmet se debtsto state-ownedbanksarelikely resources firom low-return to high-return policie afterthe cllapse ofte cDffee boom esmall Governmentsashouldseriously activities, and the lack of market disci- and the breakup of the EastAfrican com- sider assuming enterprise debts to pline, which protects the least efficient mon market reduccd private investmen ta-owned banks as they pnvatize en- enterprses from bankruptcy. One objec- sharply in the 1980s. E7 iciest fiscal ad- prises because ofthe potentially great tive of economic return is to create the Jujtment and morem bul imports wiu e nsin efficiency that will ensue andthe conditions - the profit-seeldng motive critica to increasing primat inestnent * atively low fiscal costs- andmarketmechanisins-thatmotivate 38 Policy Research Worklng Paper Series Matin and Wasow use an eclectic version This paper - a product of the Trade port, Water, and Urban Development ofthebasicacceleratormodeltoassessthe Policy Division, Policy Research Depart- Department, andtheAgricultural Policies determinants of pnvate investment and ment - is part of a research project Division, Agriculture and Rural Develop- to analyze how adjustment policies (or funded by the Banlks Research Support - ment Department - is part of a larger their absence) affect those determinants. Budget, SustainabilityofTrade Reforms effort to define a Bank water resources Their model emphasizes the effect of re- in Structural Adjustment Loans,' (RlO management policy. Copies of the paper source constraints on pnvate investment 675-32). Copies ofthe paper are avaie are avalable free from the World Bank, behavior,includingthatasingfromfor- free from the World Bank, 1818 H Street 1818 H Street NW, Wasbington, DC eign exchange rationing. NW, Washington, DC 20433. Please con- 20433. Please contact Mari Dholia, room Econometric estimation of the invest- tact Dawn Ballantyne, room NIO-023, S12-005, extension 33970 (18 pages). ment model with Kenyan data for 1968- extension 37947 (45 pages). 88 suggests thatKenyas failure toimple- ment adjustment policies after the col- 880. Exchange Rate Policy, the lapse of the coffee boom and the breakup 879. Comprehensive Water Real Exchange Rate, and Inflation: of the East African common market re- Resources Management: Lessons frwn Latin America duced private investment sharply in the A Concept Paper 1980s. Declining real credit to private M AguelA.igel sector, falling stocks of public infrastruc- Peter Rogers (April1992) tire capital, and lower availability of im- (march L992) ports were the mai causes of reduced Attemnpts to achieve read depreciation private investment. I'sues that shozdd be cowered intheformu- through continuus devaluation or by Matin and Wasow argue that inad- lotion of comprehensive water rmsources acceleratng the rate ofcmuwl-when not equate fiscal adjustment was a key fall- management policie supported by changes in other polcies ure of policy. With direct competition be- and in the underlying conditions - usu- tveen public and private sectors for lim- The worldis entering a period of intense ally end up increasing inflation, yet re- ited financial resources, fiscal deficits pre- competition for limited supplies of water main ineffctie in changing the rel ex- emptedfundsandrestictedprivateinves- for alternative uses -in agrictlture, in change rate. tartancesstothem.In addition, when cuts urban and industrial supplies, for recre- in govenmentspendingwereundertaken ationbywildlife,forhuinan consumption, Exchange rate policy is usually driven by to contain deficits,theyfell disproportion- and to maintain envirmental quality, twodifferent, aften conflicting, objectives: ately on capital expenditure, especially Mifestations ofthis competitian and to support a competitive real exdhange that on physical infrastructure. And lib- our current ability to deal with it can be rate and to serve as anoninal anchor for eralization offoreign exchange rationing, observed in many parts of the world. A low inflation. impeded by the exogenous fall in export large irrigation project in India does not A competitive real xhange rate is receipts, could not be implemented be- operate because waterhas been diverted pursued to support expansion of the ex- cause of inadequate fisal adjustment. to the rapidly growing city of Pane. In portableandimport-competingsectrs- Thus insufficient and uncertain access to China, industries are reducing their pro- and to ensure a strong balance of pay- imports was a major factor behind the duction because of water shortages, even mrents position. Using the exchange rate decline in private investment. though they are surronded by paddy as a nominal anchor for low inflation is Though real depreciation is found to fields. In California, selenium salts importanttothe extent thatlowinflation have a direct negative impact on invest- leached by irrigation are killing wildlife. and macroeconomic stability create a fa- ment, the authorsuse simulationstoDshow Bank irrigation projects in Algeria are vorable environment for long-term that it has a positive indirect effect on now competing with Bank urban water growth. private investment in the medium term supply projects for the same water-and iguel focuses on whether exchange because such depreciation relaxes thefor- many proposed irrigation projects and rate policy can -ffect the real exchange eign exchange constraint on imports. most hydro project proposals are on hold rate in the longer run, and he examines Matin and Wasow conclude that effi- because of environmental concerns. the trade-offs that typicayarise between cientfiscal adjustment andhlberalization Until recently, the approaches taken to real depreciation and inflation. of imports will be critical for the recovery water planning managementby planmers Heargues thatexchangerate policyhas of private investment in Kenya Efficient in the developingcountriesandbyanalysts only a limited ability to achieve durable fiscal adjustment should reduce fiscal atthefundingagencieswere,byandlarge, real depreciaton. Devaluation can be ef- deficits so that expenditure cuts are strac- appropriate and adequate to the task at fectivein the shortrun (becuse prices and turedto protect and even expand expendi- hand.Theincreasedcompetitionforwater, wages do not adjust as quickly), but have tureonphysicainfrastructure.Thiswoud however, makes most of the prqject-by- a limited impact in the longer rin (once requiresubstantialreductionandrational- project planning methods inadequate. prices and wages adjust), when the under- ization efcurrent expenditure. Inporthib- Rogers discusses new approaches that lying factors affecting demand and the eralization will also have the expected fa- areneededto integrate waterresource use supply of foeign exchange dominate. At- vorable impactoninvestmentbecause such among different users and across differ- tempts to achieve real depreciastion liberalization vwll be perceived as credible ent economic sectors. through continuous devaluations, or by and sustainable when accompanied byef- This paper - a joint product of the acceleratingthe rate oferawl -when not ficient fiscal adjustment. Water and Sanitation Division, Trans- supportedlbychangesin other polEcies and Potcy Research Working Paper Series 39 in the underlying conditions - usually owr the offiial exchange rte are prima- * There may be a leakage of transac- end up increasing inflation, yet remain rily determined by macroeconomic poli- tions from the official to the parallel mar- ineffective in changingthe real exchange cies. Polieymakers should be cautious in ket. rate. adopting dual (or multiple) exchange rate - Depredationoft he parlle exchange As a rule of thumb, Kiguel argues that systems, as they provide less ins ulatn for rate can enter inflationary expectations maxi-devaluations are most effective in domestic prices than most analysts as- * The spread might be an important economies with low and moderate infla- swne. factor when the central bank determines tion (below 20 percent a year), especially the rate of devaluation of the official ex- when the underlying causes call for real Ghei and Kiguel empincally examine the change rate. Ghei and Kiguel findempiri- depreciation. In these circumstances, a determinants oftheparaiel exchangerate cal evidence supporting this factor. devaluation can reduce the costs in terms for a cross-country sample of developing This paper - a product of the Transi- af the unemployment and lower growth countries. The sample includes countries lion and Macro-Adjustment Division, assocated with achieving the desiredreal in whih the parallel exchange rate is offi- Policy Research Department-is part of depreciation through deflation. cial (dual exchange rate systems) as weal the departmentes project,M nic Latin America is a rich laboratory in as those in which it is unofficial (black Implications of Multiple Exchange Mar- *hich to study different exchange rate market). kets in Developing Countries. Copies of regimes. The real exchange rate vanes In the typical exchange rate arrange- the paper are available free from the -over time in countries that have adopted ments considered, the central bank fixes Worldlank,1 83BHStreetNW,Wasbing- the crawling peg (such as Colombia and or pegs one rate (the commercial rate), ton,DC20433.PleasecontactRaquelLuz, Brazil) andin thosethatusethe exchange usedprimarilyforcurrentaccounttrans- room Nl1-059, extension 39059 ( 31 -ce more actively for disinflation. actions, and allows the parallel exchange pages) Colombia in the mid-1980s is an ex- rate, usedforcapitalaccounttransaetions, -,i-ple of successful Teal depreciation. to be market-determined. Z.lombia achieved a 40 percent real de- Theybase their empirical analysis ana 882. Issues In Refonning Financial priciationintwoyears withno sigrdficant portfolio macroeconomic model in which Systems In Eastem Europe: 'nerease in inflation. It achieved this by the parallel exchange rate is determined The Case of Bulgaria F-hiding maxi-devaluations (instead it by expectations and equilibrium asset -3elerated the rate of crwl) and by lim- considerations in the short run - but Alfiedo Tharne .tpigthe size ofthe desiredreal deprecia- depends on the evolution of key policy (April 1992) --. variables (such as the stock of money, In Mexico in 1987, by contrast, aggres- budget deficits, and trade policy) in the Authoitiesina sternEunecounries - -eexchange rate polimesbackiredinthe long run. should encourage theirreformedfinancial - ise that they led to an acceleration of The results indicate that maaoeco- systems to stmulate the supply response *-!dation while failing to achieve a sus- nomic variables explain more than 70 by inking the reform of the finncial sys- --lned real depreciation. percent (Cn average) ofthe variationin the tem to the privatiztien of banks and en- This paper - a product of the Transi- spread between the official and paallel terprises i--n and Macro-Adjustment Division, exchange rates. The results are stronger liy Research Department- is part of for countries where the spread is large What difficulties do Eastern European 'rger effort in the deparmnent to study (above 35 percent), somewhat weaker in countriesfaceinreformingtheirfinancial *; n macroeconomic implications of ex- countrieswithmoderatespreads(between systems? Whatshould theirreform priori- tinge rate policies. This paper was pre- 10 and 35 percent), and poor when the ties be? Can financial reform make the redfor the Conference on 'Ladinamica spread is below 10 percent. supply response more postive? losmercadosinternacionalesypoliticas They cannot reject the hypothesis that Thorneaddresses these questions using aierciales para el desarrollo,' El there are no differences in the determi- the situation in Bulgaria toillustate the orial, Spain, July 1991. Copies are nants ofthe spread when the parallel rate financial system most Easten European 3ilable free from the World Bani, 1818 is official and unofficial. This is not en- countrieshaveiiherited3eformingthese Street NW, Washington, DC 20433. tirely surprsing, as in most cases where financial systems is especially difficult . asecontactRaquelLuz,roomN11-059, the parallel rate is unofficial, it is largely because ofthe probems inherited from a =ension 39059(22 pages). toleratedc by theahorities. centrally planned economy (CPE). The Inaddition,althoughtheycannotreject financial system in a CPE is completely the hypothesis that restrictions on the different firm the financidl system in a 1. Dual and Multiple Exchange capital accountaffectthespread,theyfmnd marketeoneomy.Itisonlyaslightexag- te Systems In Developing that restrictions on the current account geration to say that reforming the finan- iuntries: Some Empirical have no affect onit. These results are con- cial systems in these countiesmeas cre- Idence sistent with their prior finding that port- ating a finandal sysbem frm scratch. foio considerations dominate the deteri- Thorme llusrates the types ofprohlems aGhei and Wiguel A. Kiguel nation oftheparalelrateintheshortrun. Eastern European countries face in re- Xnli 1992) Theyfind evidence that the adoption of forming their financial systems. He ar- dual exchange rate systems at best only gues that these countries can stimulate eparallel exchange rate (whether offi- partly insulates domesti prices. This in- the supply respon by giving the emerg- (or unoBwicial) and theresultingspread sulation may be limited by three factors: ing private sector more access to credit 40 Policy REslrch Working Paper Seres and by incrasing the savings deposited around the small town of Farafenmi, in qefieincy inGhanaawarnegrainmarke. in the financial system. He argus that the central Gambia. Two interventions-bed- authorities should: nets treated with Permethrin and Aldermanexpandsonadynamicmodelof * Link reformofthefinancia sectorto chemoprophylaids with Maloprim market integration, first introduced by theprivatizationofhaTiksandenterprises. (dapsone = pyrimethaunine) - were con- Ravallion (1986) to Ghana's principal * Quickly privatize a group of banks. ducted in 'primary-health-care" villages, maize markets, to investigate how infor- * Encourage privatized banks to lend with non-PHC villages serving as controls. mationistransmitted crosscommodities. exclusively to the emerging private sector. The study showed that general and He investigates one property of an effi- - Turn therestofthebanksintoinvest- malaria-specific mortality in young chil- cient market the full use of available in- mentbanksandmake them participate in dren was sharply reduced by introduing formation. tlhe restructuring and privatization of Permethrin-treated bed-nets. The effects Studies of spatial price integration si- state-owned enterprises. of using treated bed-nets were clear, be- multaneouslyinvestigate the flow ofinfor- This paper - a product of the Private causemanychildrenhadbeensleepingin mation and commodities, but it is often Sector Development and Finance Group, bed-nets before the intervention began difficult to distinguish between the two. Technical Department, Europe and Cen- without the same strong effects. A low carrelation of prices between two tral Asia and Middle East and North Af- The treated bed-net intervention had markets may indicate either a poor flow ricaRegions-ispartofthedepartmentes the additional effect of reducing other ofinformatianoreconoiincmeicien,for regional study on financial sector reform causes of death. This 'frailty protectioex example - but could also indicate com- in Eastern European countries. This pa- effect was substantial but is largely unex- petitive trade andlinked markets thatare perwaspresentedataconferenceon Cre- plained - more baic research is needed. seasonally separated because of high ating Capital Marketsin EasternEurope, Also, not all children have to be sleep- transport costs. organized by the Woodrow Wilson Center inginbed-nets forthe benefits ofthe treat- So Alderman also investigates the flow in Sofia, Bulgaria, in September 1991. ment tobe felt Small rates of noncompli- of information within a single spatial Copiesafthepaperareavailablefreefrom anceneednotinvalidatetheeffectiveness market and the relationship between the World Bank, 1818 1I Street NW, of the intervention, prices in spatally separate markets. Washington, DC 20433. Please contact Thenetswerecdippedbyvillagewomen, He studiesintercommoditypricetrans- Luz Hovsepian, room H9-065, extension supervised by the village health worker mittal from two perspectives. First, he 37297 (42 pages). and the traditional birth attendant, with asks whether the governmentcan concen- the supportofthe women'sassociation. It trate on a single commodity price, yet appears that the washing and dipping acievepnroepolicy$bjectivesinabroader 883. Maaa: The Impact of Treated processcanbeundertakensuxcessfillyby arena.ThbisisimportantinGhanabecause Bed-Nets on Childhood Mortality local people with a minimum of supervi- no single commodity dominates consum- in the Gambia sion, at a cost for t1he solution ofa few US ertfoodbudgets,althoughforadministra- cents per net dipped. tive andlgisticalreasons,directinterven- Pedro L Alonw, Allan G. HilL Patricia H. The extrareductionin mortalityattrlb- tion in all cmmodity markets is not fea- David, Greg Fegan, Joanna R. M. Armstrong utable to the use ofMaloprimas aprophy- sible. He finds that price movements for Andreact FracisCo, K Chum, and Brian IL lactic was probably slight and difficult to the main cereal consumed in the country Greenwood detect in this study because of the strong (maize) are fully transmitted to other (April 992) effectofsleepingunderatreatedbed-net. grains and to other regions. This simpli- This paper - a product of the Popula- fiesanystsbilizationprograms.(However, In rurl Gambia, asin many parts ofSub- tion, Health, and Nutrition Departnent it takes tbree months for the price shock Saharan Africa, malaria remains a ma- - emanated from the Banles support of to be fully transmitted. In the long run, jor cause of death for children below the JohnsHopkinsUniversityforachildsur- this indicates market integration, but it age of five - indee, the principal cause vival workshop focused on the is puzzling that it takes so long to move ofdeath when uaccination coueruge rates department's Health Sector Priorities commodites between markets.) are high and death rates from common Review. Copies ofthe paper are available Second, he investigates the working of infectious diseases of childhood are re- free from the World Bank, 1818 H Street cammodity markets in developing coun' duced& n recent years, concern hasgrown NW, Washington, DC 20433. Please con- tries. He notes imperfections in the way about the development of drzg-resisfant tact Othlia Nadora, room S11-219, exten- markets process information the lagged strains of malaria -prouoking renewed sion 31091 (30 pages). price ofmnizeconveysinformationthatis imterestinvectorcontroland thereduction notcontainedinithe pastprice of sorghum of man-vector transmission rates. or millet. 884 Intercommodity Price There are several possible explanations The effectiveness of insecticide-treated Transmittal: Analysis of Food fortbismarketinefficiency.Forexample, materials hadl been unclear, as earlier Markets In Ghana traders may set pnces for other coarse studies had based their results on the ef- grains in response to information about fects on vectors rather than on human Hrold Alderman maize prices-requiing supply changes morbidity and mortality rates fiom ma- (April 1992) (especially storage buildup and draw- laia. So in 1988 the UKMedical Research down) to bring markets into equilibrium. Council began a systematic trial of a com- This dynamic model of price integration Another possibility is that some traders binedinterventionforcontrollingmalania indicates functional - if not perfect - may-not dealin all grains andmay there- Pollcy Research Working Paper Series 41 fore have different costs for acquiring in- countries are the diversion ofinvestment preferential trading agreements and the formation - especially for sorghum, funds to EC countries and continued ex- increasing use of nontariff barriers which is both eaten and used for maling tenal barriers - especially administra- against low-tech, labor-intensive develop- beer. Brewers, mostofwhom operate on a tive, nontariff barriers. ing countryexports and againsthigh-tech small scale, may trade and store only sor- The EC expects higher growth and U.S. and Japanese exports. ghum, which may thus be a conceptually lower prices as a result ofEC-92, asfirms These barriers are likely to remain, as separate (although physically contiguous) will be able to exploit comparative advan- there has been no official commitment to market. But evenfor specuative markets tages and economies of scale more effec- their removal- The question is, will the in industrial countries, in which informa- tively-andascompetitionbetweenfirms (average) barriers be raised to protect the tion is generally available electronically will increase (although the last two effects least efficient producers in the EC? And and trade rarely requires the physical may nullify each other). The net effect on to the level of the highest preferential exchange ofgoods, perfectprice transmit- developing countries of the removal of trading agreements? If national barriers tal is often rejected. internal trade barriers depends on devel- areconvertedtoEC-wideprotection, there In sbort, from a practical viewpoint, opingcountries'incomeandlpriceelastici- isagood cbancethatextenal barriers will Alderma.'s dynamic model of price inte- ties with the EC. Current estimates sug- increase. If so, they may do so by only a gration indicates fimetional -if not per- gest that the effect will be small. small amount, since a single market will fect - efficiency in Ghana's coarse grain Competition among European finms is force Article 115 (which limits the move- markets. Lkely to increase if the removal ofbureau- ment ofrestricted goods between member This paper - a product of the Agricul- cratic and trade barriers reduces collabo- countries) to be abandoned. An external ture Operations Division, Western Africa rative agreements between firms. Those tarff that allows efficient producers to Department,andtheAgriculturalPolicies gains may not materialize if firms merge profit from the protection of those less Division, Agriculture and Rural Develop- or cooperate to increase their market efficient would coflict too obviously with ment Department - is part of a larger share andcompete better againstU.S. or the stated objective of greater internal departmental study of food security in Japanese firms. If new external barriers competition. Ghana. Copies of the paper are available emerge, or if EC-rude barriers replace Thispaper- aproduct ofthe Interna- free from the World Bank, 1818 H Street national barriers, EC firms may collabo- tional Trade Division, International Eco- NW, Washington, DC 20433. Please con- rate more with the large US. orJapanese nomics Department-is part ef a larger tact Cicely Spooner, room NB-039, exten- firmsjust as theyhave done in Europe to effortin the department to analyze struc- sion 32116, or by electronic mail ( 36 circumvent trade restrictions. None of tural changes in world trade and to iden- pages)- these developments will improve develop- tify their impact on developing countries ing countries' trade in manufactures or exorts. Copiesofthepaperareavilable services, free from the World Bank, 1818 H Street 885. The Impact of EC-92 Investment in EC countries may in- NW, Washington, DC 20433. Please con- on Developing Countries' Trade: crease to meet the extra demand, growth, tactAudreyvltson-Walters,roomS7-053, A Dissenting View or trade diversion resulting -frm EC-92 extension 33712 (41 pages). That investment could lead to increased A. J. Hughes Hanlett investmentsin developingountries,but- (April 1992) given limited