Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization

The proliferation of preferential trade liberalization overthe last 20 years has raised the question of whether it slowsmultilateral trade liberalization. Recent theoretical and empiricalevidence indicates that this is the case even for unilateralpreferences that developed countries provide to small and poorcountries, but there is no estimate of the resulting welfarecosts. This stumbling block effect can be avoided by replacingthe unilateral preferences with a fixed import subsidy, whichgenerates a Pareto improvement. More importantly, this paperpresents the first estimates of the welfare cost of preferentialliberalization as a stumbling block to multilateral liberalization.Recent estimates of the stumbling block effect of preferenceswith data for 170 countries and more than 5,000 products areused to calculate the welfare effects of the European Union,Japan, and the United States switching from unilateral preferencesfor least developed countries to an import subsidy scheme. Ina model with no dynamic gains to trade, the switch producesan annual net welfare gain for the 170 countries that adds about10 percent to the estimated trade liberalization gains in theDoha Round. It also generates gains for each group: the EuropeanUnion, Japan, and the United States ($2,934 million), leastdeveloped countries ($520 million), and the rest of the world($900 million).     

IPSAS or IFRS as the Framework for Public Sector Financial Reporting? New Zealand Preparers’ Perspectives

The last 30 years have seen public sector accounting in many countries undergo considerable change. More recently, some governments adopted accrual accounting and International Public Sector Accounting Standards (IPSAS), some adopted modified International Financial Reporting Standards (IFRS) while others continued with cash‐based accounting. New Zealand (NZ) has, for more than two decades, followed a sector neutral approach to financial reporting and standard setting where the same accounting standards were applied to all entities in all sectors: for‐profit, not‐for‐profit and the public sector. This period included the adoption of IFRS by for‐profit entities with minor modifications for the public sector. The suitability of IFRS for the public sector has been questioned and, recently, standard setters in NZ decided to adopt a sector‐specific standard‐setting approach with multiple tiers for each sector. The for‐profit sector will continue to follow IFRS but reporting standards for the public sector will be based on IPSAS. In this period of change we sought the views of preparers of public sector financial reports regarding the users of such reports and their preferences for the public sector reporting framework. We also sought the views of the preparers regarding the usefulness of each financial statement for users, and whether the benefits of reporting by their organisations exceeds the costs. The findings indicate support for maintaining IFRS as a basis for reporting in the NZ public sector. However, IPSAS modified to NZ conditions is also perceived as an acceptable option by respondents in this study. The income statement is, in the opinion of the respondents in this study, the most useful statement while cash flows appear to hold little value. A high proportion of respondents believe that the benefits of reporting exceed the costs, which contradicts the view that such reports are mainly compliance documents that provide little value. This finding contributes to the continuing debate on costs versus benefits on the recent introduction of IPSAS as the reporting framework for the public sector and the perceived appropriateness of IPSAS in public sector reporting.     

Economic Reform and Labor Unions: A General-Equilibrium Analysis Applied to Bangladesh and Indonesia

Noting the trend toward more independent trade unions in developingcountries, this article examines whether the presence of unionsstrengthens or weakens the benefits to be gained from economicpolicy reform. We show that the presence of "passive" unions—onesthat choose their wage-employment contract given the firm'scost-minimizing strategy—increases the welfare gains fromtrade liberalization, because trade reform lowers the wage premiumenjoyed by the unionized sector, reducing a distortion in thelabor market. These gains are amplified when the unions are"active", namely, when they negotiate a contract with the firmthat is off its labor demand curve. Such a contract resultsin featherbedding—paying workers more than their marginalproduct—and trade reform reduces the amount of featherbedding.The policy implication for Bangladesh—a country with strongtrade unions and a protected unionized sector—is thatthe benefits of further trade liberalization may be greaterthan otherwise predicted. In Indonesia, where both unionizationand import tariffs are low, allowing greater independence tounions may preserve flexibility and reward workers better thanthe current minimum-wage policy.     