financial resources, tight 886. FactOrs That AffeCt Short- monetarypolicies,andheavyindebtedness Term Commercial Bank Lending Thetradecrmationandthetadediversion indevelopingcountries-ismorelikelyto to Developing Countries effects of EC-92 on deueloping countries dlivert investnent funds fiom developing may cancel each other out. But important countries, thus limiting their future pro- Sudarshan Cooptu adverseeffects naycomefi-omdiversionof duction growth. And U.S. and Japanese andMaria Soledad. Martinez Pera inuestment from developing countries to firms, fearing greater EC barrien and lo- CApril 992) the EC. cal-content rules, may decide to establish bases in the BC. Apreliminary lok atfactors that aflce the Most benefits of the EC-92 program, and Technical standards in EC-92 may be flow ofshort-term commneria bank loans the greatest impact on developing coun- tougher than national standards in mem- to developing countries. tries, will probably not come from mar- ber countries, which could hurt develop- ginal changes in trade flowscdependenton ing country exporters. An increase in vol- Developing countries rely on short-term relatively small changes in prices and untary export restraints, a tightening of trade credits for imports of several essen- incomes. Nor will they come from cuts in local-content rules or reciprocity agree- tial consumer goods, including medicines average costs, fom changes in market ments, and subsidies for public sector and basic food supplies. The credits also structure, from the removal of internal enterprises oragriculture could alsomake ftailitate export-related transactions. barriers on trade and on the free move- life more difficult for them. Themechanimns commercial bankuse ment of factors, or from a 5 percent in- Is 'Fortress Europe" likely? The EC to provide trade credits to developing crease in EC output Commission says no,butthe Community's countries are complex and costly. Even a Those changes may be important to record so far is not good. The CAP is the temporarybreakintheflowofshort-term European policyakers, but they are of most blatant example of protectionism. credit can sexiousyhurt a countssbusi- only remote interest to developing coun- Another example is the local-content re- ness. But since short-term trade credits tries. The main threats to developing quirement Others are the `pyramid" of can be structured so that they involve few 42 Policy Reserch Working Paper Series risks to a bank snd at the same time are 887. Power Sharing and Pollution * One device is to grant the local gov- very costly to the debtor, they are gener- Control: Coordinating Policies ernmentfinancial autonomy,inthesense ally the last forms of credit to be cut and Among Levels of Government that any taxes or fines it collects from the first to be reestablished in debt-dis- enforcement are retained locally. There tressed developing countries. WgliamJack aresubstantiveimplicationsinthedcoice To gauge the likelihood of continued (April 1992) of control instrument. For example, if lo- short-term trde-related financial flows to cal goverrments maxmize revenue and developing countries, Cooptu and Peria Most policy decisions about targets and an emission tax is used, firms with high examined the factors that affect such instruments of polution control should costsofabatementcouldbeforcedto bear short-term commercial bank loans. Little probably be made at the highest letel of mostof the cost of reducing emissions. It literature was available on the subject government involved But effctive imple- maybe more eficientforthelocal govern- Only recently have relevant data become meneation - including inspecton, en- ment to enforce astandard, because then available, and further analysis would be fircement, and prosecution -may require mostabatementis carriedoutbylow-cost facilitated by more useful disaggregation inuoluing all levels of government. Coor- abaters of the data that are made available. dinafion is then necessary, with substan- - Amore subtle incentive is to explic- Gooptu and Peria studied relevant data tiue implcations for choices of policy tools itly affect the enforcement budget ofa lo- over time for seven countries for which and the assinent ofresponsibilte cal regulator. By contrling thesize ofthe data were available: Argentina, Brazil, budget through lump-sun transfers and Egypt, India, Kenya, Mexico, and Turkey. Traditional approaches to pollution con- indirectly through fine rebates, the cen- They found that: trol emphasize the'government'e rolein tral goermentcanmodifirtheinspection * Countries with greater growth pros- providingincentives toalterthebehavior activities ofalocal regulatory agencyin a pects (higher investmant-to-GNP ratios) ofrelevanteconomicagents.Buttoexploait way that improves welfare. get more short-term credit. cost advantages at different levels ofgov- - Under decentralized control, cm- * Short-termrcreditsareusuallym2eant emient, pollution control policies typi- mand and control polices may be imple- tofinancecountrieswith signilcanttrade callyinvoveassigningavarietyofrespon- mented more efficienLtly than market- deficits. sibilities to different public agencies. based instruments. And uniform national * Higher levels of external indebted- These responsibilities can include or regional standards may improve the ness (as a ratio of total debt outstanding choosingpolihargets,controlinginstru- efficiency of itejnurisdictional negotia- to GNP) are generally coupled with higher meents,anddevelopingandimplementing tions. levels ofshort-term external indebtedness strategies for monitoring and enforce- This paper - a product of the Public tocommercialbanks(ahigh ratioofshort- ment. Economics Division, Policy Research De- term debt to GNP). Ahierarchicallydecentralizedmanage- pertment-is part ofCECPEs work pro- * Country-specific factors affect the ment structure -introduces problems of gram on evaluating economic policy in- volume ofshor-erm lending available to coordination because different agencies struments for pollution control, and part a country. If a else is equal, some coon- mayhave different objectives. These prob- of the research project 'Pollution and the tries (such as Kenya) find it harder to get lems can be alleviated-andthe efficiency Choice of Economic Policy Instruments in short-term commercial bank financing gains from decentralized control retained Developing Countries" (RPO 676-48), than others (such as Mexico). Purther -by modifying intergovemmental rela- fimded by the Banks Research Support analysis is needed to determine which tions, particularly by using implicit and BudgeL Copies ofthe paper are available factors account for these differences, but explicit financial transfers and by divid- free from the World Bank, 1818 H Street possibilities to be explored include a ingiinitial property rights equally among NW, Washington, DC 20433.Please con- country's track record in implementing local authorities to ensure that they will tact Pegw Pender. room N1O-067, exten- World Bank/IMF structural adjustment all want to participate in the negotiating sion 37699 (53 pages). progr=aistheexistenceofdomestCilnan- process Jack descnbes in this paper. cial markets; and orderlyresolution cfthe Among Jack's conclusions: country'sexternaldebtburdeninlinewith * Nosinglelevelofgovernmentshould 888. Transformation of Agriculture a thoughtfu strategy formanaging exter- be responible for all environmental In Central Eastern Eumpe nal debt. policy. Policy decisionsabouttargets and and the Fonner USSR: Major This paper-aproduct ofthe Financial instrmnents shouldbe based on the most Polky Issues and Perspectlves Advisory Service Unit, Office of the Vice completeandaccuratedataavaileand President, Cofinancing and Financial should encompass all aspects ofthe prob- Cmhba Csiki Adlvisory Services - is part of a larger lem. But effective implementation -in- (April 1992) Bank effort to understand the attributes cludinginspection,enforcement,andpros- of alternative types of financial flows to ecution - may require involving all lev- Theformer USSR could ecome self-suffi- developing countries. Copies ofthe paper els of government. cient inflod, but in the medium term will are available free from the World Bank, v Coordination of government policies probably remain a net agricultural im- 1818 H Street NW, Washington, DC -between levels ofgovernment (vertical porter - if it can persuade eportes to 20433- Please contact Rose Vo, room S8- coordination) or between administrative extend credit But Cetral Eastern Euro- 042, extension 33722 (41 pages). bodies in the sametier(horizotal)-may pean agricultural exports are likely to ex- be improved by using intergovernmental paond Cent-al Eastern Europe could be- incentive schemes. come a tougher, more aggressiueplayer in Policy Research Wodnklg Paper SerfIes 43 agriculture, principally in the marketsfor come parity among agricultural produc- tence of teachers already in the system: more demanding food product - espe- ers. This means developing a new legal providing inservice training and encour- cialy pork, poulty, and fiuits and ueg- framework, including, among other aging regular classroom supervision. etables. things, a land law that defines ownership After examininga nationwide sample of and land use rights and defines the pro- small rural primary schools in Thailand, Cstki surveys agricultural reform to date, cesses for distributing ownership titles, they found that a teacher's experience in identifies key policy issues, and outlines handling former owners' claims, and inservicetrairingcoursespredictsneither potential scenarios for the transformation transferring land and other assets of co- instructional quality nor studentachieve- of agriculture in Bulgaria, Czechoslov-a- operatives to private ownership. ment. In sharp contrast, intensity of sU- Ida, the former GDR, Hungary, Poland, * SupportenvirornentEllysustainable pervision within a school significantly Romania, and - to a lesser extent - the agricultural production technologies and predicts both instructional quality and -former USSR. better environmental protection. student achievement, after canrollingfor After decades of socialism, these coun- In analyzingfuture possibilitiesfor, and avariety ofschool, teacher, andclassroom tiese agricultural sectors are character- influences on, the region's agricultural variables. ized by large, inefficient farms with high markets, Csdkifocuseson thesequestions: The effect of supervision is significant productioncosts;heavierfoodconsurption Whatwillthetrendinfoodproductionbe, - roughly the same as the effect of than in market economies of comparable particularly for grain and meat? Will food preservice education. Intensive fiel d work prosperity, and excess demand for food, at consumption increase, and how will that in carefulyselected rural schools suggests subsidized food prices; macroeconomic affect domestic markets? How wnll the that supervision by effective principals is imbalances, including inflation, budget intenational market change? Howmuch a critical component in a larger strategy deficits, and foreign debt; and a monopoly wnll conditions oftrade policy improve for tocreateandsustainan 'ethosofimprove- in food processing and distrbution, agicultural expots, and how will rela- ment'in school teaching and learning. Central Eastem Europe isbeginningto tions among countries change? This paper - a joint product of the create a newagricultural structure based This paper - a joint product of the World Bank and Micbigan State Univer- on private ownership, real cooperatives, AgiculturalPoliciesDivision,Agriculture sity-ispartofalargereffortintheBank anda marketeconomy. TheformerUSSR andRuralDevelopmentDepartment,and to understand differences in educational is also striving to overcome serious eco- the Transition and Macro-A4justment effectiveness. Support for this analysis naomic difficulty with comprehensive eco- Division, Policy Research Department - was provided by the Barnkes Research nomic and political reform but is in a far is part of a larger eflort in the Bank to Support Budget for the research project earlier stage of agrarian reform. To de- analyze the transformation of agriculture On-the-Job Inprovements in Teacher velop a market-oriented, competitive ag- in theformer socialist countries. Copies of Competence: Policy Options and Their ricultural structure, these countries need the paper are available free from the Effects on Teaching and Learning (IPO to: World Bank, 1818 H StreetNW, Washing- 67636C). Support for datacollection was - Create marketable landed property ton, DC 20433. Please contact Cicely provided by Prject BRIDGES under a (CsAki discusses several ways to do this). Spooner, room NB-039, extension 32116, cooperative agreement between Harvard * Change agricultures structure to or by electronic mail ( 32 pages). University and S&T ED, United States emphasize medium-size private agricul- Agency for International Development tural ventures and various cooperatives (DPE 5824-AOO-5076-00). Copies of this (whose future is a heavily debated issue), 889. On-the-Job inprovements paper are available free hfom the World together with state or communal faTms. In Teacher Competence: Policy Bank, 1818HStreetNW,Washingtan,DC * Change governments role, reassess- Options and Their Effects on 20433. Plese contact Cynthia Cnstobal, ing the agricultural sector as part of the Teaching and Learning In Thailand room SS-035, extension 33640(45 pages). jnacroeconomic fmework. Thisinvolves liberalizing consumer and producer food Stephen W. Raudenbush, Suwanna pnces, eliminating food subsidies, and Eamsukkawat, Ikechukc Ilbor, NMohamed 890. Populaton, Health, providing an extensin service and net- Kamali, and Winol Taoklam and Nutriton: Fiscal 1991 Work. (April 1092) Sector Review * Create a government enviro nent supportive of private ventures and the Teachersuperuisionbyv fectiveprincipals Denise Vllncourt, Janet Nasuim, transformation of the cooperative sector. is critical to improued teachingand learwn and Stacye Brown The government's role should be to create ing in developing countrie. Both eaher (Apnr 1992) physical facilities for farmers' markets supervision andpresrvice training arefar and a wholesaling network for private more impornant than inseruice teacher To strengthen q7'orts to alleuiate poverty farming. training. and to develop management and institu- - Create a real agricultural market tional capacity, the Bank should improve that encourages fair competition. This Teachers must hone their teaching sklls e skills mixfiftspopulation, health,and means fully eliminating food subsidies on thejob ifthe quality ofprimary educa- nutrition staff prouide beter standard within a few years and eliminating the tionis toimprovein developingcountries. andrguideincsfaranalyzingandadd=- state monopoly on foreign trade. Thefiveauthors ofthispaperuseammulti- inginstiutionaand managementissues, - Develop agricultural policy that level modeling procedure to examine two and ensure that enough tine is spent on emphasizes efficient production and in- policy options for improving the compe- ins nal and management issues. 44 Policy Research Working Paper Series Growth in both number of projects and ment experts in divisions working on the complex, nontransparent legal and regu- amount of lending has been a notable fea- PHN sector. latoryinstitutions and compare theircosts ture of the Bank's support to the popula- * Revising Bank priorities and prac- with those of Chile's institutions, which tion, health, and nutrition (PHN) sector tices to ensure that enough time is spent are relatively simple. since fiscal 1981, when the Bank first on supervision and on upstream diagnos- They examine four basic areas where began lending for health. The proportion tic work, and that managementrigorously legal and regulatory institutions could of total Bank lending to the sector in- reviews the management and institu- createcriticalobstaclestoefficiencyinthe creased from 4.5 percent in fiscal 1990 to tional development content oflending and garment industries of Sao Paulo and 6.9 percent in fiscal 1991 (from 4.1 percent sector work. Santiago: to 5.8 percent, iflendingto non-PHNcom- * Grounding PHHN polices in a macro- * The start-up of a new business (en- ponents is excluded), surpassing targets economic and multisectoral framework try). set by the Bank's senior managementfor oriented toward growth with poverty re- * The regulation of business. growth in the sector. duction, together with asound strategy for * Orders by customers of garment In September 1990, President Conable building institutions and the capacity to firms. expressed the Banles determination to implementandmanagepoicy. Thismeans * Sales with credit. provide greater support for primary country operations divisions have a criti- They find that Chilean business trans- health care - and set agoal ofincreasing cal role in helping key natinad actions benefit from legal simplicity and lending for primary health care from decisiormnakers understand andcinternal- more consistent enforcementtthaninBra- about 3 percenttoabout 5 percent oftotal ize objectives of poverty alleviation and zil, but that these perceived advantages Bank leeding in the next three to four institution building. are offset because of the differences be- years. This goal was exceeded in fiscal * Seeking more creative use of Bank tween formal law and practice in Brazil. 1991: lending to primary health care for instrumentsthroughareviewandassess- In two of these areas, Brazil has evolved that year amounted to US$1,220 million, ment of the best use of lending instru- some effective institutional substitutes to or 5.4 percent of total Bank lending. mentsforPHN sectorinterventionsp;ore reduce the costs that would otherwise The momentum in actual and fore- innovativeidentificadonandfinancingof have been imposed by inefficent formal casted growth in PHN lending is attrib- local expertise; and greater effort to en- institutions. utable to several factors, including the courage the exchange of experience and In the entry of new businesses, profes- high priority assigned to human resource ideas among developing countries. sions have evolved to transform the pro- development (as a key component of eco- This paper - a product of the Popila- cess of registering a new business firm a nomic reform and developmentobjectives) tion, Health, and Nutrition Department potentially torturous obstacle path into a and the Baik's strong commitment to the - is part of alarger effort in the depart- fairly affordable one-stop process. In debt alleviationofpoverty, which requires pro- ment to address management and insti- colection, information systems limit the viding basic social services to the poor. tutional issues in the PHN sector. Copies need to resort to the formal legal system. The theme of this year's annual sector of the paper are available free from the Nonetheless, regulation -in the form review blends two special topics: poverty World Banklc, 1BlHStreetNW,Washing- of complex and resource-intensive tax alleviation and the development of man- ton, DC 20433. Please contact Otilia rules, regulatory processes, and conflict- agementandinstitutionalcapacity.Based Nadora, room S11-219, extension 31091 resolution mechanisms -raises the cost on a review of project experience, both (65 pages). of transactions for Braziian businesses. withinand outside of thePHN sector, this Costs are furtherraisedby greateruncer- report distills lessons that should assist tainty and frequent renegotiation of or- task managers in the design and imple- 891. Pubilc Institutions and Private ders.So, overall,theenvironmentforbusi- mentation ofinterventionsto develop pov- Transactions: The Legal ness in Brazil is less favrable than that erty-sensitive management and institu- and Regulatory Environment in Chile. tional capacity in the PHN sector. for Business Transactions But the authors warn agaist a preoc- The Banks ability to strengthen insti- In Brazil and Chile cupationwithformallegal andregulatory tutions, especidally those needed to allevi- reform as a short-term means of promot- ate poverty, are constrained by the num- Andrew Stone, Bria LY, ing economic development. In the eyes of berand the skills mix of PHN staff; by the and Ricardo Paredes Brazilian entrepreneurs, macroeconomic absence of standards and guidelines for (April L992) and political instability are far more im- analyzing and addressing institutional portant problems. and management issues, and by too little Chileenjoys a betterformcd Iegl and reg- This paper - a product of the Finance time to spend on institutional and man- latory environment than BraziL But dif- and Private SectorDevelopmentDivision, agement issues. Therefore, the sector re- ferences are reduced by Brazil's effctive Policy Research Department-is part of view recommends: informal substitutes. In fact, Brazlian a larger effort in the department to pro- * Improvingthesectorstaffnotonlyin entrepreneurs rank macroeconomic and mote realistic assessmentof obstacles to numbers but in access to rgidelines and politcal stability as a higherprioity than private sector development through firm- training, making more use of in-house egal and reguatory rjbrm level surveys. Copies of the paper are management and institutional develop- available free from the World Bank, 1818 ment expertise; using more consulting Drawingonthenewinstitutionaleconom- H Street NW, Washington, DC 20433. specialists; andcincreasingthe number of ics, Stone, Levy, andParedesexaminethe Please contact Daniele Evans, Toom N9- management and institutional develop- impactonbusinessesofBrazil'srelatively 057, extension 37496 (30 pages). Policy Research Mofrking Paper Series 45 892. Evaluating the Asset-Based characteristics of the corporate tax com- ment ofa legal framework that can acts Minimum Tax on Corporations: pletely dominate the impact ofvarious tax adecentralized'invisiblehand'toreplace An Option-Pricing Approach provisions on the marginal effective tax previousadmninistrativecontrolsandsteer rate (MERT) under full certainty. the private market in an efficient diree- Antonio Entoche and Sweder van Wijnbergen v The MAT, with its simple tax code tion. (April 1992) and marginal impact on the MERT, is an Gray and Stiblar describe the current appealing short cut to comprehensive tax legal framework in Slovenia in several Twhemnimumassettax, withitssimpletarx reform - and the revenue effects in Bra- areas - including contract, company, codeandmarginalimpactonthemarginal zil could be substantial. In countries like bankruptcy, constitutional, real property, effectiue tax rate, is anappealing shortcut Brazil-whererate-of-return uncertainty intellectual property, foreigninvestment, to comprehensiue tax reform - and in is more likely to be increased by macro- andantimonopolylaw.Theseareasoflaw Brazil it could substantially improue reu- economic uncertainty than by introduc- define (1) property rights, (2) the means enue tion of a MAT-if a MAT could reduce to exchange them, and (3) the rules for fiscal imbalancesandthusmacroeconomic competitive market behavior. They form In many countries, well-meant ad hoc uncertainty, it might also indirectly help the bedrock of alegal system foramarket tax incentives proliferate over time, cre- lower the MERT more than it would raise economy. ating an opaque corporate tax structure it directly. The situation that Slovenia faces in and many unanticipated tax loopholes. Two common assumptions turned out undertaking legal reforma differs from Tax authoritiesin several countries have not to he true. First, because capital in- that for other Central and Eastern Euro- considered and sometimes introduced tensity varies greatly across sectors, the pean (CEE) coauntries for three reasons. mninimum corporate taxes. These are de- MATdoes not reduce sectoras distortions. flrst, Yugoslavia took: an independent signed to reduce losses in revenues and The standard deviation of the MERT is course and began experimentingwith the distortions in the allocation of resources higher with MAT than without. introduction of market forces soon after thatresultfrom theinteractionofvarious Second, although that variation gives World War IL As a resut, Slovenia - credits, exemptions, and so on. the MAT a higher marginal impact, it is which was the richest of the Yugoslav Liability under such a tax is sometimes not true that high-risk firms are hardest republics-leads other GEE countries in linked to profits but more often to assets, hit by the MAT. High-risk firms tend to standard of living experience with mar- as these are harder to manipulate. be high-rate-of-return firms, which re- hets, and opennews to influences from EstacheandvanWijnbergenrefertosuch duces MATs impact. Concern that the abroad (particularly fram Western Eu- a tax as a minimum asset tax (MALT).. MAT would discriminate between the rope).Second,unkoeCEEcountries, The assessment of a minimum tax is most innovative but riskiest firms seems the federal sucture of Yugoslavia over usually based on the computation of the to be unwarranted thepast4Oyearsh3s grantedconsiderable changes the minimum tax will introduce This paper - a product of the Country law-nmaking powers to the republics. The in marginal effective tax rates, using the Operations Division, Country Depart- issue offederal-republiclegal reaionsand standard King-Fullerton methodoloag. ment , Latin America and the Caribbean 'conflicts of law? has thus alway been This methodologyhas greatlimitations as Region - is part of a larger effort in the cental. ThirdSloveniaistryingtoresolve it does not deal with the revenue effects region to assist the government of Brazil the question of which Yugoslav laws to ofthe loopholes and cannot handle uncer- in reformingits tax system. Copies ofthe adopt andwhichtoreplace with whollynew tinty. Thisis aseriousshortcomingasthe paper are available free from the World Slovenelegiation Legal"sucssiotehas impact of the MAT depends on the sto- Banlr, 1818HStreetNW,Washington,DC become a mjr issue. chasticcharacteristicsof thelinkbetween 20433 Please contact Antonio Estache, Sloveniahasprogessedsteailytoward assessed asset value and asset incomein room EIO-081, extension 81442 (28 creatingabasiclegalfaeworkinwhich each period. pages). the private sector can grow and develop. Estache and van Wijnbergen suggest an It benefits from the efforts that Yugoslav alternative approach based on option pric- economic and legal reformers have made ing, an approach designed to incorporate 893. The Evolving Legal since mid-1988, and from its willingness the impact of rate-of-return uncertainty Framework for Private Sector to adopt many of the Yugoslav soluions on the burden a MAT will impose. This Activity In Slovenia upon independence rather than trying to approach allows the assessment of the start again fro scratch. minimum!s taxs expected tax burden. It CherylW. Gray and Frajo D. Stibla Few changes appear to be needed in also yields a measure of the value of a (April 1992) some areas of law -including company, minimum tax toagovernment faced with foreign investment, and intellectual prop- great uncertaintyaboutrevenueprospects In mouing toward a market economy, erty law. But in others, such as bank- because of the prolifertion of tax incen- Slovenia is working hard to create a legal ruptcy and antimonopoly law, both the tives. They use their methodology to as- fiameworkthatcanfasterthegrowthofthe legalfameworkandthelegalinstitutions sess a recent Branlian MAT proposal us- private sector, to interpret and implement the law still ing sectoral data on corporate income tax lack an adequate structure and sufficient revenue and asset value. They conclude: The government of Slovenia is moving credibility to support a private market * Uncertainty should play an explicit rapidly to promote the growth of an effi- economy.Asin otherpost-socialistecono- role in evaluations of MAT proposals and cient market economy. One of the most mies, real property rights is an area of corporate taxes generally. The option important tasks it faces is the develop- tremendous uncertainty, both because of 46 PolICy ReseaCh Working Paper Series Slovenia's determination to reverse the According to Ingram, gapsin percapita 20433. Please contact Jean Gray pastthroughreprivatizationandbecause GDPhave inereased amonglow-, middle- Ponchamnroom S3032,extension31022 ofthe limits it pl onforeign ownership. ,andhigh-income countries. The range of (40 pages, including tables). Finally, truelegalrefonn-notjuston per capita GDP growth rates in develop- paper - cannot move more quickdy than ing countries haa widened ns well. political and economic reform. IfSlovenia Ingram finds that evidence does not 095. How Can Debt Swaps can advance on the political and economic indicate a convergence ofproductivitylev- Be Used for Development? fronts as well in 1992, it can create an els aeross the sample ofcountries. Differ- attractive setting for new private invest- encesinabsolutelevelsofproductivityare MolrnaMulherJee ment. increasing, not decreasing - among the (Apil 1992) This paper - a product of the Transi- developing countries, andbetween devel- tion and Macro-Adjustment Division, oping and industrial countries. In addition to financl bneflts,debt con- Policy Research Department-is part of There is some convergence in average versio projects iniated by debtors pro- a larger research effort on legal reform in productivity growth ratesbetween devel- vide a valuabe opportunity for sfrength- Central and Eastern Europe. Copies are oping and industrial countries, but mod- cting institutins available free fron the World Bank, 1818 est disaggregation by income level and H Street NW. Washington, DC 20433. region reveals a divergence in growth The idea behind debt conversion is that Please contact Maine Berg, room Nil- rates among developing country groups instead of continuing to m payments 054, extension 36969(35 pages). and between those groups and high-in- on oubdsanding loans in hard currencyin come countries. the face of debt servicing diffieuties, the However, the evidence shows strong debtorsfind mme other wayto setde debts 894. Social Indcatoms convergence across the smple for sveral that is saisfactoryto themselves andthe and Productivity Convergence social indicators that are good measures creditor. In particular, debt for develop- In Developing Countries of human welfar. Four social indicators ment can be a useful way to stabilize a -life expectancy, caloricintake,primary growing debt stock, far eample, by con- Gngpoy Igam enrollment zatios, and urbanization - verting amounts which are alray in (pil 1992) show evidence of convergence for every arrears. convergence index used. Two social indi- Mukhereediscussestherelativeimpor- If the goal of economic development uB to caters - labor force participation rates tance oEfdebt conversion as a development promote human welfare, the most ejiient and defense spending as a share of GNP tool, contrasts conversion of debt owed to focus ofdevelopment effrts is in ueo. -shownoevidenceofconvergmeebyany public and private creditors, touches on jrznme deweoping cognh Thethe index used. The other 10 sosi! indicators the issue of its impact on inflation, and paoff in unproved socia incatos tha showsomeevidenceofconvergence;social eaminescriteiafbrdecidingwhidchtypes measure human zwefare g higheth an it spending as a percentage of GNP is the of debt are suitable for conversion. She would be for similar efforts in miAc.in.- next most convergent of the remaining contends thatthe principle ofdebtconver- comn cou;&ies. indicators. sion could be appledin many situations, Socia indicator levels are dten closely provides examples, and describes the Most analysis of the convergence of - relatedtoGDPlevels, butotherfactorsare mechanicsofdebteonversionfordevelop- ducivitmy addresses industril countries, also clearly at work, including the trans- ment purpows as part of an overal sec- Ingram takesabroaderapproach tomea 1111s1on of knowledge, information, and toal strategy. sures of performance. newtechnologiesacrossnationalborders. She concludes by discussing twc. ways For one thing, he analyzes some mea- Ingrams main conclusion. a given ab- tostrengtheninstitutions?-rcarAyingout sures ofproductivity but focuses far more solute or proportional increase in per debt conversions. on social indicators that are not narowly capita GDP in very low-income develop- Lre, unanticipat4d inflows of re- economic, including: ing countries is generay associated with sources can create diMcult relationships * Indices of outcome, such as life ex- greate improvements in the social indi- in traditionally underfinded activities. pectancy. cators that measure human welfiare than Creditors ofen havelittle confidence that * Idlices of thle availability of inputs, is a similar increase in middle-ncome debtors will be able to fulfill project-re- such as doctors per capita. developing countries. lated obligations because they have inad- * Indices that can be either inputs or To the extent that improving welfare is equate absorptive capacty, weak msttu- outcomes,suchaspercapitacaloricintake the otjective of development efforts, itis tions, ivadequate sources of information of food. mostefficienttofocussucheffortsonlow- inthedaisionaldngma6cinery, andin- * Measures of government spending income developing countries. adequatemanagerial andadministrative patterns. This paper-a productofthe Research sklls. Moreover,heexaminesalargeuniverse Advisr Staf, Office of the Vice Presi- Debt conversion projects maybe a use- ofcountries 21 high-income orindustial dent, DevelopmentEconomics-was pr- fUl, noncontroversial vebicle for brnging countries and up to 88 developing con- pared for the Conference on Historical in domeistc mnnagerid talent fiom local tries (depending on the availabity of PespectivesOn the International Conver- coernmentorgaziraonsn contrc data). Some data cover the entire period, gence of Productivity held in April 1992. (for exanple, to a ministry) to be respon- 1960-B5; some cover ardy a few yewrs in Copies are availble free fiom the World slible for implementation - to make the that period. Bank, 1818HSSreetNW,Washingtaa,DC prcject -deiverable.3 Policy Reserch Working Paper Series 47 One instrument for allowing this to EeuelaNusua wa created in the 1976 participationw swell asreducing dropout happen is a trust fund. The trustee has as an official improvement on the unitary rate. legal title over the fund and a fiduciary school. By 1978, more than 500 schools And their preliiaryfindings suggest responsmiblity to the beneficiaries to follow were involved; another 1,500 were added that this was done at a unit cost only 5 to the terms and comply with applicable by 1982. Furffier expansion, partaly fi- 10 percent higher thm unit CoSts in tra- laws.National environmental trust funds nanced by the World Bank, inceased en- ditional schoolsThe extracosts ofprovid- have been establishedin several countries rollment to 17,948 schools by 19, men- iug special sudy guides, a library, and in connection with debt-for-nature swaps. ing 800,000 students. teacers with extra training - three Another is for sector policymakers to EeuelfaNlueua isarural shool in which times the amount of teacher trining re- approach international counterpart one or two teachers offer all five years of quiredfortrauditional classes-are offset nongovernment organizations direcdy to primary education in one or two multi- by the fact that the schools have only one find outifthere isinterestinfundingspe- grade classrooms. Promotion is flexble, or two teachers for fie grades. cific development activities (especially but not automatic; the saudent is pro- Is Escuela Nuewa replicable? People those which are not eligible for multilat- moted to the next level once s/he accom- worry about this It took more than 15 eral financing) through debt conversions plishes the minimum educational objec- years for it to become a formal program, to support a well-defined sectoral tives, wbich could take more than me mndthesupportitgetsdependslawgelyon program. Lhe lesson from debt-for-nature academic yea. (This system alters the the personal preferences of local admin- conversions --toaybethatthe development system of automatic promotion to which istrators. Some also fear that expansion community ant' banks mustworktoger there were ojections.) of this innovative program might lessen closely, combining their expertise to Special instructionil materials are offlic ontrwloftiequaityofitsimple- provide long-term resources for develop- used,includingmanualsforteachersand mentation, including the quality of ment- supervisorsandstudientguidesthatfadui- teahertraining, fdeliveryofmaterials, This paper is a product of the Project tato individual and group work. Curnicu- ad of school follow-up. FinancingGroup, Cofinancingand Huan- lum and materials encourage the practi- This paper - a product of the Human cial Advisory Services Department. Cop- cal application ofwhatislearnedtolifein Resomuw Division, Technical Depart- iesofthepaperareavailablefree fromthe a rural conunity. Teachers and super- ment, LatI Amenca and the Caribbea WorldBank, 1818HStreetNW Washing- visors get special training in how to in- -ispartofalarger effortintoassesstbe ton, DC 20433. Please contact Kar volve the community and how to use the quaityofpiaryeductionintheregion. Yousus , room H9-055, extension 33102 ( new educational materias, student Copies oFte paperare available free frm 24 pages). guides, and the studentlibrary. Ech edu- the World Bank, 1818 H Street NW, cational district has a d t ion Wasington, DC 20433. Please contact schod. Maria aIca, room S13-139, extension 896. Achievement Evaluation The system suppots peer inastuction, 37720 (21 pages). of Colombla's Escuela Nueva: with older students coaching younger Is Multigrade the Answer? ones. The schoos have study corners fo- cused on difrerent subject areas and a 897. Unemployment Insurance Gerge Psacharopoulos, Carlos Rojas, smalllibrWythatalsofunctionsasa8om- for Devebping Countries and Eduardo Velez munity information center. Many activi- (April 1992) ties - such as -n agricultural calendar Daniel S. Enmensh and a county monogaph - are designed (May 1992) Other things being equa4 students iz to involve parents in support of their Colombia's innovatiue multigracde rurml children's leaning. What struture of tazes and benes is school program achieve higher achieve- A self-momtoring mechanism allows appropriate far an unemploment insur- mentscores thantheircountrparsintro- students tomonitortheirownattendance anceprogram?Canthesamepriniples be ditionrl schools - at unit costs that ap- records; they can communcate concerns applied in devekopng as in developed pear to be only 5 to 10 percent higher. and problems though a suggestion box countrs? * Student propress is monitored in a Tn the mid-1980s, half of ColombiaIs ru- progres control book, geared to mastery Unemployment insurance, contends ral schools did not offer complete primary of activities and the flexible promotion Hamermash, provides compensation for education and more than half of rural concept. lost inome by requring individuals or children betwveen the ages of 7 and 9 had . A traditional school folows a national employers, or both, to pay taxes into a never attended school. Unitary schools- curriculum, does not give slow learners common fundIt ispartofagenera safeLy multigrade classrooms taught by one special attention, and does not stimulate net cDnstructed by citizens of developed teacher - were established in the early students with special materiias. oumntries.Itis uniqueamongsocialinsur- 1960sin isolated rura areas with few stu- Pacharapouloas,Rjas, andVelez evaiu- ance prgrams in that it offers payment dents, but when efforts were made to oc- ated a 1987 sample of more than 3,000 foraneventiatisparlypreventableeand pand the program nationally several prob- third and fifth grades fiom 168 Escela thatisnotphysicallypainful. Thus,itdif- lems became apparent - with teacher Nueva and 60-traditional schools (a con- fersfromold-agpanddisabilityinsurance, training, with the automatic promotion trol group). They found that Eauela from compensation for work-related in- stem, and with the relevance of course Nueua had significantlyimproved student jury and illness, and others This exposes .0ntent to rural life. outcomes and student and community it to greater crticism from citizens op- 48 Polky Reseawh Worklng Paper Seres posed to any sodal insurance, critiCiSm 898. Refomning Finance But taking concerns about moral haz- that planners who build unemployment In Transitlonal Socialist ard to an extreme - prohibiting debt fi- insurance progrms must take into ae- Economies: Avoiding the Path nance-could starve new firmsforeredit count. from Shell Money to Shell Games and limit economic growth. And without Hanermeshbanalyzesthevariousgoals healthy growth, the reform-oriented re- that have been adduced for unemploy- Gemrad Caprio, Jr. and Ross Levine solve of TSEs resolve may wane. ment insurance and decides which ones (April 1992) This paper-aproductofthePinancial make sense. -Sometimes the supposed Sector Development Department - is goals run counter to what unemployment In severl transitional sociaist economies part of a larger effort in the department ins-urance programs actually do, but one thefinancial system is indangerafbecom- to sudy financial reform in transitional goal - providing consumption insurance ingppart of a sheLl game to hde the losses socialist economies. Copies of the paper - is at least partly met by typical unem- of the 'rear economy. Rapid, successful are available free from the World Bank, - ployment insurance programs in devel- economicreformrequirespuuttingtheshell 1818 H Street NW, Washington, DC oped countries, game to an end. 20433. Please contact Wlai Hamermesh lists the parameters of Pitayatonakrn, room N9-003, extension typicl unemployrnent insurance pro- In the late 1980s, transitional socialist 37666(37 pages). grams andtheirrangesinindustial corn- econoniies (TSEs) in Central and Eastern tries. Evidence about the economic impact Europe were only somewhatmore sophis- of these parameters provides planners ticated than shell money systems: savings 899. The Flnancing of Small with abasis or choice thatcan gwde them books orcurrency hadtobe used for most Firms In Gennany in constrctingunemploymentinsurance transactionsand there was noriskassess- programs elsewhere. ment,informationmonitaringandacqui- Christiaan EIim Experience and evidence in developed sition,orportfoliomanagement.TheTSEs OlMay 1992 economiesmaycarryoverintodeveloping have moved toward a two-tiered banildng economies, Hamermesh concludes, but system (at different speeds), but they lag In Germany, smaul banks finance smaU this is unclear. Several caracteristics of in the development ofcompetitive,market- firns Adive govenment suppot and a developing economies, particularly the based financial systems. In several TSEs sophistcated refinancing netur iOw- possibfitythatadual labormarketexdsts, the financial system seems tobe part of a tiely overcomefinancialnmarkd impercw- are important. This suggests the need for shell game to hide the losses of the "r teans. careinintroducingunemploymentinsur- economy. ance progrms in these economies. Caprio and Levine argue that rapid, In Germany, qmall firms are financed Hamermesh suggests several lines of re- successful economic reform requires put- chieflybysmall baks, which are grouped search to answer questions about the va- tingthesheU game to an end.Theyreview into two systems: the savings banks lidity of the cnsumption-insurance goal several contentious issues of financial (Sparkassen) and the creditcooperatives. indevelopingcountries, and aboutappro- reform in the TSEs, especially issues in- The government actively supports the fi- priate structures of taxes and benefits. volving macrofinance, corporate finance, nancing of investments in smaindustry Hamermeshs discussions of dual labor the internal debt problem, and the need - especially business start-ups. Harm markets and the size of the modern sec- to build efficient banks. explains how small firms are financed in tor do not apply to the formerly planned KeyproMblemsinthefinancialsectorare Germany. economies of Eastern Europe, butbis dis- achieving some flexibility with interest HarmcontendsthatsmaRllandmedium- cussion of progrm parameters and goals rates, making the financal system com- size firms contribute a lotto the German-i maybe useful for policymakers there who petitive and efficienthelpingin theretool- economy. Small firms are not subject to must analyze expectations aboutany un- ingof existing firms and the construction the control institutions - such as super-. employment insurance program that is of new ones, building the banks' institu- visory board seats, proxy voting, and eq- proposed. tional capabiity for commercial lending uity holdings - that shape the relation- This paper - a product of the Educa- (includingunprovingthebankinonitor- ships between large firms and large tion and Employment Division, Popula- ing capability and sills in assessingnisk banks. tion and Human Resources Depart;ment and credit), and cleaning up the heavy Government programs - whether -is part of the department's progrm of arrears in debts between enterprises, loans from government banks or credit studiesonemploymentandlabormarket Caprio and Levine contend that the insurance from subsidizedcredit-guaran- issues. Copies are available free from the banks should be cleaned up" when they tee institutions - are all administered WorldBank, 1818HStreetNW,Washing- are privatized, to prevent the quick re- through the banking system. The govem- ton, DC 20433. Please contact Selia emergence ofdebtproblems.They believe ment fimds or insures selected projects, Khan, room S6-228, extension 33651(44 that either ofthe proposed alternatives for but the banks assume therole ofthemoni- pages). shaping nancial systems in the TSEs - tor and credit analyst in return for com- veryhighlyeapitalizedbankcingornarrow pensation. banling - would minimize the need for The operations ofgovernmentbanksdo future support Either alternative would not have a subsidy component beyond reduce leverage in the TSEs and provide profits forgone. Their loans carry low in- more financial stability. terestratesbut not to the extent that they Poaicy Researcb Working Paper Series 49 allow profitable arbitrage with financial German banks are often criticized, or the factionalized U.S. system investments_ The subsidy associated with praised, depending on a person's view- Thispaper-aproductoftheFinancial the credit-guarantee institutions benefits point, for owningGermanindustryandfor Sector Development Departnent - is almost exclusively the entrepreneur who playingan activepartincorporatecontrol. part of a larger effort in the department would otherwise have been rationed out Harm n gues that this misrepresents to study the role and functions of finan- of the market. Banks benefit only to the German banking- First, the number of cial institutions. Copies of the paper are extent that overcoming such rationing German firms a bank can own or control, available free from the World Bank, 1818 brings them new business. Therefore, although significant, is limited. H Street NW, Washington, DC 20433. subsidies are not exploited beyond an in- Some very large firms are predomi- Please contact Wilai Pitayatonakarn, tended level. nantly privately owned, or are not char- roomN9-003, extension,37666 (32pages). Harm points out that small banks, tered as joint-stock companies that could .which are part of a decentralized market potentiallybe listed on an exchange. Most structure, overcome imperfections in