How costly is the Sarbanes Oxley Act? Evidence on the effects of the Act on corporate profitability

The Sarbanes-Oxley Act (SOX) was intended to protect investors by improving the accuracy and reliability of corporate disclosures. However, critics have argued that the costs of SOX far outweigh its intended benefits. Prior studies based on stock-price reactions to SOX-related events document mixed evidence on the expected impact of SOX. In contrast, we provide evidence on the net realized costs of SOX by examining its impact on operating profitability. We find that average cash flows decline by 1.3% of total assets after SOX. These costs are more significant for smaller firms, for more complex firms, and for firms with lower-growth opportunities. Annually, these costs range from $6 million for smaller firms to $39 million for larger firms. Further, we document that net SOX-related costs are not limited to one-time expenses associated with internal-control design and implementation. In aggregate, for the 1428 firms in our sample, these costs amount to about $19 billion per year. Profitability is lower for up to four years post-SOX. To our knowledge, ours are the first estimates of the realized net costs imposed by SOX.     

Particulate matter air pollution control programs in Japan — an analysis of cost savings in the absence of future remediation

The objectives of this study were to assess avoided economic costs (or anticipated ‘benefits’) of not implementing new environmental policies for particulate matter (PM) in Japan and compare these future benefits to estimates of future health risks developed in a separate analysis. The estimates for the benefits of avoided PM pollution control in the year 2010 were (1) $27 billion USD for stationary source controls, (2) $2.1 billion to $3.3 billion USD for diesel motor vehicle controls, (3) $41 million USD for governmental employee salaries, (4) $470 million USD for governmental financial assistance, (5) $510 million USD for special diesel vehicle control measures in Tokyo, and (6) $31 billion USD for total costs.

Using human health and productivity risks, calculated in a separate study to be $56 billion USD, the best net ratio of benefits to costs was 1.8 to 1. Inexpensive control options include road watering or paving for unpaved dirt roads and road vacuuming for paved roads. Intermediate options include differential road pricing, retrofitting diesel particulate filters, and reformulating diesel fuel. High cost options include adding particulate controls, such as wet scrubbers, baghouses, and electrostatic precipitators on uncontrolled stationary sources.     

Cross-Country Evidence on Public Sector Retrenchment

This article reports the results from a survey of public sectoremployment retrench-ment episodes across a wide variety of developingand transition economies. The information collected and analyzedis primarily from internal World Bank documents and in-depthinterviews with World Bank staff having operational informationabout experiences in specific countries. Using the informationcollected on 41 retrenchment programs across 37 countries, thearticle analyzes the relationships between the factors leadingto retrenchment, the scope and nature of retrenchment, and themethods used to accomplish the retrenchment. The discussionof methods includes an analysis of the mix of involuntary andvoluntary employment reduction programs, the compensation schemesoffered, and the extent of targeting of specific types of workers.Although relevant quantitative information is limited, the articlealso attempts to evaluate the outcome of the programs on severaldimensions. The most striking findings relate to analysis ofthe factors leading a significant fraction of programs to rehireworkers separated from the public sector (thereby defeatingthe programs'objective). In addition, the article relates programcharacteristics to calculated summary financial payback indicatorsand to the nature of the labor market adjustment.     

The Welfare Costs of Price Controls for Cars and Color Televisions in Poland: Contrasting Estimates of Rent-Seeking from Recent Experience

The welfare costs of price controls can vary enormously, dependingon the method of allocating the good in shortage and the possiblerent-seeking costs that may result. With full rent dissipation,the welfare loss from price controls on Polish color televisionsin 1989 was about ten times the standard estimates of distortioncosts, which ignore rent-seeking, and was more than 100 percentof the value of domestic producers' sales. The methods of allocatingcars, however, did not result in rent-seeking costs. The domesticprice controls were an unintended implicit subsidy to imports.Subsidies for cars were estimated at 43 percent and for colortelevisions at 22 percent.     

Public education reform: Community or national funding of education?

I use a political economy model of public funding of education to evaluate the welfare implications of a move from a community- to a nation-wide funding policy. Broadening the scope of education finance has intragenerational redistribution effects as well as intergenerational effects. Previous studies have emphasized the intragenerational redistribution effects of moving from local to state-financed systems, while holding factor prices fixed. The model in this paper includes a social security system and allows factor prices to vary endogenously. I examine the welfare effects of broadening the scope of financing from a community- to a nation-wide system and find that there are very large welfare gains as voters “internalize” the effect of the education policy on both factor prices and social security benefits. I also focus on the intergenerational distributional effects, finding that significant welfare gains occur despite the displacement of the median voter to an older agent that cares less about children's well-being.     