the small firms, and evensomelarge firms, do financial market by buildinginstitutions not even have a supervisoy board - that supersede the market mechanism. which is the most important forum The savings bank and credit cooperative through which bankers can represent systems have each developed an internal their interests in a firm. capital rarket, not unlike those within Second,althoughmostofthelargest100 large banks operating nationwide. Only firmshaveabankcmemberontheirsuper- central institutions participate in the do- visoryboard,thisdoesnotimplyeffective mesticmoney market toplacethesystems bank control. Many comparnies have two excess liquidity or to raise funds to cover bankers from different institutions on the system's deficits.Also, thefundingpro- their board. gramsofthegovernmentbankslcanbeseen Third, the role of the banker in the su- asarefinancingmechanismthatespecidaly pervisory board has to be viewed in the helps small banks. The same is true for lightoftherigorousstandardsofcorporate rediscountable trade bills. governance imposed on German public Harm stresses that the nonmarket finns. The Codetermination Law of 1976 means for allocatingfunds have developed mandatesthat laborberepresented on the only to counter market imperfections. supervisory board of the largest firms as Maketincentivesprovidetheframework well as all joint-stock compames. for economic decisions. The system is bal- This stresses the role ofthe supervisory anced to the extent that the scope for per- board as a negotiatingforum forall inter- verse allocation of funds is minimized by ested parties. It leaves little room for the mandating joint decisions of potentially interpretation that the bankers areeeXClu- conflicting parties. sively in control. Thispaper-aproductofthe Financial Fourth, bank ownership of industry is Sector Development Department - is not pervasive, but is in fact limited to a part of a larger effort in the department few special cases. Ownership ofsignificant to study the role and functions of finan- stakes has further decrased during the cial institutions. Copies of the paper are last decade. availablefree fiom the WorldBank, 1818 Fifth, proxy voting is more important H Street NW, Washington, DC 20433. than stock ownership as a potentialmeans Please contact Wilai Pitayatonakarn, ofcontrol. Harm notes that it is generally room N9-003, extension 37666 (35pages). agreed in Germany that banks provide a useful service to small shareholders. Al- though more than half of the largest 100 900. The Relationship between firms are notaffected by proxyvoting, the Gennan Banks and Large German continued attractiveness of corporate eq- Firms uitiesfor the general public suggests that the control issues associated with praxy Christian Harm voting will become increasingly impor- (May 1992) tant. Harm argues that the German system Large German banls provide aoU kinds of of corporate governance represents an financialserviceto largeindustrial com- efficient attempt to minimize socially panies and participate in an effective sys- wasteful behavior. The negotated cmisen- ten ofcorporafegovernanca tBcntrary sus achieved in the boardroom provides to widely-Aedd iews, tdy co not own Ger- betterincentives to managementtomaxd- man industry. mize firm value and social welfare than Volume X Numbers 901 - 1000 Pollcy Research Working Paper Seodes 53 901. Opening the Capiltal ..ccount: from opemng the capital account domes- domesticinterestrates.Thepublicsector's A Survey of Issues and Results tic real interest rates would decline, and domestic debt was substantial, however, there mightbe a 10 to 15 percentincrease andthe highinterestrates drove the pub- James A. Hanson in investment, which also might bringbet- lic sectDrfsinterest bill considerably above (May 1992) ter technology and management with it. its non-interest surplus. The public sector Reasonable fiscl balance and a sound could therefore cover its interest bill only Opening the capital account allows idi- domestic financial system are precondi- by taking on additional debt. Because the uiduals to diversify and protect Memselues tions to successfully opening the capital interest bill was so large, domestic debt betteragaitnst risks, as weU as increasing account. Without these preconditions, grew rapidly. Hyperinflation resulted tfhe economy's access to foreign saving But capitalflightmayoccurorthe government when the outstanding debt became larger it also limits the country's ability to make may have to bail out domestic banks. than domestic financial markets could be monetary policy cnd tax capitaL Captalaucontberahizationantosoe persuaded to holdL extent, be phased with current account The Central Bank played a focal role in Increased trade, improved communica- hlberalization by legalizing and limiting tbeseproceses.Itissuew fiterest-bearing tions, growinginternationalization ofpro- difrerent instruments and institutions to debt in the forms of remunerated bank duction, and legalization of foreign cur- varying degrees. Finally, tradeliberaliza- reserves, 'inaccessible deposits,3and Cen- rency instrunents have increased access tion programs and exchange rate policy tral Bank bills, to absorb money. The in- to international capital markets. Develop- need to be viewed not only in terms of terest bill on these liabilities generated ingcountrygovernmentsarebeginningto maintining currentaccount balance but mounting 'quasi-fiscar borrowing re- consider complementing increasingly alsohowthey affectthe-real interestrate quirements, winch the Central Bank fi- open goods markets with de jure capital and investment, through the capital ac- nanced tbrough additional debt issues. acount liberalization. To assist this count. Thisdebtwasheldmainlybycommercial analysis, Hanson surveys the costs and This paper- ajoint proluct of the Of- banks who financed themselves through benefits ofopemng domestic capital mar- fice ofthe Director, Country Department high-yielding short-term deposits. kets and including some practical issues. W, Latin America and the Caibbean Hyperinflationaxy pressure developed Capital account liberalization provides Region, and the Financial Policy and Sys- when depositors, perceivingthat the Cen- greater access to foreign financing for tems Division, Country Ecnomics De- tralBaksdebtaccunulationwasbecom- aggregate investment. Italsoallowsindi- partment - is part of a larger research ing excessive, withdrew and moved rap- viduals to diversify and protect them- effort to understand financial reform. It idly into foreign exchange, engendering selves against risks more easily. But in- was funded by the Bankls Reseach Sup- heavy devaluation pressure. dividualsoftenseektoprotectthemselves port Budget for research project 'The Copies of this paper are available free against actual and potential govemment Impact of Financial Reform" (RPO 676- from the World Bank, 1818 H Street NW, policies.Thismayleadtoreduceddomes- 13).Thepaperfocusesontbedebateabout Washington, DC 20433. Please contact tic saving when the capital amcount is the sequencing ofreform -which should Alexandra Blkhurst, room 16-018, ex- opened, particularlyin an unstable policy come first: the liberalization ofcapital or tension 37897 (53 pages). An earlier ver- environment, currentaccounts? Copies ofthepaperare soarofthis paper-aproduct ofthe Coun- Open capital accounts reduce the abil- available free from the World Bank, 1818 try Operations Division, CountryDepart- ity totax capital and to conduct monetary H Street NW, Washington, DC 20433. ment IV, Latin America and the Cani- policy (undera fixed exchange rate). They Please contactDiane Bouvet, room 16-061, bean Region - was published as the also increase a countrys exposure to ex- extension 36783 (43 pages). Region's Internal Discussion Paper 66, ternal monetary shocks. But the loss oftax śPublic Sector 'Debt Distress' in and monetary independence brings an Argentina'sRecentStablizaaton Effrts." offsettingbenefitthegovernmenesincen- 902. PublIc Sector "Debt Distress' tive to undertake such policies is reduced, In Argentina, 1988-89 which lessens the risk of policy instabil- 903. The Economic Effects ity. An open capital account also may en- Paul Beclerman of Minimum Import Prices hance the ability to conduct fiscal policy, (May 92) (With an Applicatlon to Uruguay) depending on how international investors respond to variations in fiscal deficits. Efforts to control Argentinas inflation in Federico Changabaquf Finally, in evaluating the costs and ben- 1988 and 1989 failed,generating episodes and Patick Messeri efits oflegally opening the capital account, of hyperintion, largely because the sta- (May 1992) it is important to consider just how open bilization programs drove the public sec- the capital account really is and to what tor into debt disns. By imuosing floor prices on imports, the extent existing regulations merely shift pr n for reference and minimum the burden of implicit taxes onto those Underthe August L988 "Primaverae Plan export prices jeoparize trade libaliza- with less access to foreign exchange. and the July 1989 "Bunge y Born" Plan tionefforts bycrtAtgtheimpressionthat Mostevidence about theimpactofcapi- stablmization programs, the Argentine tariff cuts are greater than they are Ref- tal account liberalization comes from in- authorities sought to anchor the price rencePricesaddto the distrtio cread dustrial countries. Available evidence level through an appreciated real ex- bya pure tariffystem by distorting rela- suggests that developing countxies with change rate, which they sustained tiue domestic prices - by promotng the stable policy environments could benefit through polices that maintained high domestic consunption of highs-quality 54 Policy Research Working Paper Seres goods and the domestic production of Ballantyne, room N1O-039, extension high investment rates, such as deforesta- lower-quality goods. 37947 (23 pages). tion and sulfr oxides, tend to improve with higher incomesL By increasing the cost of imports, mini- * The main exceptions to this pattemr mumunitimportreferencepricesnotorly 904. Economic Growth are dissolved oxygen in rivers, municipal generate theusual distortionsoneexpects and Environmental Quality: te, and carbon emissions-all of from tariff protection but add new ones Time-Series and Cross-Country which have negative effects that can be that a pure tariff ystem would not gen- Evidence exernalized. erate. * Technologyseemstoworkin favorof Reference prices substantially reduce Nemat Shafik and Sahei4it Bandyopadhyay improved environmental quality. Except the price gap betweenimports with prices (Jiune 1992) for fecal coliform, all environmental indi- above and below the reference price. By caLtorsimproveordonotworsenovertime, making 'cheap" imports relatively more Iti spossibe to 'grow ot or some environ- controlling for the effect of income. expensive than 'expensive" imports, ref- mental problems, but there is nothing az- * The econometric evidence sugests erence prices affect quality in three ways tomatic about doing.A Action tends to be thitrade, debt, andothermacroeconomic that appear not to have been analyzed taken where there are generalzed local policyvariablesseemtohavelittlegener- before: costs and substantial private and social ahzedeffectonthe enviromnent, although * Theycaninduceforeignfirmstoshift benefits. Where the costs ofenuironmental some policies can be linked to specific toward more expensive exports to the degradation are borne by othws (by the environmental problems. country with reference prices, poor or by oter countries), there arE few * The evidence suggests that it is pos- * They can induce domestic producers inentives to alter damagin behavior sibletogrow out of"some envirnmental in that country to shift production toward T1zde, debt, and other macroeconomic problems, but there is nothing automatic lower-quality, cheaper goods. policy uarables seem to have litlegener- aboutdoingso-polciesandivestinents - Because this decreases the relative alized effet on the environment toreduce degradation arenecessary. The price of the expensive varieties, domestic evidence shows that most countries find consumers may lean toward buying more Shafik and Bandyopadhyay explore the such environmental policies and invest- expensive goods. relationship between economic growth ments worthwhile. In other words, this system ofadinis- and environmental quality by analyzing * Actiontendstobe takenwherethere tered protection distorts domestic con- patterns ofenvirormental transfmatmon are generalized local casts and substan- sumption and production. for countries at different ineome levels. tialprivate andsocialbenefits. Wherethe UIsing the case of Uruguay, Theylook at how eightindicators of envi- costs of environmental degradation are C^hanganaqf and Messerlin estimate ronmental quaity evolve in response to borne by others (by the poor or by other whatprotection the reference price proce- economic growth and policies across a countries), there are fewincentives to al- dures provide for Uruguayan industries IargenumberofcoLmtriesandaaosstime. terdamagingbehavior. and analyze how tlis protection affects Has past economic growth been asso- This paper-a product ofthe Office of Uruguay's economy. ciated with the accumulation of natural theMVcePtesident, DevelopmentEcnom- Theyshow thatthereferenceaudmini- capital or the drawing down of natural ics -was produced as a backgrond pa- mum export price procedures imposefloor resource stocks? Is the accumulation of per for World Development Report 1992, prices on imports that cover more than a physicalandhumancapitalacomplement which focuses on the environment. Cop- third ofvalue addedin Uruguayanmanu- to or a substitute for the accumulation of iesaf thispaperare available freefiromthe facturing. The minimum exportprice sys- natural capital? How do these relation- WorldBank, 1818 HStreetNW, Washing- tem boosts published tariff rates for cov- ships vary across different environmentaI tan, DC 20433. Please contact the World ered goods by 7 percent (probably an un- resources? Andhowhave macroeconomic DevelopmentReport office, room T7-101, derestimate) and the reference system poicies affected the evolution of environ- extension 31393 (50 pages). boasts them 18 percent. mental quality? Among their conelusionsr These systemsjeopardize tradeliberal- * Incomehasthemostconsistentlysig- ization efforts by creatng the inpression nificanteffect on all indicators ofenviron- 905- Investing in All the People that taiff cuts are greater than they re- mental quality. But the relationship be- ally ar These systems also create ma- twee environmental quality and eco- LawrenceL Summers sive distortions (from 15 to 30 percent) nonic growth is far from simple. As in- (may 29w2) between the relative domestic prices of comesrise,mostenvironmentalindicators imported goods above andbelowthe floor deteriorate initially, except for access to Money spent ancreaig the educatin of prices. safe water and urrban saitation - prob- girls not only more socially produ&r,;e This paper - a product of the Trade lems that higher incomes help resolve. than miitary outlays. It is also fir more Policy Division, Country Economics De- * Many indicators tend to improve as productivetnotherscidsectoroutlays partinent-is part ofalargereffortinthe countries approach middle-incomelevels. -and than the vwstly largerphyuirluapi- department to monitor and improve the There is sme evidence thatcountnes with il outlays projected for the ne decade. effectiveness oftrade policyreforms. Cop- highinvestmentratesandrapideconomic ies of thepaperare avlablefreefom the growth put greater pressure on natural Recent research has convinced Summers World Bank, 1818 H StreetNW,Wasbing- resources, particularly in terms of pollu- that once all the benefits are recognized, ton, DC 20433. Please contact Dawn tion. But some indicators thatworsen with investment in the education of girls may Policy Research Woaitng Paper Serfes 55 be :"he highest return investment avail- nual General Meeting of the Pakistan only paper, the legal framework comes to able in the developing world - and it is Society of Development Economists in life only when legal and administrative an especially high priority for Pakistan. Islamabad, Pakistan, in January 1992. institutions can enforce the laws and Summers stresses five points to make his Copies of the paper are available fiee from readily resolve the disputes they inevita- case for action: the World Bank, 1818 H Street NW, bly spur, andonlywhenthepublicaccepts - Tens of millions of women (perhaps Washington, DC 20433. Please contact that the laws are binding Moreover, the as many as 100million) are missingworld- Maria Fernandez, room S9-035, extension laws by necessity provide only a general wide mainly because of higher death rates 33766 (26 pages, including tables). framework. Their content must be filled for young girls than boys. Higher death bymore detailed regulationsandnpractice ratesare symptomaticofthemoregeneral in individual coess, a process that takes pattem offemade deprivation in the devel- 906. Bulgaria's Evolving Legal time. The challenge of legal development oping world, especially in South Asia. Framework for Prvate Sector isasimmenseasthatofeconomicreform, - Underinvestment in girls is an eco- Development and the two are inexorably intertwined. nomic problem resulting from a vicious This paper -a product afthe Socialist ycle caused by distorted incentives. Par- Cheryl W. Gray and Peter lTnachlov Economies Reform Unit, Country Eco- ents donet invest in their daughters be- (May 1992) nomics Department, and the Europe and cause they expectthem to grow upto serve CentralAsiaDivsion, Legal Department only their husbands; uneducated women The administrative andjudcial machin- -is part of a larger effort in the Rank to have few alternatives, so the expectation ery for implementing new laws is sower study evolving legal frameworks in East- becomes self-fulfilling. to develop than the new laws themselves. ernEurope. Copiesofthe paperare avil- * Incrasingeducationalopporturities The chalernge of legal deuelopment is as able free from the World Bank, 1818 H for girls offers the best chance of break- immenseasthatafeconmicreform-and Street NW, Washington, DC 20433. ing this vicious cycle. Considering both the two are inexorably intertwined Please ecact Maine Berg, room Nil- private benefits andreturns to otherfam- 054, extensin 36969 (34 pages). ilymembers, itis perhaps the best yield- ing return of adl investments available in Bulgariasin themidstofahistorictrans- developingcountnes.Amongothertinngs, formation frm a planned tD a market 907 Institutional Reform women spend more of their income on economy. The Bulgarian government is In Emnerging Secuts Markets children than theirhusbands do, and edu- working steadly to create a legal frame- catedwomenaremorelikelytoseekmedi- work in which the private sector can d- RbertPa cal care and to improve sanitation prac_ velop. Manynewlaws-includinga new a&y 1992i tices. Educated women choose to have constitution and new laws on companies, fewer children and can provide more for foreign investment, and competition - Developing a secrities market is a long- thxose they dohave, havebeenadoptedoverthepasttwoyears, ter, task that requires = Giving an extra 100 girls an addi- and more ar now being drafted and de- tenswe ttioawl deeopme4 for tional year of education in 1990 would aed Bulgarias pre-warlegal famework which there arefew shortcut& And many have oDst approximately $30,000. This was quie modem for its time, and most of es regpair-ed have both posve investment would prevent roughly 60 in- of these new laws draw on pre-war Bul- a negative mmiication in oier pars fant deaths and three materna deaths - gaan tradition. of the financial system and the economy. andavert500births. Summersconcludes Gray and lanacbkov descibe the cur- that the social benefits alone of increased rent legal framework in Bulgaria in the In the longni, sound, efficient securities femaleeducationaremorethansufficient areas of ctional,real property in- markets can contribute to economic to cover its costs. tellectual property, company, foreign in- growfi; in the short run, they play an -* Programs to increase female educa- vestment, bankruptry, contract, and important role in fnacl liberalization tion are less expensive than other devel- antimonopoly law. These areas of law and deepening. They do so principally by opment investments and could quicldy define property rights the means for ex- providingameansforboth capital raisers increase female enrollment rates. Piol- changingpropertyights, and the rules for and investMrs to diversify risk. ties should be to reduce the cost ofschool- competitive market behavior - the bed- Pardy provides a guide to issues in- ing for girls and to make special efforts to rock of a legal system for a ma-rket volved in institutional and regulatory re- accommodate parents's practical needs. economy- form of secuities markets - and a dis- - Major initiatives to increase female In Bulgaria as in the other countries of cussion of the practical implicaltions of educationcantrnsformsocietyovertime. Central and Eastern Europe, definingreal different policy options and sequencing If more girls had gone to school a genera- property rights and creating the condi- decisions. tion ago, millions of infant deaths could tions for free and fair competition are the Pardy argues that establishing sound have been averted each year, and tens mostcontentious and confasedlegal ares securities markets requires institutional millions of families could have been because they tred so heavily on vested developmentthatisasbstantial task for healthier andhappier. interests. Other areas of law are less of a ydevelopingcounties Prerequistes This paper, by the ViLce President, De- problem, for the developmentof secunitiesmarkets velopment Economics, and Chief Econo- But the admiristrative and judicial include: mist, World Bakr, was prepared for the machinery-forimplementing thoselawsis * Amacroeconomicandfcal environ- Quad-i-Azam Lecture at the Eighth An- dowertodevelop Lawsbythemselvesare ment conducive to the apply of quaity 56 Policy Research Working Paper Series securities -as well as sufficient demand tion by the Tax Incentives Evaluation Copiesofthepaperare availablefreefrom for them. Project of the Public Economics Division the World Bank, 1818 H Street NW, - Alegal,regulatory,andinstitutional constituteinterestingnewworkfordevel- Washington, DC 20433. Please contact infrastructure that can support efficient aping countries. Carlina Jones, room N10-063, extension operation of the securities market. Rajagopal and Shah argue that analy- 37699 (70 pages, with tables)- Pardy discusses the second of these in ses of such questions can be considerably detail, providing guidelines for basic enriched by explicitly incorporating into infiastructural requirements. Essentially the analysis the industrial market struc- 909. Parallel Markets, the Foreign such an infrastructure must provide four ture of the industry at hand and propos- Exchange Auction, and Exchange things: ing an empirical procedure to test the Rate Unification In Zambia * Certainty about property rights and marketpowerhypothesis. Such atesthas contracts. important implications for the effective- Janine Aron and Ibrahim A. Elbadawi * Transparent trading and other pro- ness offiscal incentives forinvestment. If (ay 1992) cedures and public disclosure by compa- the producers in an industry have market nies of all information relevant to the power, they maybe able to shift taxes for- Zambia's fature with macro o0Tmic re- value of their securities. wardcompletelysothatanytaxincentives farm-incudingexchange-ratereform- * Protectionagainstunfairpracticesby would simply result in windfall gains for is the result of acroeonomic (especially insiders and intermediaries. the firms in that industry. But in a com- fat) laxity. And the exchnge-rate pre- - Protection against the financial fail- petitive industry, producers are not able mium is liWy to rise as terms of trade ureofintermediariesandmarketinstitu- to shift taxes forward completely so that wrsen, foreign aid dwcines, and expcta- tions such as clearinghouses. tax incentives can stimulate investment. tions of deualuations rise. Pardy also provides examples of the Rajagopal and Shah test the market policy conflicts and uncertainties that are power hypothesis empirically using data Since Zambia's independence in 1964, a routine in securities market reform and for selected industries- in Turkey, chemi- large, thriving parallel market forforeign development, and suggests approaches to cals and petroleum derivatives; in Paid- exchange has coexisted with a rich menu managing them. stan, textiles as well as chemicals and ofofficial exchange rate policies aimed at This paper - a product of the Einan- pharmaceuticals. In addition, they also achieving a more flexible exchange rate cial Policy and Systems Division, Country examine the impact of investment tax andprice system as wellas financial and Economics Department - is part of a credits (credits against tax liability), in- trade liberalization. Despite aggressive larger effort in the department to explore vestment allowances (deductions against policies in these areas, particularly forthe ways to promote the developmentofsound taxable income), and research and devel- exchangerate, the blackmarketpremium securities markets. Copies of the paper opment expensing on production and in- (defined as the ratio of the black market are available free from the World Bank, vestment decisions and government rev- rate to the oficial rate) remmns high - 1818 H Street NW, Washington, DC enues. averaging 100 percent for 1970-88 and 20433. Please contactFSD, room N9-005, Theyintroduce threeempiricalinnova- more than 400 percent i recent years. extension 37664 (32 pages). tions in this study. First, they specify an AmonandElbadawiexaminetheorigins expression for the rental price of capital, ofthe parallel market, the statistical prop- consistent vith rationaliatherthan static erties of the paralel premium, and the 908. Tax Incentives, Market Power, exectations. Second,insteadofassuwming shocksandmacroeconomicpoicychanges and Corporate Investment: perfect competition, they implement an thatinfluence its evolution. Usingannual A Rational Expectations Model empirica test of market power. Third, data, they specify and estimate an edlec- Applied to Pakistani and Turkish they empirically derive an incremental tic error-correction model for the pre- Industries benefit-cost ratio for the incentives evalu- mium- ated in the study. They find that the large parallel mar- DagmarRajagopal and Anwar Shah Theyconclude thatfi rnsin those indu-s Iket might have caused problems in mac- (May 1992) tries had limnited market power and were roeconomic management '-d economic thus able to shift taxes forward only par- reform.Alarge exchange rate premium as A production structure model incorporat- tially. Thus, tax incentives did have an an indication of foreign exchange short- Lig rational expectations and market impact on production and investment de- ages will have direct deleteriousimpacton power is used to derive imporant insights cisions in firms in those industries. But copper production and export. It can also on the effectiveness of tax incenies on theseimpactsvariedgreatlyacrossdiffer- indirecy hurt copper exprts thrugh its industrialproducion and investment de- ent industries, and in three of five cases, negative effect on domesticincentives for cisions in developing countries. tax incentives resulted in higherrevenue the officialy sanctioned copper economy. losses compared with their stimulative Abighpremiumwasalsofoundtoencour- Onlyrecently has empirca research been impact on investment in physical or age overimporing (and probably used to evaluate tax andindustrial policy knowledge capital. overinvcidng)ofofficiafytradedimports- indevelopingcountriesusingaframework This paper - a product of the Public Aron and Elbadawi find that foreign that incorporates the cost of capital and Economics Division, Country Economics inflation and depreciation of the black the production structure. Recent applica- Department-is part ofalarger effortin market rate (in a cost-push manner) di- ticns of dynamic duality and computable the department to evaluate fiscal incen- rectly increase domestic inflation. Depre- general equilibrium analyses ofthis ques- tives for domestic andforeign investment ciation of the black market rate also sig- PoUcy Reseatch Wocikng Paper Seres 57 iauis indirectly that econoniicrefonn lacks free rate -before the foreign sector can andprotectve controls andespeciallyon z=dibilityandthatmacroeconomiepolicy begintorespondtorealdepredation.Then the need for capital adequacy and for ;sunsustainable. Short-term changes in therewill be less needforaid flows to con- strong baning supervision. tne premium reflect expected changes in tinue at their initial levels. - There is ample recognition of the pulicy and politics. This paper - a product of the Macro- importance of speedy and decisive inter- The major factor behind the failure of economic Adjustment and Growth Divi- vention to prevent insolvent institutions uniification and economic reform is the sion, Country Economics Department- fiom magnifying loses and infecting the Lundamental endogeniety of the parallel is part ofalarger effortin the deparbnent rest of the financial ystem. premium in macroeconomic and trade to study the macroeconomic implications * The role of deposit insurance is still policy - as well as in exogenous terms- ofmultipleexchange marketrin develop- unclear. It is instrumental in protecting :!trade and foreign aid shocks. Improv- ing countries. Copies of the paper ar smallsavers, butotherwiseitaroleinpre- ing the terms of trade or increasing for- available free firm the World Bank, 1818 venting bank rns, promoting competi- e?gnaidleadstoadeclineinthepremium. H Street NW, Washington, DC 20433. tion, or stimulating better regulatory .rus effect dominates the indirect effects Please contactAnnaMbranon,room Ni11- mechanismsisopentoseriousobjections. ofreal wealthandreal appreciation,which 042, extension 39074 (115 pages). a The regulatory issues of nonbank fi- wwrktoincreasethepremium.Expansive nandal intermediaries are similar to fbcal and monetary policy muse the pre- those ofbanks. Forlife insurance compa- iiram to rise. 910. Policy Issues In Financlal nies, price and productcontrols-which Ofall the factors thatinfluence the pre- Regulation inhibit competition -are being replaced mium and have caused exchange rate by solvency controls. In addition, the use unification to fail, terms-of-trade shocks Dimitri Vittas of insurance (and pension) funds fir fi- dominate. But the driving force behind alMay 1992) nanIngre publicsectordebtsatbelow- vetsstence of the premum was outright mketyieldsisbeingreplacedbyinvest- laxity in fiscal and monetary yolicy - The 1980s were a decade ofextensiv regu- meat rules that emphasize safety and peecislly in 1985 and the follewing two latoiy reornm. Macroeconommicandaiocac- profitaity. vears of the exchange rate auctions, and tiue controls that inhibit competition, in- * Themostcontroversialtypeofeontrol during the collapse ofeconomic reform in noatin, and efiincy were out.' Pru- is still structurl controls that impose 1987. dential and other contols that promote geographic or functional limits on the ac- Aron and Elbadasw conclude that ex- stabilty and fains were isj' The rela- tities of financial instit ns. There is ąarnge rate reform without fiscal reform tue costs and benefits of uniuesal banks a worldwide trend in favor of universal nmybefiutile.-Fiscalretrenchmentfor the and financial groups remain a subiect of banking and even in ftvor of cloe links Zrst two years of the crawling peg was cantrversy. between banks and insmance, but less influenced by political considerations. supportforcloielinksbetweenbsiksand Zambiaisoneofthemosturbanizedcoun- DimnitriVittasummarizes thefindinof industrial companies. tries in Africa about half the people live afotbcomingbookonfinancialregulation * Universalinsttutionsposeaserious inurbanareas,andtheurbanmiiddleclass that examines the policy ssues of finan- challenge to regulators and supervisors wields considerable influence. This ex- cial regolation and reviews the experi- Countries with weak supervisory agencies '-ins the pervasive ensemble of price ences of both developed and developing would be well advised to promote simpler - Aitrol and subsidy schemes that have countries. He stresses the following ten and more transparent structures. ---vived reform attempts. But the ratio points: * There is considerable controvery ;-Cgovernmentrevenue toGDP has never * The 1980s were not a decade of do- about the desirability and benefitsof uni- -!n below 20 percent (one of the highest regulation, but aperiod ofextensiveregu- versal bankig. Manyanalysts emphasize es in Africa) despite sharp declines in latoryreform. There was decreased reli- the difficulties of regulation by function m ns of trade. More emphasis should be ance on economic regulations thatinhibit and ofrelyingon rules ofconductfor over- en to the political economy and distri- competition, innovation, and efficiency- coming excessive risk taldas conflicts of ional consequences (especially theru- butincreaswdemphasonpradentialand interest, and the abuse ofprivllegedinfor- .urban nexus) in the early stages of other regulations that promote stabiibty mation. These analyst favor structural nomic reformn and fairness, contrds thatlimit the scopeforfraudand Zambia's economy, heavnly dependent * There is now widespread consensus mismanagement. But other analysts ar- zopper exprts, is pardculardy usmep- on the need for market mechanisms for gue that the threat of regulation, consid- oe to external shocks. Itisimportant to monetary and credit control and for allo- erations of reputation, and provisions for sralize major trade and financial mar- cating scarce financial resources. legal redress against offending institu- kpts in such a way as to compress the * Whatthebest speedandsequenceof tionswouldbeeffectiveinpolicinguniver- allelmarketandcpreventthepremium financial reform are remains an open sal institutions. n serving as a major signal to the question. The contrasting experiences of Vittas concludes by noting that most __:nomy. Japan and Chile support a cautious, Anglo-AmericanandScandinaviancoun- Increased foreign aid could help aiti- grdual approachIndonesia' experience tries currently suffer from the eonase- e the destablizing effects of terms-of- suggests that several paths ofreform may quenes ofexcesve anduncritical expan- de shocks. This is likely to be most workl sion of credit as well as firomwidespread -pfulin the early stages ofreform, when * There is strong consenUS on the _ -- tandasignificantamount an foster credibility and stabilize the importanceofprudential, of franud. He argues tiatffina l prob- 58 Policy Reseasrh Woaking Paper Sedes lems were to persist, the case for impos- be influenced by the invoicing of exports. initil contraction (a period of one to two ing portfolio and growth limits for pruden- Exports fiom Canada and Japan to the years),alongpause (fir three to flueyears), ial purposes mightmerit detailed consid- United States are invoiced primarily in and sustained recovery. The length ofthe eration. U.S dollars. The same can be said of inuestmentpauseislongerforlow-income Thispaper-aproductoftheFinancial Japans and Australia's total exports- The countries, and the cycle of public inest- Policy and Systems Division, Country exports of the other countries are priced menwt is ofgreateramplitudethanthe cycle Economics Department-is the introduc- mostly in their own currency. If exports ofprivate inuestment Thepaperdiscusses tory chapter of a forthcoming Economic are invoicedinthe exporters'currency,as the roles of macroeonomic retraint, co- Development Institute book *n financial is common in industrial countries, ex- ordinationfailums, value ofwaitiug, and regulation. It reviews and summarizes change rate volatility does not matter. lack ofsupportive infrustructwre ingentr- several papers that have already been Exporters pass price changes due to ex- ating these cycls ofinwestment issued as World Bank Policy Research change rate fluctuations on to importers, Working Papers. Copies of this paper are who in turn pass them on to consumers. Solimano reviews recent literature on available free from the World Bank, 1818 There are several reasons why consumers capital formation and economic reform H Street NW, Washingtonb, DC 20433. may be indifferent to the exchange rate and looks at the cycle of private invest- Please contact Wilai Pitayatonakarn, risk, especially for manufactured prod- ment that occurs during adjustment. He room N9-003, extension 37666 (38 pages). ucts. identifies three phases in the response of But if exports are preced in the import- private investment to adjustment pro- ers' currency or a third currency, volatil- grams: initial contaction, a long pause, 911. Does Exchange Rate VolatilEty ity matters -because both the exporter and sustained recovery. Hinder Export Growth? Additional and the importer must take into account The empirical evidence for Chile, Evidence how their profits vary when considering Mexico, and Thailand shows that the ini- the currency risk they face. For the ex- tial contractionlastsfirom one totwoyears --fng Qian ansPanos Vamngis porter, the covariance between costs and and the pause for three to five years. (May 1992) revenues is likely to be smaler than for Moreover, the length of the investment the importer. That means that wlule the pause is longer for low-income countries Inconsistency in the relationslip between importer or final consumer has a 'natu- such as Bolivia and Ghana. Andthe cycle errha nit rate vol atiy and exportgrowth ral hedge available, the exporter does not of public investment is of greater ampli- reflects differences anongcouznriesin the Finally, one can argue that the effect of tide thanl he cycle of private investment. currency in which trde is inoiced. Also, exchange rate volatility on trade is over- In characterizing the cycles of invest- exhangerrate uvlatiity may affect theal- stated, fur the following reasons. Ex- ment, Solimano assesses the role of such ocation of trade more than its leueL change rate volatility does not measure factors as demand restrint, currency the added rskiness of a firm's portfolio. depreciation, the value of waiting, cred- Qian and Varangis examine the impact of Exchange rates can provide a natural ibiityfailures, andthe lackof supportive exchangeratevolatilityontrade,usingan hedge in anfim's portfolio. Exchan rates infirstructure. ARCH-in-mean model. The advantages of may be negatively correlated with each This paper - a product of the Macro- this statistical approach over earlier ap- other or with the firm's other assets. And economic Adjustment and Growth Divi- proaches are that it provides more offl- finally, the use of forward markets can sion, Country Economics Department - cientcoefflcientestimnates anditprevents provide a useful short-term hedge. ispart ofalarger effort in the department the problem ofspunious regressions. They This paper - a product of the Interna- to study therole ofcapitab formationin the applied the model to six countries, esti- tional Trade Division, International Eco- transition from adjustment to growth. mating both bilateral and aggregate ex- nomics Department - is part of a larger Copies ofthe paperareavallable fiee from ports. effort in the department to analyze the the World Bank, 1818 H Street NW, They found exchange rate volatlity to effects ofthe exchange rate on trade. Cop- Washington, DC 20433. Please contact have a negative, statistically significant ies ofthe paper are available freefrom the Raquel Luz, room N11-059, extension impact in two cases: Canadian and Japa- World Bank, 1818 H StreetNW, Washing- 39059 (43 pages). nese exports tothe UnitedStates. Interms ton, DC 20433. Please contact Dawn ofaggregate exports, the relationship was Gustafson,roomS7-44, extension 33714 negativebutstatisticallyinsignificantfor (42 pages). 913. The Women's Development Japan and Australia; positive and statis- Program In Rajasthan: A Case ticallysignificantforSweden and, to some Study In Group Formation extent,the UnitedKingdom;but statisti- 912- Understanding the investmerit for Women's Development cally insgnificant for the Netherlands. Cycle In Adjustment Programs: The mnagnitudeofthe impactof exchange EVidence from Reforming Maitreyi Das rate volatility varied greatly - from a Economies (My 1992) reduction in exports of 7.4 percent (Canada)toanincreaseof5percent(Swe- Andr6s Solimano Through awareness-building and group den), following a 10 pereent increase in (May 1992) formation, rural womeninseveraldisctriCs volatility. in India have read that deprivation is These results led tothehypothesis that Private investment often goes through not unchangeable, that alernatiues exist, theimpactofexchangeratevolatiltymay threephases underadjustment progms: that they are competent enough to choose PolJicy Research Worklng Paper Serles 59 betweenalternatives, andthat theyare not report on Gender and Poverty in India. al personnel in the country, notjust those alone. Copies ofthispaperare available free from employed by the ministry of health. the World Bank, 1818 H Street NW, * Some countries need support to de- Das presents the Women's Development Washington, DC 20433. Please contact veloppoliciesthatwiblhelpthemmakethe Program (WDP) - launched in six dis- Stella David, room S2-264, extension best use ofregional training ihelities (in trictsin Rajasthan, Indiain 1984, andnow 33752(94 pages). publichealtendmanagemnent)innearby extending to nine - as a case study in countries. More support should be given awareness-buildingand group fornation to regional centersthatoffernianagement amongTrual women. 914. Health Personnel training for health workers and to initia- A departure from the traditional pat- Development In Sub-Saharan tives forimprovingin-service andon-the- tern of viewing women as the objects of Africa job training in management skills. welfare, WDPhas been a distinctsuccess. * Guidelines are urgently needed on 'Rural women have realized that their J.LParickVaughan how to rationalize spending on health depTivation is not unchangeable, that al- (May 1992) personnel. ternatives exist, that they are competent - There is an urgent need to update enough to choose between altematives, Sub-SahaanAfiica needs regionaltrain- methods for monitoring health workers and that they are not alone. ingl4cilities in publicheakhandmanage- andforprovidingthe basicn umeicalpro- One important feature of the project ment, in-depth studies on the cost inpEi- jections needed for planning. document was that it was provisional and cations of different trining and stafiing - In-depth studies are needed on the tentative, essentially a guide to structure options,gaidelinesforspendingonheath cost implications of training and employ- and financial patterns. Other programs personnl, and new methods for mn2itor- ing various types and numbers ofbealth focus on strengthening delivery systems; ing and projecting personnel needs workers, to give more insight into the WDP's sole rim was to form groups that optionsinnationalheaIthpersonnelpoll- would consolidate themselves for their Despite a significant growth in the total cies. own development - these groups, once number of trained health workers, the This paper - a product of the Popula- formed, would initiate any action they Afica regionis stfil poorly staffed. Itwas tion, Health, and Nutrition Dinvsion, needed and decided upon. the only World Health Organization re- Population and Human Resources De- The second important element of the gion that showed a decline in the doctor- partment - is part of a larger study of project document was the degree offree- to-population ratio from 1980 to 1986 Afiicaahealthpolicybythe Sector Opera- dom visualized for women's groups and Emigration aftrainedhealth workers- tions and Policy Vice Presdency. Copies nongovernment orgamizations. WDP particularlyphysicians-excerbates the of the pape are available free from the stressedtheneedtobuildawarenessand problem. Basic trining for health work- WorldBank, 1818 HStreetNW, Washing- confidence among women as essential to ers is Teasonably well established, but ton, DC 20433. Please contact Otilia integrating them into the development advanced and in-service training have Nadora, room SI1-219, extension 31091 process. been widely neglected. There remainsi a (19 pages). The institutional perspective ofaplace serious shortageofseniorstaffwithtrain- or center where women can be ofered ing in public health and management. continuing education and training gave Sub-Saharan Africa has not a single 915. Trade Polcy and Exchange way to the conceptofan njbormal network school of public health, and it also lacks Rate Issues In the Fonmer Soviet of womerns groups. Education was defined adequateregionalt mriingeenters in pub- Union as the acquisition of knowledge, which lichealth andmanagement. Planning for may not necessarily mean literacy. It health workers has been based largely on W.MaxCorden could even mean the acquisition of skills simple projections ofthe number of work- May 1992) 'for generating or controlling resources. ers required - without much regard for WDP has demonstrated that illiterate the economic costs or the availability of One approach to trade policy among the women can be effective group organizers. financial resources. )brmer Soviet repubic is to have no trade .The question this project opens up is this Most countries in Sub-Sahara Africa policy-to have omnpetelyfieetade with organize women for what? Too much focus have undertaken structural adjustment convertibiyfitr currmnacunt tranat- an training in communication and group programs that, together with world eco- tion Trzdeppaicqyshouldbefrunsparent interaction could become an end in itself. nomic conditions, have led to declining Any tariffandexport taxsturenshould Mahila Samakhya, a progam to organize financial allocations to ministries of besimple. Quantitaivecontrlsshouldbe women for education, used the process of health. As spending cutshave beenmade avoided. And nobariers to existing trade WDP but changed its aims and emphads. for such items as drugs, maintenance, and between the republis should be intro- What emerges from the WDP experi- transport, the proportion spent on health duced. ence is theprocess it unleashed: the orga- personnel hasrisen. There are now strong nization, interaction, and participation of pressures on ministries to reduce the Taking the long view (assuming prices women. number of health workers they employ have been liberalized, Carden reviews This paper - a product of the Women and to encourage more privatehealth ser- possible trade and exchange rate polies in Development Division, Population and vices. Vaughan concludes that oftherepubliesoftheformerSovietUnion. Human Resources Department - was * Health personnel policies must be- He considers alternative exdhange-rate prepared as a background paper for the come truly national, takdng into account regimes,includingamonetaryunion.For 60 Policy Research Working Paper Series Russia, a fixed but adjustable regime is 916. Measuring the RiSk of Default 917. Creditor Country Regulations most realistic. Frequent adustment may In Six Highly Indebted Countries and Commercial Bank Lending be desirable, to prevent the use of trade to Developing Countries restrictions to achieve balance of pay- Mrc Chemney and Jacques Morisset ments obectives. (June 