Macroprudential regulation and macroeconomic activity

I develop a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on banks’ financial decisions and the implications for the real sector. I model an occasionally binding capital requirement constraint and analyze its costs and benefits. This friction means that the banks refrain from valuable lending. At the same time, capital requirements provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations and raise welfare. I also show that switching to a countercyclical capital requirement regime can help reduce volatility and raise welfare. Finally, by means of the welfare analysis, I also obtain the optimal level of capital requirement.     

Liquidity,innovation and growth

Many countries simultaneously suffer from high inflation, low growth and poorly developed financial sectors. In this paper, we integrate a microfounded model of money and finance into a model of endogenous growth to examine the effects of inflation on welfare, growth and the size of the financial sector. A novel feature is that the innovation sector is decentralized. Financial intermediaries arise endogenously to provide liquidity to this sector. Consistent with the data but in contrast to previous work, reducing inflation generates large growth gains. These large gains cannot be easily reproduced by imposing a cash-in-advance constraint in the innovation sector.     

A competitive model of the informal sector

In developing nations, formal workers tend to be more experienced, more educated, and earn more than informal workers. These facts are often interpreted as evidence that low-skill workers face barriers to entry into the formal sector. Yet, there is little empirical evidence that such barriers are important. This paper describes a model where, in equilibrium, the characteristics of formal and informal workers differ systematically, even though labor markets are perfectly competitive. The informal sector emphasizes low-skill work, as in the data, because informal managers have access to less outside financing, and choose to substitute low-skill labor for physical capital.     

Infrastructure public–private partnership project ecosystem – financial and economic positioning of stakeholders

The purpose of this paper is to construct an analytical cash flow-based project model to facilitate project appraisal of both private investors and public sector. With the help of the model that focuses on ecosystem and its stakeholders, it is simpler to identify potential conflicts usually encountered in public–private partnership (PPP) projects. The model construct is based on classical cash flow accounting and cost–benefit analysis. In the model, the flows of cash (private investors) and the flows of costs and benefits (public investors) are integrated in a single framework. The model shows that within the ecosystem the investors' (public vs. private) social, economic and financial targets are not necessarily coinciding. Prospecting of common ground and win–win situations becomes a crucial success factor for any PPP project. The paper discusses the policy and investment strategy implications for successful PPPs.     

Matching Severance Payments with Worker Losses in the Egyptian Public Sector

Severance pay programs can reduce political opposition and minimizethe social costs of labor redundancies. In Egypt, only voluntaryprograms are feasible because legal limitations preclude layoffsand strong organized labor groups oppose any weakening of jobsecurity protections. A common problem with voluntary severanceprograms, however, is that they tend to overpay workers relativeto the welfare losses they experience from displacement. This article estimates the losses that public sector workerswould incur if they were displaced from their jobs and simulatesseveral voluntary severance schemes to determine how well theschemes match compensation payments to these estimated losses.It provides a fairly strong argument for looking at the structureof opportunity costs and wage profiles when designing severanceprograms. It shows that significant overpayment can be avoidedby matching compensation payments to the expected losses ofworkers. It also provides a method for estimating these lossesfrom standard labor force surveys that are available in mostcountries.     

Trade Openness and Exchange Rate Regimes

The paper evaluates the net welfare gains of inflation targeting over a fixed exchange rate as a function of a country's trade openness, using a multisectoral structural model calibrated to Chile. For most calibrations with separable preferences, net welfare gains are increasing in trade openness. The reason is that in more open economies terms of trade shocks, which favor inflation targeting, become quantitatively more important, while price markup shocks in the imperfectly competitive nontradables sector, which favor exchange rate targeting, become less important. The most important exception is heavily indebted countries, where net welfare gains are decreasing in trade openness.     