1992) Asli Demirgtl-Knnt Trade intervention policies, if needed, (June 1992) should not weaken the fiscal situation. The risk that the debtor cowatry wilU de- There may be a case for export taxes or fault on its external debt may be siqnifl- The Bank far International Seklement's fora uniform revenue tariff for example, candy decreased by a debt-reduction op- capitaladequacy regulatiorns maybesome- but subsidies and quantitative restric- eraion, by a reduction in international what ess effecue than they appear in tions should be avoided. Ifsome domestic interest rates, and by changes in the accomplishing their maingoal ofcontrl- price controls remain, export taxes are country's willingness to pay. ling the oueraU riskines of the intemna- needed. donal banking system. But they may be Corden examines the need for transi- The pnce of debt on the seeondary mar- guite effectiue (probably u e n tional tariffs, including the argument for ket reflects the risk that the debtor coun- in dereasingecommercial bank leding to a temporay uniform tariff that is higher try might default on its external debt. deveoping countries. - than the long-ranrevenue tariffThe ten- Using the option-pricing theory, porazy uniform tariff would be designed Chesney andMorissetidentifythefactos Demirgil$Knnt discasses the possible to prevent temporary overshooting ofthe that influenced the risk of deFault in six impact of creditor country regulatory de- exdhangerate-buttheargumentissub- highly indebted countries fiom 1986 to velopments on the asset choice and port- jecttoimportantquaifications.Ifthereis 1990. foio islkiness of commeria banks. She any protection of infant industries, there In particular, they provide a measure focuses partcularly on the effect of the mustbea"hardtariff'path-thegradual of the debtorcountriss'wllingnesstopay. Bank for lnternational Settlementes decline of the tariff rate should be firmly They identify the parameters of the sto- (BIS's)risk-relatedcapitaladequacyregu- provided for in advance. ebastic process followed by this variable, lationsandcountryriskprovisiomnngprac- The case for a free trade area is strong so this approach can be usedto predict tie tices. because therepublics ofthe former Soviet future price of debt. She oncludesthatBlSregulatonsuay Union we so highly specialized, butthere Their model also emphasizes that a be less effective than they appear on the will be problems if price controls remain debt-reduction operation may lead to a surfiae in accomplig their main goal and differ among the republics. There significantincreasein the price ofdebton - cntrolling overal rislkness of the in- could be a free trade area even if there is the secondarymarket. This effectappears tebnaional bnkg system - but quite no monetary union. A customs union, in- tobe linked tothe initial stock ofetemal effective (probably unitentionally) in volving a common extemal tariff would debt, assuggestedbytheIrdebtoverhang decreasing commercial bank lending to prevent border contrls and trade del lee- hypothesis. developing countries. tion but would make a common tariff Finally, Chesney and Morisset show She adds that mandated provisioning policy(andhenceajointtanffcomon) empimicallythatacountrysuwllingnessto rulesalsodeterincreasedbanklendingto necesary. payissignificantlyinfluencedby changes developing countries. One approach to trade policy, Corden inindicatorsafthecountry'sabiliytopay Risk-related capita adequacy require- concludes, is in effect to have no trade (for exanple, by an increase in reserves ments pose two muan problems for devel- policy - to have completely free trade or in GODP growth), and by exogenous oping county lending. Firt, by focusing with convertibility for current account eventssuchastheincreaseinommerial on idvidu asset risk and assignig a transactions. Some taiffs anld export banks' loan reserves in mid-1987 or the highriskweight to assets withhigh return taxes may bejustified, at least as second- Brady Plan announcement in 1989. vanance, the regulation skews banks best policies. If so, however, Corden Thispaper -aproductof theDebtand asset chices away from assets withigih' stress that four principles be observed International Finance Division, Interna- risk weights. To decrease the insolvency * Barriers to existing trade between tional Economics Department -is part risk of banks, what should be controlled the republics should not be set up. ofalargereffortin the deparbnenttoin- is the portfliorxisk, not the choice ofindi- - * All quantitative control measures vestigate the benefits and costs to debtor vidual asset.L Taking into account asset- should be avoided, countriesandcreditorsofvoluntary,mar- return correlations, it is possible to con- * Tariff and export tax strctures ket-based debt and debt servie reduction struct low-nsk portfolios that include s'hould be very simple. arrangements. Copies of the paper are loans to developingcountries due to diver- * Trade policy should be transparent. availb;le free from the World Bank, 1818 sification benefits. This paper - a produt of the Trade H Street NW, Washington, DC 20433. Second, the assignedrisk weights donot Palicy Division, Country Economics De- Please contact Rose Vo, room S&4042, ex- measureassetriakproperly. By partment-waspreparedundertheaus- tension 33722 (21 pages). very broad risk weights, the regulation pices of the UNDPlWorld Bank Trade lumps togetberassets with very dfferent Expansion Program. Copies of the paper risk Itisimportanttorealiethat devel- are available fiee from the World Bank, aping countries are not a homogeneous 1818 H Street NW, Washaigton, DC group. Not dictinguis countres in 20433. Please contact PRDTP,room N1- assigningiik weights unjusdty punishes 023, extension 38004(53 pages). low-risk countries, possibly retarding Policy Research Working Paper Seles 61 improved access to financial markets. Madagascar's weak administrative sys- 919. Fiscal and Quasi-Flscal Also, by assigning a lower risk weight to tem and complex tEx structure (with many Deficis, Nominal and Real: developing country bank loans of short exemptions) have led to tax evasion and Measurement and Poicy Issues maturity, the regulation encourages credi- smuggling. De Melo, Roland-Holst, and tor banks to lend short term. This may Haddadcompare Madagascar'sfiscalsye- Roberto de Rezende Rocks increase risks, especiallyifcountrieshfnd tem with that of other low-income coun- and Fernando Salidanha long-term projects by rolling over short- tries, noting its greater reliance on (June 1992) term loans. distortionary taxes. One stated objective of BIS guidelines Using a 10-sector model and general- When foreign xhange ls1 systemati- is to harmonize bank regulations across equilibrium calculations, they estimate cally accumdula, the interest rates on countries. This is largely true of capital revenue losses from exemptions, tax eva- domestic credits should be adjusted and and capital adequacy definitions. But for sion, and smuggling for three important the central bank's cash proifts shoul -stop developing countries, loan loss reserves- tax instruments: import duties, value- being transfered to the governm.-&. These especiallymandatedprovisions-arealso addedtaxes,andexcisetaxes.Allowingfor losses may reflec the central bank's in- important, as they discourage lending. the agricultural and informal sectors to picit financing of imbalane in other 'These provisioning practices still vary remain exempt from taxEation, they esti- areas of the ecanomy. Eiminatg lass widely across countries and are slow to mate thatapplyingpublished taxrates to at their soar often require a #scal ad- adjust to improvements in developing the nonexempt sectors would raise tax justment, the need for which may not be country performance. revenue (from these three instruments apparent. At a time when commercial banks re- alone) fiom 6A percent to 15.1 percent of main reluctant to lend to developing coun- GDP at a relatively low welfare cost (0.4 In many developingeountries, the central tries, BIS capital adequacy regulations, percent of GDP), because such a move bankassumesanactiveroleinmobilizing coupled with country risk provisioning would reduce dispersion across instru- domestic and foreign exchange and allo- practices,appear toreinforce this tentaency. ments and within the import tariffstruc- catingittothepublic andprivate sectors. An international risk ratingcommittee ture. In these countries, central bank opera- couldcorrecttlebiasesagainstlendingto Next they calculate the welfare gain tions may create imbalances between developing courtries by determiningsuf- that would result from less distortionary costs andrevenues, usualy called quasi- ficiently detailed countryrisk weights, as taxstuctures. Simulationresultssuggest fiscal deficits. Sometimes these can be as well as a unified guideline for country that the excess burden of taxes would be large as, or large than, deficits of the provisions. This committee could also re- greatly reduced if Madagascar moved nonfinancial public sector.aile to con- flectimprovements in country creditwor- closer toa tax system with uniform rates sider these operatiom maygiverise to the thiness in their risk weights and could across sectors and instruments. Rela- puzzling simultaneous occurence of low suggest provisioning levels in a timely tively low uniform taxes would raise the fiscal deficits and high inlation. manner so developing countries do not same revenue as the structure prevailing There have been few attempts to for- suffer unnecessarily, in 1988, and would reduce incentives for mally integrte the accounts of the cen- Thispaper-aproduct ofthe Debtand tax evasion and smuggling. tral banlsnd he nonfinancial pubhc sec- International Finance Division, Interna- Assuming that the uniform tax (for tor. Rochaand Saldanhaexamine the in- tional Economics Department - is part import and export duties,VAT, andexcise teractions between (noninal and real) of a larger effort in the department to taxes)wouldbeimposedonlyinsectorsin government and central bank accounts, analyze commercial bank lending to de- which taxcollection is nowpositive, simu- analyze the problem of systematic foreign veloping countries. Copies ofthe paperare lations suggest that a uxnform tax rate of exchag losses in the central bank, and available free from the World Bank, 1818 6 percent across instruments would be identify policy issues assodBted with H Street NW, Washington, DC 20433. enough to raise the saune revenues col- quasi-fiscal deficits. Please contact Rose Vo, room 88-042, ex- lected under the current structure. More- Despite their limits, real measures of tension 33722 (37 pages). over, lowerbound estimates indicate that the deficit areless distorted than nominal the excess burden of taxation would be measure;especilyforthecentralbankes reduced by moving toward uniformity of quasi-fiscal deficit. Central banks rarely 918. Tax Evasion and Tax Reform about 5 percent of the tax base. spell out losses in their income state- in a Low-Income Economy: This paper - a product of the Trade ments, which often show sizable nominal Geeneral Equilibrium Estimates Policy Division, Country Economics De- surpluses - even where there is a real for Madagascar partment - is the product of a follow-up deficitin operations ofthe private domes- activity from a technical assistance mis- tic and foreign sectors. Jaime de Melo, David Roland-Holst, sion to Madagascar in February 1989, The accumulation of foreign echange and Mone Haddad carried out under the auspices of thejoint losses imposes a burden on the consoli- (June 1992) UNDPJWorldBankTrade ExpansionPro- datedpublictseosfinncesLThis burden gram. Copies of tlis paper are available - especially the central bans fbrign If Madagascar moved toward a simpler, fiee fiom the World Bank, 1818 H Street exchange losses -is transferred in part uniforn tax structure, it could raise the NW, Washington, DC 20433. Please con- to fiture periods, so policymakers often same revenues it now raises - wzth less tact Dawn Balantyne, room NIO-023, overlockitsconsequences.Itisnotuncm- incentive for the tax evasion and snug- extension 38004 (34 pages). monfortheseloasestobeallowedtoaceu- gling now prevuaent mulate in large amounts, while domestic 62 Policy Research Worting Paper Sefes interest rates are kept low and the cen- Among economists, it is generally taken struments for controlling polution in de- tral bank keeps transferring its declining as given that environmental regulation veloping countries. This research was cash profits to the nonfinancial public based on the use of economic incentives funded by the World Bank's Research sector. The mounting burden ofnetinter- and the competitive market will be more Support Budget under research project estexpenditures may thencontribute sig- efficient (attain the same environmental "Pollution and the Choice of Policy Instru- nificentlyto monetaryexpansion-asitu- goal at lower social cost) than traditional ments (RPO 678-48).'Copies ofthe paper ation that worsens when the central bank command-and-control approaches repre- are available free from the World Bank, must repay its net foreign liabilities. sented by environmental regulations in 1818 11 Street NW, Washington, DC Rocha and Saldanha argue thatforeign the United States and to a lesser extent 20433. Please contactCarlinaJones,room exchange losses must be considered in the European Community. The sulfur N10-063, extension 37754(46 pages). evaluatingfiscal policy,even wherelosses trading provision of the recent amend- seem to be largely unrealized - as over ments to the U.S. Clean Air Act suggests time all losses are "realized" through in- that some attentionisbeingpaidto econo- 921. Road Infrastructure terestlcows. When foreignexchangelosses mists' claims, but it would be unrealistic and Economic Development: systematically accumulate, the interest toassume that the command-and-ontrol Some Diagnostic indicators rates on domestic credits need to be ad- structureofU.S.environmentalpolicywill justed and the central hankls cash profits be displaced by economic incentives any Ccar Queiroz and Surbid Gautam should stop being transferred to the gov- time soon. (June 1992) emmnent. Otherwise, a large quasi-fiscal While incentive- and market-based deficitcan leadto monetary expansion and regulation may have penetrated verylittle The average stwk of paved roads per mit- spiraling inflation, as happened in Yugo- in the United States, their potential use lion nhabants in highumome economes slavia in the 1980s- In certain circum- for environmental improvement in the is 59 times that in low-inome economis stances, subsidies implicit in public sec- rapidlydevelopingoountriesofthePacific And those roads an in better condition tor credits should also be part of deficit Rim and the transitional economies of than the ones in low-income economies calculations. Eastem Europe and the Commaonwealth Real quasi-fiscal deficitsusually reflect may be great These countries have no Queiroz and Gautamn investigate the as- losses in other sectors of the economy and history of comnand-and-control regula- socation between per capita income and the need for a resource transfer. So cor- tion of the environment and the relative zhe magnitude and quality of road infra- recting these deficits may require more efficiency ofregulation maybe importarnt structure. They adopt an empirical ap- than simply eliminating credit subsidies to their capital-onstrained economies. preach, directlycomparingor correlating by increasing real interest rates to posi- The relative efficiency ofincentive- and acountrys income with selectedvariables tive levels. Eliminating losses at their market-based regulation depends on the associated with existing road networks. source often requires afiscal adjustment, specific nature of the activity to be rega- Cross-section analysis of data %in 98 the need for which may not be apparent. lated. In some cases it may be greatly oDuntries, andtime-series analysisofUS. Thispaper-aproductoftheTradeand superior to command-and-control regula- data since 1950, show consistent and sig- Fir5nce Division, Europe, Midde East, tion; in others, only marginndly so. More- nificant assocations between econazoic and North Africa Technical Department over, tobe effective, incentive-basedrega- development (per capita GNP) and road -is part of a larger effort in the Bank to lationmayrequire greater effort formoni- infirstructure (per capitalength ofpaved investigate the issues ofinflationandsta- toring and enforcement - effort that off- road network). bilization in EMENAcountries. Copies of sets gains in efficiency. So the choice of The datashow that the per capitastock the paper are available free from the regulatory approach is not always clear of read infrastructure in gh-incoome WorldBank, 1818 HStreetNW, Washing- cut, and some analytical means of distin- economiesis dramaticallygreaterthanin ton, DC 20433. Please contact Luz guishing between options is requiredL middle- and low-income economies. For Hovsepian,roomH9-065,exstension37297 Kopp reviews and recommends a mod- instance, the average density of pavecr (59 pages). eling platform for analyzing regulations roads (lmmllion inhabitants) vaaiesfrom designed to control pointsource emissions. 170 in low-income economies to 1,660 in The platform is intended to provide quan- middle-income and 10,110 in high-inconme 920. Economic Incentives titative information on the efficiency of economies. That is, the average density of and Point Source Emissions: several alternativeincentive-based, mar- paved roads in high-income economies is Choice of Modeling Platform ket-oxiented, and command-and-control 59 times that in the low-income group. regulatory policies might adopt rapidly Road conditions also seem tobe assoi- RaymondJ Kopp developingand transitional economies. In ated with economic development The (June 1992) addition to discussing the model, Kopp average density of paved roads in good pays considerable attention to such a condition varies from 40 kmhmIllion in- A modelingpLtfornmforquantifyinginjbr- models informational requiirements and habitants in low-income economies to 470 mation about altenaiue regulatons fior totechniquesfor dealingwith inadequate in middle-income and 8,550 in high-in- conzroWigpointsoureernission-thatis, data. come economies. for choosing among inentive-baseL mar- This paper - a product of the Public The empirical information presented ket.oriented. and commanc-and-wcontrl Economics Division, Country Economics can be used as indicators fareas ofwes;k- reguatoiypoliiesthat might adopt rapidly Department- -is part ofra larger effort in ness or stregth in a country's stock of deueloping and transitional economies. the departmnent to assess alternative in- road infrastructure. PolIcy Research Worting Paper Series 63 This paper - a joint product of the In- vision that would extend to Central * How should surveys be focused and frastructure Operations Division, West- America any preferences the US. grants designed? ern AfricaDepartnent, and the Transport to others (beyond those already provided * Whattypesofquestionsworkbestin Division,infrastructureandUrban Devel- by the Caribbean Basin Initiative). Such surveys? opment Department -is part ofa larger a provision, effective between now and, * How can surveys be oriented toward effort to define the macroeconomic link- say, 1995, would provide a mechanism for their target population? ages and impactofinfrastructure. Copies the transition from unilateralism to some * Howshouldcsurveysbeimplemented? of the paper are available free friom the type of reciprocity in U.S. commercial re- * How should responses be analyzed World Bank, 1818 HStreetNW,Washing- lations with these eountries. During this End used? ton, DC 20433. Please contact TWIJTD, period, tf.e countries of Central America In this common sense guide, Stone room S10-027, extension 31005 (35 pages). would continue to undertake the neces- emphasizes how a carefully designed and sary economic and institutional reforms implemented survey helps you get the to enable them to meetinternational com- most from a brief session with an entre- 922. Central America petition more effectively. preneur or semor manager. Stone gives at a Crossroads WYhile Central America should do all it examplesofquestions thathavebeenuse- can to get greater, preferential, and more iul in eliciting analytically tradable re- SylviaSaborio andConstantineMichalopoulos secure access for its products - particu- sponses relevant for policy formulation. (June 1992) larly in the main, most dynaic malrket Hegivesspecial emphasistorankedques- for its nontraditional exports - it must tions, which have proven valuable in fo- Steps the CentralAnenrcan governments recognize that current obstacles to export cusing attention on the constraints on must take fir fuller integrtion into the growth are related not only to external operationo and growth that firms find international economy. market opportunities, butalsotointernal most binding. problems that inhibit export supply. He alsoidentifies pitfalls that diminish In the last few years, the countries of This paper was prepared for the Meet- thevalueofsurveysandbiastheirresults. Central America have taken steps to sta- ing of the Inter-American Dialogue's And he discusses such practical necessi- bilize their economies and to introduce Project on Latin America's Integration tiesas trainingandsupervisingloal sur- domestic and trade reform aimed at im- into the WorldEconomy,heldinWashing- veyors, identifying firms, and entering proving resource allocation and making ton, DC on December 18-20, 1991. It is to data into an appropriate software padk- domestic markets more competitive. As beformallypublishedbytheInter-Ameri- age- the Central American governments move can Dialogue in a volume edited by Wnm- Finaly, Stone cautions against two ex- toward integrating their economies into ston Eritsch, later in 1992. Copies of this tremes: omitting assessments af the pi- the world market, Saborio and Michalo- paper are available free from the World vate sector (thus ignoring the views and poulos suggest that theyr Bank, 1818 HStreetNW, Washington,DC experiences of firms) or using survey re- - Continue to participate fully in the 20433. Please contact Maureen Colinet, sults out of context, and foiling to weigh multilateral round of trade negotiations, room H3-063, extension 37044(31 pages). them against othersourcesofinformation. because as small, open economies they Omission is the more serious ofthe two have a great stake in the health of the problems. international tradirg system. 923. Ustening to Firms: The firm-level survey is based on the * Revitaize the Central American How to Use Firm-Level Surveys premise that firms have unique insights Common Market, not as a sheltered re- to Assess Constraints on Private into the problems of private enterprise gional market for inefficient domestic Sector Development beeause of their daily encounters with finnsbutasanexpandedbaseforregional their country's policies and institutional competitiveness and for coordinating Andrew EL W. Stone environment. Surprises found in recent jolicy with the rest ofthe world. (June 1992) worksuggesttheimportanceofthesesur- - Seek preferential trade arrnge- veysinfocusingastrategyforprivatesec- ments with the United States and possi- Firm-leuel surueys reueal injbrmationcen~ tor developmenton the most constrairning bly other countries in the context of the t-D to formufating poliy advice and features of that environment. Enterprise for the Americas Initiative projects topromotepriuatesectordeuelop- This paper - a product of the Public (EAI), if it serves the larger purpose of met, oftenchallengingconuentional wis- Sector Management and Private Sector liberalizing trade - but be leery of par- don This common sense guide suggests Development Division, Country Econom- tial, isolated agreements that may divert how to do surueys welL ics Department - was prepared for the more trade than they create. Department's training seminar on 'Pools Mexico's entryinto the North American Firm-level surveys elicit information im- forPrivate Sector Assessmen. Portions of Free Trade Area (NAFT could seriously pmrtanttoformulatingsoundpolicyadviee the paper have appearedin other CECPS harm Central American interests by di- anddesigningprojectstopromoteprivate work. Copies of this paper are availale verting trade and investment from the sector development Drawing on recent free from the World Bank, 1818 H Street region. To temporanly protect the Cen- WorldBankexperienceineightcountries, NW, Washington, DC 20433. Please con- traa American countries from the unin- Stoneadvises why and howtoimplement tact Daniele Evans, room N9-057, exten- tended fallout of Mexico's entry into targeted field surveys. He answers six sion 37496 (19 pages plus 9 pages of an NAFTA, Saborio and Michalopoulos rec- questions: annex). ommend the adoption of an interim pro- Why use targeted field surveys? 64 Policy Reasearch Working Paper Serfes 924. How Reduced Demand operas promoted small families and 925. A General-Equllibrlum-Based for Children and Access to Family women withfewercbildren -Colombian Social Policy Model for COte Planning Accelerated the Fertility women's ideal number of children de- d'lvolre Decline In Colombia reased rapidly. Market costs, which were high in the Ngee-Choon Chia, SadekWahba, Rafael Rofman early 1960s, decreased rapidly when and John Whalley (June 1992) Profamilia was created. Colombian (June 1992) women already wanted to limit the num- What happened in Colombia shows how a her of children they had, so psychic costs A usefud social policy fiamework that can well-munagedfamnilyplanningprogram is for family planning were low. The only generate rich inputs to the Ivorien polcy more likely to succeed when rhe women in thing needed to produce arapid decline in process. a county already want fewer chidren - fertility wasinexpensive, easily available so that women are motivated to control contraceptive devices. Proifilia and the This paper reports on a general-equihlb- fertility. In such a county, introducing govemmenttaokresponsibilityforsupply- rium-based socal policy model for C8te familyplanningservices simplyfaciitates ing the family planing services and did dlvoire -its structure, the data used in and speeds up a fertility declin that would it efficiently. its implementation, andits application to rend to occur anyway, albeit more slowly. Social processes are rarely created by the analysis of tax incidence and policy, Rofman concludes. Profamilia's antipoverty programs. By the early 1960s, Colombia was one of activities facilitated Colombia's Iartility Theauthors emphasize thatspecilfea- thefastestgrowingcountriesintheworld, transition, but did not create the social, tres of the Ivorian economy and tax sys- With a total fertility rate of seven chlldren economic, and cultural forces behind the tem are central to any assessment of the per woman andrapidly declining mortal- fertility decline. Governments or distnbution consequences of tax policies ity, its population was growing 3.2 percent nongovernmentorganizationscanencour- and other social policies in C6te divoire. a year, arate that would double the popu- age or slow down social processes, but if Because tebasesofindividualtaxestend lation every 22 years. the social climate is unsupportive, indi- to be narrow - the incidence effects by But that population growth rate slowed vidual behavior will not change. socioeconomic group are pronounced, down dramatically in the years 1973-85: The rates of urbanization and educa- while those by income range are milder. to 1.7 percent, or a doubling time of 41 tional improvement have been immilar in Urban employees are largely affected by years. This slowdown, caused by a dra- most other Latin American countries s9 income taxes (through withhdlding). Es- matic decline in fertility, was one of the Rofinan concludes thatthere is noreason portfood croppers are affectedbythe sta- most rapid fertlity transitions in the to expect other Latin American countries bilization fund and exporttaxes. In addi- world. The causes and mechanisms for to resist fiamily planning more than Co- tion, large interhousehold transg&rs in tlis phenomenon deserve to be carefiuly lombia. Indeed, the Catholic church, a C5te d'lvoire give incidence profiles that studiediftheexperienceistDbereplicated bastion of resistance to famiyplanning, differ fram conventional analysis. The in other countries. is generally stronger in Colombia than reason: the taxes seeminglyborne by one To analyze the fertility change in Co- elsewhere. What places Colombia apart household group have second-round ef- lombia, Rofman uses a framework devel- from the other Latin Ameican countries fects on other household groups through oped by Richard Easterlin - which con- is Profamilia and the attitude of the Co- changed interhousehold trnsfers. siders how socioeconomic changes affect lombian government, which - while not For the targeted antipoverty programs, the supply of and demandforchildren and encouraging the use of contraceptives - the authors show thatwhengeneral equi- the costs of regulation. did not obstruct the efforts of private or- librium effects are taken into account, it Rofinan concludes thatfamily planning ganizations to do so. is impossible under abudget-neutal tar- succeeded in Colombia chiefly because This paper - a product of the Popula- geting program to completely eliminate there was already relatively low demand tion, Health, and Nutrition Division, poverty (as traditional analysis would for children when family planning was Population and Human Resources De- suggest). At the same time, small trans- introduced-the average desired family pertment- was research finded by the fers generally have a greater reltve ef- size was already 11 percentbelowthefer- World Banls Research Support Budget fectthan largertargetingprograms. This- tility rate in the early 1970s. Surveys under research project 'Impediments to has several policyimplicationsforthecta-t sihowed that urban women wanted fmewer Contraceptive Use in Different Environ- of the progams and the choice of groups children than rural women, and more mentts(RPO 675-72). Copies ofthe paper that shouldbenefit.Asinthetaxincidence educated women wanted fewer children are available free from the World Bank, analysis, the authors show that such do- than less educated women. 1818 H Street NW, Washington, DC mestic features as interhousehold trans- So the psychic costs of fertility decine 20433.Please contactOtiliaNadora,room fers play an important role in determin- were alread low - perhaps because the S11-219, extension 31091(69 pages). ingthefinaloutcomeofthetarg- ngpro- Catholic church did not have as much in- gram. fluence on personal behavior as expected. The model should be seen as an instru- And cultural patterns did not oppose ment that helps in developing capacties changing and modernizing behavior, but for macreaalysis and in generilly en- actualyencouraged them.Whetheror not hancingtheeconomic debate. Itshouldbe the media promoted changes in social at- transparent enough to enable policy- titudes - Merrick proposes that soap makers to use it efficiently - and at the Policy Resesach Working Paper Series 65 same time answer sone key questions of single-purpose operator such as a mining One generalization holds true in all cir- relevance to the Ivorian economy. evacuation rallway)-although a desire for cumsaoneer a monolithic railway does not This paper - a product of ithe Poverty bettermeasurementofperformancemight functionwellinamarketeconomyinom- and Social Policy Division-AfricaTech- still leadto aline-of-businessorganization. petition with privately owned, properly nical Department - is part of a larger The lines-of-business option improves (lightly) regulated competitors - espe- effortin the region to developpoverty-con- accountability and responsiveness to cialy trucdking. All attempts to commer- sciousmacroeconomicframeworksin Sub- marketsbutoperatingconflictsandtrans- cialize, corporatize, orincrease the role of Saharan Afica. Copies of the paper are action costs increase as the monolith be- the private sector in railway activities available free from the World Bank, 1818 comes divided. Economies in transition, have started with one or another form of H Street NW, Washington, DC 20433. small railways with a restricted number reshaping the railway entity. Solutions Please contactKarol Brown, room J4-285, of customers, or larger railways seeking will vary, but the universal objective asan extension 35073 (8R pages). to departincrementallyfiom amonolithic economybecomesmore market-driven is fiamewbrk will probably find the line-of- to make the railway more market-aensi- business approach the best first step. tive. 926. Optlons for Reshaping Thecompetitie access optionintroduces Thispaper-aproductoftheTranport the Railway intramodal conpetition in selected mar- Division, IfistructureandUrbanDlevel- kets, while maintaining unitary control opment Department-ispartofalarger Neil E. MNyer and Louis S. Thompson over most railway operations. Unless the effort in the Department to analyze and (June 1992) distribution of"franchises'is self-balanc- improve the effectiveness of trnsport ing - providing clear benefits to all par- enterprises. Copies ofthe paper are avail- Changing bwtsport demands and grow- ticipants - the owning railways are un- able free frma the World Bank, 1818 H ingcompetizionfrom trucks, autos, andair likely to permit a serious level ofcompeti- Street NW, Washington, DC 20433. transport are jorcing the monolithic ril- tion in markets they have traditionally Please contact Barbara Gregory, room way to change. Options for change must controlled.Aneedforintrumdairmlcom- S1O-049, extension 33744 (59 pages). be adapted to different national and other petition - either in large countries vwth circumstanca, with a suitable tradeoff well-developedrail systems mrinadjacent betweena efjciencyofproductionandeffec- countries withintegratedeconomies, asin 927. General Equtilbrium Effects riveness in meeting marke needs. the European Community - could pro- of Investment Incentives In Mexico mote greater use of competitive access In many countries, the mismatch between solutions. Andrew Peltenstein and Anwar Shah whattheraiways offerand what custom- The 'wholesaler option should asmm- (June 19= ers wanthas caused significant economic pUsh an excellent marketing job, but the inefficiency and severe financial strains actual operation would remain in mono- InMexic, reduingcoporateta.ustimu- for the railwavs and their government lithichands. When the quality ofeustomer lates investmentmore thanincreasingthe owners. The.concept of the ralway as a service is paramount (as in container in&estmt tax credit or the employment monolithic entity is so strong in many landbridgeservicesorincertainunittran tax redit does. countries as to be a roadblock against re- applications) or when the rail service is shaping the railway. Yet such reshaping driven by external requirements (as in Mexicohasexperimentedwithseveraltax hs already taken place successfilly in container dry ports), it may be best if the instruments designed to promote private such countries as Canada, Japan, New railway is a 'wholesaler selling to a "re- capitalformation. Amongsuchinitiatives Zealand, Spain, Sweden, the United King- tailer' who relates directly (and more ef- were general and industry-specific tax dom, and the Urit2d States -and shows fectively) with the customer. credits, employment tax credits, and cr- promise elsewhere. The 'toll rail enterprise' might come porate tax reductions. ' Where incremental approaches ae fea- closest to reflectinga theoretical model f Feltenstein and Shah examine the rela- sible, a useful first step in bringing the marketingeffectiveness,yetitwouldgen- tive efficacy of such instruments using a market to the railway is a transition to erate potential operating conflicts and dynamic computable general equilibrium some form of lines-of business strategy, higher transactioncosts-andwouldalso model. They carry out model simumons which, like British Rail, could be intensi- call for the greatest administrative capa- using three equal-yield investmentincen- fied in stages. Where incremental ap- bi:ity in the owning government. Where tive scenarios:increasesininvestnenttax proaches have not worked, cannot work, arailserviceiseasilyseparablefromother credits,increasesinemploymenttaxcred- or have reached the limits of their effec- services, or where the service does not its, and an equivalent reduction in the tiveness,acountry should consider the ftill conflictheavilywithotherservicesa"tol corporate tax rate. range of options Moyer and ThompGon ral enterprise"solution maybe desirable Of the three, they find that reducing explore in this paper. - as with Amtrak, VIA (the Canadian corporatetaxesismosteffectiveatsimu- The monolithic ra rates high on Amtrak), and the Japanese Rail Freight lating investment in Mexico. apparent technical efficency(conilicts are Corporation. Situations in which this ap- Various explanations are plausible for ' acided by executive fiat and transaction proach might work best: granting track- why reducing tax rates is superior to pro- est are minimized) but low on market- age rights to Zimbabwe to serve the port viding investment tax credits in Mexico. jg effectiveness. A monolithic railway of Beira in Mozambique and to Russian Mexicohad ligh inflation and hig nomi- ightbe an appropriate choice for afilly Railways to serve the port of Tallinn in nalinterestrates'withrealinterestrates 'lanned, command economy(orfor a true Estonia. negativefrcertainyer-sofxms faced 66 Pollcy Research Working Paper Series severe financing constraints. In such a coastal Andhra Pradesh, India. assigned respectively to the federl and macroeconomicclimate,firmsseereduced Kishor develops a theoretical model that state gouements - can improue fvms' taxrates as improvingtheir cash flow and incorporates these externalities and ex- compliance and enuironmental agency a signal of an improved public policy cli- amines the conditionsneededforeconomi- performance without damagng state rev- mate. cally optimal use of pesticides - as well enue, and perhaps even improue it Inaperiod ofeconomic uncertainty End as of other agricultural inputs in cotton decline, nonrefundable, unindexed tax cultivation. Estache and Zheng make a case for fed- credits on new investments are less valu- Using field data, Kishor tries to quan- eral monitoring of state environmental able than an immediate reduction in tax titrthelossesin cotton and othercrops due agencies' (SEPAs) performance - be- liability from both old and new capital. to the development of resistant pests. causeofthetradeoffforthestatesbetween Finally, in an open economy, reducing Under one scenario, the costs ofexternali- the need to raise revenue from taxes on the tax rate increases the demand for all ties could raise the economic cost of cot- local output and the need to limit pollu- capital rather than new capital alone - ton cultivation 50 to 60 percent. tion. so the relative value of domestic capital After empirically evaluating the tan- They also show that fines and taxes rises.Accordingly, thepublicincreasesits tion of inputs (fertilizer and pesticides) assigned respectively to the federal and holdings of domestic debt, causing the and theimplementationofintegratedpest state governments can improve finn?s price of domestic bonds to rise and real management (IPM) practices to address oompliance and SEPA!s performance - interest rates to fall, stimulating invest- the pest problem, Kishor concludes that andhenceenvironmental quality-with- ment. IPM (which emphasizes reduced use of outdamagingstaterevenue,andperhaps This paper - a product of the Public pesticides) offers the most feasible and even improvingit. Economics Division, Country Economics environmentally benign way to achieve They rely for their analysis on numen- Department-isoneofaseriesofdiscus- Pareto optimalit, especially in the long calpolicysimulationsbasedonananslyli- sion papers prepared for the research term. cal framework designed as a multilevel project 'An Evaluation of Tax Incentives Headdressessomeproblemsinmaking Stackelberggame.Thisfameworkrepro- for Industrial andTecthnological Develop- IPM operational, such as providing effi- duces the hierarchical structure of pollu- ment7(RPO 675-10),fundedby theBtns cient scouting services. He cordectures tion control policies in Brzil, where the Research Support Budget. Copies of this thatheavy goverrnentintervention will federal environmental protection agency paper are available free from the World be needed if IPM practices are to be suc- relies on SEPAs to ensure that federaly Bank, 1818HStreetNW,Washington, DC cessfully adopted by farmers. defined minimum ambient standards are 20433. Pleas contact CarlinaJones, room Even without IPM,longstaple cottonis met locally. N1O-063, extension 37699 (44 pages). Iikelytoremainan efficient Indian exporL The numericalsimudatonsarebasedon But implementing IPM would substan- a case study of the food and the printing tially reduce not only the exterrnl costs and publishing industries. 928. Pesticide Extemalities, but also the private costs of cotton culti- This paper - a product of the Infra- Comparative Advantage, and vation. structure Division, Country Department Commodity Trade: Cotton In This paper is a product of the Trade I, Latin America and the Caribean -is Andhra Pradesh, India Policy Division, Country Economics De- part of a larger effort in the region to de- partment. It was fimded by the World sign specific reforms that can assist gov- Nalin ML Kishor Bans Research Support Budget under eniments in decentrlized economies, (July 1992) research project The Impact of Pesticide such as Brazil or Venezuela, in dealing Emmunity on the Production and Trade of with unusual sources ofpolicy failures in Implementing integrated pest manage- Agricultural Commodities: Cotton Culti- theareaofpollutioncontrol-Copiesofthe ment in coastal Andhra Pradesh, India, vation in Coastal AndhraPadeshl (RPO paper are available free from the World. would reduce not only thie external costs 676-92). Copies ofthe paper are available Bank, 1818HStreetNW, Washington, DC but also theprivate costs ofcomn cultiva- free from the World Bank, 1818 H Street 20433. Please contact Antonio Estache, tion. NW, Washington, DC 20433. Please con- room LO-081, extension 81442 (46 tact Dawn Ballantyne, room N1O-023, pages)l Becusethecottonbollwormismigratory, extension 38004 (112 pages). a farmer who controls the pest in his own field creates a positive externality for 930. Participatory Development: other farmers. But because pesticide use 929. Managing Pollution Control Myths and Dilemmas leads to the development of pesticide-re- In Brazil: The Potential Use sistant strains,he also creates a negative of Taxes and Fines by Federal Robet Piciotto externality. These externalities affect a and State Governments (July 1992) wide range of food crops (notably, coarse grains, pulses, vegetables, and spices) as Antonio Estache andc Kangbin Teng Participatory development has potntial well as cotton. Because of theirextensive (July 1992) as a ufying frmework fir tie develop- (and poorly understood) migratory pat- ment inquiry. But more eamples of suc- tems, pesticide-Tesistant bollworms are Federal wanitoringofdecenrlzed (state) cess are needed to bef up the theory, and attackingfoodcropssituatedhLndreds of envirnmental management-through a moretheoryisneededtoiluminateanelu- kilometers from the cotton tracts in system of poutaion-basedfines and fae siue development reality. -oiicy Research Woaking Paper Series 67 recent evolution of development Second, institutional development is policymakershold back firom strong com- a' n highlightedpopularinvolve- enhanced by policy reform and should be mitments in their exchange rate policy. in decisionmaking. Yet policy pursued in its own right as part of a The stronger the commit;ment to an ex- :Ak.'nI'anMlstop-and-goimplementation country's development strategy. Achiev- change rate rule, the more costly it is to -_ been associated with 'excessiveore- ing an adequate legal framework, civil deviate fiom it. They develop a Barro- . - vunessto interest groups. service reform, and public information Gordon type of model in which the The paper argues that the success with dissemination should have priority - as policymaker has to decide the degree of Lkipatury development projects re- these eleiaents help reduce societal trans- commitment under uncertainty. spottly action costs and risks. They show that even for policymakers * Communication between develop- Third, the institutional aspects ofdevel- with a strong preference for maintaining --it policy professionals and grassroots opment projects and programs should be the fixed exchange rate, there arecircum- :titioners leaves much to be desired. given appropriate weight- In this context, stances under which they will choose to * The discourse of development eco- priority should be given to the full1 use of devalue. They may choose to do so, for lics remains dominated by marketmechanismstoconcentratescarce example, when the economy is hit by an roeconomists, whileinstitutional eco- participation sldlls and resources where adverse shock and the costs of adhering icsremains at themargin of develop- they have the greatest impact - on the to thefixedexchangeratearegreaterthan Lt research. creationandmaintenanceofpublicgoods. those assocated with devaluing. * Theveryconceptofparticipationhas Fourth, special emphasis should be Theirmodelmakesitpossibletounder- - been subject to rigorous scrutiny, and placed on the efficient production and dis- stand why mauyhigh inflation economies --ore systematic approach to participa- semination of knowledge, as well as on have not adopted full dollarization as a appears desirable, telecommunications and transportation wayto stabilize prices. In emphasizingthe The focus onparticipatoy development infrastructure, since these investments cost ofreneging, they differ from analysts -_fies an opening of development eco- alsofacilitateefficientsocial andeconomic who sinle out the desire to rely on Lics to disciplines other than interaction. seigniorage as the main motive for stop- roeconomics. In particular, Copies of the paper are available free ping short af fall dollarization. :oeconomicsandbusinessadministra- from the World Bank 1818 HStreet NW, They argue that strong commitments m must jon forces under the umbrella Washington, DC 20433. Please contact will be made only once there is a good institutional economics, political Anne Muhtasib, room F13-035, extension chance the policymaker w not renege, - Lomyshouldberediscoveredbydevel- 84573 (22 pages). and by then they might not be necessary lent economists, and development - a point they illustrte with examples .ticeshouldbe shaped by all the social from Latin American countries. Pnce disciplines. 931. How Much to Commit to an This paper-a product of the Macro- Toacceleratethisprocess,Plcciottoputs Exchange Rate Rule: Balancing economic Adjustment and Growth Divi- tard a transaction-based definition of Credibility and Flexibility sion, Country Economics Department - 'icipation and proposes a cost-benefit ispartofalarger effortin the department roach to the design of participation Alex Culderman, Miguel A Kignel, to understandmacreconomic adjustment -esses. He links participation to insti- andNissan Liviatan andfinancial policies. Itwaspreparedfor Dnal development and suggests that (July 1992) a special issue of Revista de Anilisis spread of constructive change from Econ6micoonDoliarization. Copies ofthis t to project to programs will not take The cost of reneging is a key reason paper are available free from the World e ewithout the desigi ofrealistic whole- pdicymakers hold back from strong com- Bank, 1818 H StreetNW, Washington, DC ig programnscombinedwith policyand mitrmnts intheirehangeratepolicy. The 20433. Please contact Raquel Luz, rom , itutional reform at the macro level. stronger the commitment to an e=xhange NIL-059, extension 39059 (32 pages). y then will individual development rate rde, the more costly it is to deviate ationsfindtheirultimatejustification from it sectorandcountry.Strategic alliances 932. Interest Rates, Offlcial - ing development agencies - global Policymnakers can support a fixed ex- Lending, and the Debt Crisis: ' lcal, governmental and nongovern- change rate with various degrees of eom- A ReasSeSSMent -tal - have to be strengthened to fa- mitment.Aregimeinwhichcountries can -ate dissemination and to achieve re- devalue unilaterally represents a weaker Asl DemirgaoKunt ad Enrica Detragiache s on a larger scale. Visible results in commitment than one in which devalua- (July 1992) roved livng standards, expanded eco- tion must be agreed upon with other par- ic opportunity for the world's poor, ties (as in the European monetary sys- Studies of economic performance among a protected environment wviU be the tem). Full dollarization, understood here the highly indebted countries during the - test of gdlbal participation. as full replacement of the domestic cur- c'ebt crisis should contri for a-oss-coun- Four main recommendations for devel- rency by the US. dollar, is an extreme ity diffieren-s in the burden of interoet entpolicyflowfirom Picciotto'sreview comritment to a fixed exchanged rate - payments Some countries had beter ac urticipatory development isindeedasspecial aseofafixedexchange ens to highly subsz interest rates. FiTst, participation shouldbe viewed as rate. .tal complement to macroeconomic Cukiermnn, Kiguel, and iaviatan argue Demirgfig-Kunt and Detrgiache dcca- stmen . that the cost of reneging is a key reason ment and try to explain the sizable cross- 68 Policy Research Woraing Paper Series country differences in interest rates on Demirga-Kuntposesthequestioicare 934. PublIc Hospital Costs and external debt paid by a group of highly debt and equity finance complements or Quality In the Dominican Republc indebted developing countriesin 1973-89. substitutes? The answer also has a bear- They find that Indonesia and Turkey, ing on the banking systems in developing Maureen A. Lewis, Margaret B. Sulvetta, and which are often praised for not reschedul- countries, as the bulk of debt financing is Gerard BE LaForgia ing in the 1980s, paid interest rates sub- provided through financial intermediar- (July 1992) stantiallybelow LIBOR-andavoidedthe ies. interest rate shock of the early 1980s. Whether financing in developing coun- Domianapublc hospitalsprouide heuth Differencesin the default-risk premium tries should be provided through capital care inefficiendy, withenormous shortwg explain some of he variation among coun- markets orfinancialintermediariesisthe ofgoods and functioning equipmnt, wih tries, but different degrees of access to subjectofresearch addressing theoptimal excessive personrr4 especially physicians. officia loans carrying highly subsidized structure of financial contracts. and withfew incentivesfor, orconbros on. interest rates played the major role. If debt and equity finance are substi- quality performance. The organiation In the sample they studied, they found tutes, the cost ofequity would decline with and deluvery of heath care require basic no evidence that debt at loating interest the emergenee of an active securities rqeorm, with more acountablity and rates was more expensive than debt at market, and banks would fice additional quality contro and beftnr physician pay-" fixed rates. competitionfor theircorporate customers. ment practices For the period 1981-89, itis possible to But debt and equity finance can also be controlfordifferencesin thecurrencycom- complements since an equity market Measuring costs in pablic hospitals in position ofdebt, andtheresults are essen- would allow the owner of a closely-held developing countries is hamperedby the tialy unchanged. companytoradMydiversifyriskbytrans- lack of an appropriate cOsting system, or These results sugpest that studies of ferring some of the equity to other mcdi- ofanysystemaliccostaccounting Invoices econmic performance among the highly viduals. Then the firm would be able to for goods and services, prices for inputs, indebted counties during the debt crsis alsoincrease its borrowing. Also from the and patientrecords are generalyabsent. should control for cross-country differ- lendingside, an active stockmarketwouild As aresult,-costmeasureehave histori- ences in the burden ofinterestpayments. inrease the debt offirms, allowing them callybeen based on budget figures the This paper-aproduct oftheDebt and to borrow more by improving the quality only available financial data. But budget International Finance Divion, Interna- of information available to the banks llocations bear little relationship to the tional Economics Department - is part Demirgog-Kunt tests which of these resources actually requred to provide of a larger effort in the department to scenarios is more lkely by analyzing the services to hospital patients. understand the economic relationships capital structures of corporations for a The patient-based methodolog de- between developing countries and exter- sample ofcountries with stockmanrketsat scribeda by Lewis, Sulvetta, and LaForgia nal reditors in regad to credit rationing differentstagesofdevelopment. Although circumvents this problem by measuring and debt negotiations. Copies of the pa- the datausedinthisstudyarelimitedand actual hospital resources allocated to pa- p2r are available free from the World theresultsarepreliminay,apositiveand tients. Their study was conducted in a Bank, l8l8HStreetNW,Waslington, DC verysignificantcorrelationexistsbetween single Dominican hospital during a one- 20433. Please contact Rose Vo, room S8- firm leverage and the extent ofstock mar- weekperiodinApril 1989.Theirapproach 042, extension 33722 (33 pages). ket development documents and gives prices forgoods, ser- This result supports the view that eq- vices, andpersonnel time providedby the uityand debt finance are complementary. hospital to emergency patients, inpa- 933 DevelopIng Country Capital Thus, equity markets and fiancial mar- tients, and outpatients. Structures and Emerging Stock kets are also complementary - so the They used the following to measure Markets existence of active stock markets should quality and effidencr: increase the volume of business for finan- * The qualiications and relative costs Asi Demiro-Kunt cial intermediaries. of medical manpower deliveringservices (Jubrl992) FurtherTesearchisneededtodetermine * The extent and nature of shortages. if these results hold for individual coun- - Comparisonsofphysicianordersan& Are debt and equity finance complmens tries over time. Such research would use actual services provided. or substiues? Probaby complements, firm-level data, additional explanatory * (For selected diagnoses) the specifics which means that the existence of active variables, and different definitions of le- of clinicl practices in the hospital, comn- stock markets should incse the volume verage. pared with accepted clinicalnormssforthe of business forfinan intemediaries Thispaper-aproduct oftheFinancial Dominican Republic. Policy and Systems Division, Country Theyfoundthataverageandtotalcoats Demirgtl-untinvestigates the relation- Economics Department - is part of a of services understnte the true costs - ship between stock market development larger effort in the department to under- because of shortages, inappropriate and andthefinancingpatternsofcorporations stand the impact of emerging stock mar- underusedpersonnel,andnonfimctioring in developing countries. -Wth an increas- ketsin developing countries. Copies ofthe equipment. Quality ofcare messnasug- ing number of stock markets emerging, paper are available free from the World gest low quality and poor efficiency. the increased market activity could have Baik, 1818 HStreetNW,Wasbington,DC Norms of medical practie were not fol- an important impact on the capital struc- 20433 Please contact Rose Vo, room S8- lowedin more than 80 percentofthe cses ture of developing country corporaions. 042, extension 37664 (40 pages). exanunedL Rates of completion for dag- 23ffcy Research Working Paper Series 69 :1' -tests were below 50 percent for Stocldngandhedgingdecisions,which are 936. Taxation, Informalon -.zatient services and between 60 and interdependent, are solved simulta- Asymmetries, and a Firm's w percent for inpatient and emergency neously.As aresult ofthese refinements, Financing Choices 4ices. The study registered significant the optimal decisionrulesare significantly thly"saving? of$641 for noncomple- different. Andrew Iyon of tests and $824 for nonavalability Several useful results emerge from (July 3992) 2:3rugs& Choes analysis: Policy recommendations of Lewis, * When both output and price risks How the effects of *tation and informa- _ .tta, andLaForgiacenteron the need exist, stocks and futur can be combined tion asymmetie infZuence the firm's fi- -otrL the organization and delivery of to reduce the overall exposure to risks nancial decs,and how pubic poli Ith care as well as physician payment (measuredbytheprecaionaxypremium may affizt all three. -tices-and to givingmore authority or units of output the producer is willing 'aspital administrators. To make Do- to pay for eliminating risks). Lyon mweys the effects of taxtion and can hospitals more efficient, there Inanunbisedfutursmarket(fututes asymmetricinformationonthefinancng .t be greater authority and account- price equals expected spot price at the ofinvestment. In the absence ofthese two "'ity for hospital directors and better maturty ofthe ftres contract),commod- fctors, traditional economic models pre- *itives for improving medical and ity producers should shot t-hedge (sell fu- dict that funds for investment flow to ingementperforrance.Qualityassur- tures contracts) less than the expected projectswiththehighestexpectedetumn. e needs great improvement if the Do- available supplies, -if output and price The form ofthe investment (for example, can system is to ensure a basic stan- risk are negatively correlated. And they whether by eqmty, bank loan, or snother d of care. should short-bedg. more than the ex- form of debtfinance) is irelevant. This paper is a product of the Popula- pecedavalablesupplies.ifthoserisks are In the presence of either taation or L and Human Resources Operatons positively correlated. When the futures infornmaion asymmetries, however, nei- ision, Country Department L Latin pzicedeviatesfiom the expectedspot rice therofthesepredictionsneosarlyholds. ericanandthe Caribbean.Suppotfor (futures price bias), speculative tading Financing may not go toward those project was provided by USAID, dominates producers'x fixtures position projectswiththehighestexpectedreturn *ragh the REACH Prject, and by The The demandforfuturesishighlysensitive and the form in which the financing is kan Institute. Copies of the paper are tothefuturespricebias, whilethe demand conveyed canaffectthe profitahilityofthe ilable freer fro the World Bank, 1818 for stDCks is not. project to both the provider offunds and itreet NW, Washington, DC 20433 - Itis well-known that commodityex- the reipient ise contact Patricia Trapani, room 17- prting developing countries face great Whatarethepoleyimplicaionsofthe -extension 31947 (21 pages). pnre risk and - particularly with agi- effects ofthesefactorson tbefinancingof cultural commodities-uncertainoutput investment? as well. The optimal stocking and hedg- * Depending on teclogical chore- i The Precautionary Demand ing rules Choe derives could have practi- teristics, infromationat asymmetries can Commodity Stocks cal applications for these countries. resut in either overinvestment or Earlier analyses that onsiderd only underinvestmtinaneconomy. Clearly, inJoxg Choc the hedgn problem typically suggest depending on which outcome occur, y 1992) relatively low optimal hedge ratios (the policy recoy mendations to correct the proportion ofexpected available supplies inefficiency cliffer. While persistent ucers' stockholdng and hedging de- that is short-hedged); this ratio was also overnvestmant is unlikely to chaacter- 2ns are a precauonary behavior insensitive to expected available supples ize most developigeconomies, there are inst output and price risk Commod- and to the degree of risk aversioa. certsinlymany occasins when funds are - porting developing countris that The optimal desion rules Choe derives applied to projects with low expected re- these risks shouId typically hold smal suggest that the opuxal hedge ratio is turns. _hs and hedge a large part of their er- Lielytobe much higher than ratios given * Incesses in the level of walth and izd supplies. mi earlier studies. It depends on initial collateral in an eecomy can greatly re- endowments, output and price expecta- due the costs ofasymmetric informanion. ,e shows producers' stockholding and tions, and the degree ofabsolute riskaver- Increases in collateral reduce the risk 'ging decisions as a precautionary be- sion. ficedbylendes Enpreneswithpoor ioragainstoutput and price risksThe This paper-a product of the Interna- projects are less lilely to mdwtak them litional view is tlat producer stocks tional Trade Dihiision, International Boo- when they must risk more of their own heldfortheirconuenieacyieEd. Choe's noies Department - is part of a larger wealth. GovermentpoLcies tbatincr roach explains recent just-in-time in- effot in the department to explain com- the ability of individuals to cdoa nalize tory management and allows unified modity price behavior and model the glo- wedlth-forexample,byprmotingprop- Ltmentoftheprecautionaryandspeca- bal markets for primary commodities. erty rights and the estabshment tfale- ve demands for stocks and the use of Copiesofthe paperare avallablefreefiom gal system thit allows the low-costtrans- ires contracts. - the World Bank, 1818 H Street NW, ferofoolateral-canincmasetheability Thoealsoassumesamoresensiblepref- Washington, DC 20433. Please contact ofpotenalLyvsucessfprojectstoreceive ice function sothat demand functions Sarah lipscomb, room 87-062, extenin financing. Policiesthatilitate the abil- stocks and futures are nonlinear. 33718(38 pages). ity of individuals to aemilate savings 70 Policy Reseamrch Woking Paper Series play arelatedrole. Inadditionto increas- 937. How Soft Is the Budget the economydecentralizes (with decision- ing the collateral of an entrepreneur, the Constraint for Yugoslav Firms? making shifting tolocal governments and ability to earn high rates of return in- enterprises), powerful coalitions emerge creases the opportunity cost of undertak- Evan Kraft and Milan Vodapivec that representspecialinterests, andmany ing projects with low expected returns. (July 1992) new channels ofredistribution may open. - Creating decentralized securities Wheremultipartydemocracyis sdll devel- markets is likely to be less advantageous Despite the virtual absence of direct go- oping and property rights are inl designed, whereinformation asymmetriesaregreat einment subsidies tofirms, and the exist- decentraization may thus increase, not Individual providers of funds have an in- ence of open unernployment, Yugosku decrease, redistribution. centive to free-ride on the information and firms were subjected to nzassiuepervasive The authors question the appropriate- monitoring of entrepreneurs provided by redistribution through a soft budget con- ness ofiany analyses of, and conclusions others. Only firms with establishedrepu- staint. Yugoslaias channels ofrmedistri- drawn from, the 'Yugoslav experiment.e' tations may be able to obtain funds in bution differedsigevzantlyfiromthosein Most studies of the Yugoslav economy these markets. othersocialisteconomies, but theredistri- takeforgrantedthatanyresidual surplus * Similarly, whlRe competition among bution shared a common driving force- of a firm accrues to those who curently lenders is generally promoted, such com- the pursuit of job and wage security. work for the firma But evidence that in- petition can also reduce the incentive for come is massively redistributed among individual lenders to lend to entrepre- Do Yugoslavia's channels and pattern of firms casts doubt on the validity of such neurs where information andmonitoinng 'soft budget" redistribution differ from an assumption and thus on the results of costs ame large. Competitors would at- those documented for other Eastern Eu- studes based on it tempt to "steal these borrowers away ropeaneconomies?Afterall,Yugoslavia's Thispaper-aproduct ofthe Socialist after they were certifed as creditworthy. self-management system has been re- Economies Reform Urnit, Country Eco- Purther, limited competition allows a garded as athird way,a system funda- nomics Department - is part ofalcrger lendertousethesanctionofdenyingcredit mentally different from those of other so- effortinthe departmentto investigate the as an instrument to influence borrwers diaist economies. The workers' roles as behavior of firms in socialist econamies- toactresponsblyinordertoobtainfilbire decisionmakers and as claimants offirms' Copiesofthepaperare available free from financing., residual income are ineonsistentwiththe the World Bank 1818 H Street NW, * Astheresultofinformationasymme- concept of state paternalism implied in Washington, DC 20433. Please contact tdres, certain types of projects are more soft budget redistribution. Sabah Moussa, room NIl-017, extension likely to cbtain financing at a lower cost Kraft and Vodopivec show that 39019(31 pages). using equity finance rather than debt, If Yugoslav firms have also been subjected the tax costs of equity are higher than to massive, pervasive redistribution those ofdebt, however, these projects may through asoftbudgetconstraint;in 1986, 938. Health, Govermene be relatively underfinanced. Tax policy gross subsidies in manufactinng and the Poor: The Case might wish to consider whether the tax amountedto50perent,andnetsubsidies for the Private Sector treatment of equity and debt should be to 15.6 percent ofGDP. In anewapproach equalized cr whether tax costs of these to quantifying such redistribution, Kraft Nancy BEdsal andEstele Jame projects can be reduced in other ways. and Vodopivec focus particularly on the (July 1992) - Governmentmrayfeel an oblgationto redistribution flows produced by holding intervene directlyin creditallocation, but financial assetsandliabilitiesin anirdla- Seleciueaser fees andprivatizationamuld should do so only where it has a greater tionary environment in which financial be usd to reducegovernment spendingon rbility to identify creditworthy recpients claims are generally not indexed. Analyz- heaIthcarefJ'rtherichandmiddlecZasses, than other lenders do. In the absence of ingfirm-level data forYugoslavias entire peinining redirection of government any cmparative advantage, government manuficturing sector for 1986 show that spendig to programs that would ben-fit attention to the basic infirastructure that such flows - in contrast with those of thepoor, thus producing the highest maor- reducesthecostsofobtaininginformation other Eastem European economies- talitygains- and enforcing contracts is hlkely to better have been a hr more important source of assist the efficient allocation of credit. redistributiort than formal taxes and sub- BirndsalandJamespresentacaseforim- This paper - a product of the Public sidies. Although Yugoslavi's channels of itedand selective) usercharges and some Economics Division, Country Economics redistribution differ significantly from privatiation of health care in developing Department-is one ofaseries ofpapers those in other socialist economies, the countries. commissionedforthe resechprqject, 'An redistbution shares a common driving They demonstrate that - consistent Evaluation of Tax Incentives for Indus- force- the pursuit ofjob and wage secu- with publc choice theory - government trial and Technological Development," rity. Producers of energy, food, andheavy actions in the health sector are neither (RPO 675-10), funded by the BanXs Re- manufictures, as well as less developed equitablenorefficientin developingcoun- search Support Budget Copies of this regions,haveespecidallybenefitedfromthe tries. In general, they increase the real paper are available free from the World redistribution. income of influential middle and upper Bank, 1818HStreetNW,Waslhington,DC This analysis for Yugoslavia suggests income groups- despite thefactthatthe 20433. Pleas contac CarlinaJones, room animportantlessonforthepTocessoftran- greatest mortalityguins would come fiom N10-063, extension a7699 (46 pages). sitioninEasternEuropeaneconomies. As directing health spending to the poor. - tcy Research Woiting Paper SerIes 71 Then they discuss why-if thisimplicit adjustment and broad economic policies. 'resource gap" lies at the heart of donor- 'el of government behavior is correct It is important, they say, to folly inte- sponsored initiatives to involve the private government health interventions will grate existing and expected economic sector in family planuing, but there are melesseffectivethan theyhavebeen. policyinto project preparation andproject otherequallygoodargumentafordoingso. They point out that high mortality in appraisal documents in the social sector- Governments and donors are often un- --loping countries is related more to The paucity of robust quantitative in- aware ofhow much the private sector (e- rty than it used to be, while pressure formation on the costs and benefits of so- pecially the commercial sector) already 3vernments to finance health carefor cial projects may have perpetuated the participates-andcouldparticipate-in middle class and the rich is increas- false notion that social projects, unliLke family planning. ,'3ecause the population is aging and other types of projects, may be insulated Foreit discusses whythe private sector costs of handling adult chronic dis- firom the effects ofgenerl economic policy. should be invnlved in planning, how the s are rising. Kaufinann and Wang present an ana- private sector shoulehbe defined, whatthe The inequityandinefficiency ofgovern- lytical framework to stuggest the mecha- experience has been so far with private theslth programs reflect the current nisms through which sach policies affect sector involvement, and what might be ' ical equalibrium which, unfortu- each stage ofa project cycle. They use sta- expected in the future. ily, cannot be easily changed- Oppor- tistical analysis and case studies from a To support family planning in the pri- ties for change, including marginal broad range of sector reports and project vate sector, she recommends that donors iges in the distribution of political documents. (1) expandthe totalIfamilyplannigmar- ir, must be recognized and exploited Bivariate statistical analysis ofthe in- ket to help satislj existing and fiture 'never they arise. Information that cidence of ansatisfatory projects shows unmet needs for contraception and (2) mases public awareness ofcurrent in- that social projects are two to three times shift current users from subsidized to -ties, fiscal stress, and tactical use of aslikelytoberatedunsatisfactorywhere more nearly self-supporting outlets - lyavalIableresourcesmayalso create there is restrictive trade, overvalued cur- withoutcompromisingcoverage, equity, or irtunities to alter the equilibrium. rency, a fiscal deficit, and relative price quality ofcare. This paper - a product ofthe Country distortions-The evidence is even stronger The kinds of private sector acli'.;ties