Public Sector Downsizing: An Introduction

Authorities throughout the developing world are turning to downsizingin an effort to reduce budget deficits and address the inefficienciesengendered by state-led development strategies. Because large-scaleinvoluntary dismissals are often politically difficult, a voluntaryapproach to reductions in public sector employment is increasinglypopular among developing-country governments, multilateral organizations,and donor countries. This article (and, more generally, theresearch project on Public Sector Retrenchment) attempts tosketch a protocol for public sector downsizing that takes intoaccount the costs and benefits for the workers and the economy. After reviewing the international experience with downsizing,the article addresses five questions: how to identify the redundantworkers, how to predict their losses from separation, how todesign compensation and assistance packages, how to assess thefinancial and economic returns to downsizing, and how to dealwith downsizing in one-company towns. Based on the answers tothese questions, a decision tree is proposed.     

Aid and the Supply Side: Public Investment, Export Performance, and Dutch Disease in Low-Income Countries

Contemporary policy debates on the macroeconomics of aid oftenconcentrate on short-run Dutch disease effects, ignoring thepossible supply-side impact of aid-financed public expenditure.In the simple model of aid and public expenditure presentedhere, public infrastructure generates an intertemporal productivityspillover, which may exhibit a sector-specific bias. The modelalso provides for a learning-by-doing externality, through whichtotal factor productivity in the tradable sector is an increasingfunction of past export volumes. An extended computable versionof this model is used to simulate the effect of a step increasein net aid flows. The simulations show that beyond the shortrun, when conventional demand-side Dutch disease effects arepresent, the relationship between enhanced aid flows and realexchange rates, output growth, and welfare is less straightforwardthan simple models of aid suggest. Public infrastructure investmentthat generates a productivity bias in favor of nontradable productiondelivers the largest aggregate return to aid, but at the costof a deterioration in the income distribution. Income gainsaccrue predominantly to skilled and unskilled urban households,leaving the rural poor relatively worse off. Under plausibleparameterizations of the model, the rural poor may also be worseoff in absolute terms.     

The Effect of SOX Section 404: Costs,Earnings Quality,and Stock Prices

This paper exploits a natural quasi‐experiment to isolate the effects that were uniquely due to the Sarbanes–Oxley Act (SOX): U.S. firms with a public float under $75 million could delay Section 404 compliance, and foreign firms under $700 million could delay the auditor's attestation requirement. As designed, Section 404 led to conservative reported earnings, but also imposed real costs. On net, SOX compliance reduced the market value of small firms.     

Does Economic Analysis Improve the Quality of Foreign Assistance?

The World Bank undertakes an annual expenditure of around $60million on country-specific economic analysis and advice forits member developing countries. What is the impact of thiseconomic and sector work on the quality of World Bank lending?It would be useful to know whether past analytical work hasgenerated measurable economic benefits that would justify itscontinued provision in an environment of increasingly scarceresources. This article sets out an idealized model of decisionmaking inwhich a country manager makes a broad allocation of resourcesbetween lending services and economic and sector work. Giventhat decision, the task manager for each project makes project-specificdecisions with respect to the allocation of resources betweenpreparation and supervision. The analysis indicates that economicand sector work has a significant positive impact on the qualityof World Bank loans. The results provide clear evidence of underinvestmentin economic and sector work. And the analysis shows that resourcescould be switched from preparation and supervision to economicand sector work to the benefit of both the quality of programsand level of disbursements.     

The Impact of Firing Costs on Turnover and Unemployment: Evidence from the Colombian Labour Market Reform

Reductions in firing costs are often advocated as a way of increasing the dynamism of labour markets in both developed and less developed countries. Evidence from Europe and the U.S. on the impact of firing costs has, however, been mixed. Moreover, legislative changes both in Europe and the U.S. have been limited. This paper, instead, examines the impact of the Colombian Labour Market Reform of 1990, which substantially reduced dismissal costs. I estimate the incidence of a reduction in firing costs on worker turnover by exploiting the temporal change in the Colombian labour legislation as well as the variability in coverage between formal and informal sector workers. Using a grouping estimator to control for common aggregate shocks and selection, I find that the exit hazard rates into and out of unemployment increased after the reform by over 1\% for formal workers (covered by the legislation) relative to informal workers (uncovered). The increase of the hazards implies a net decrease in unemployment of a third of a percentage point, which accounts for about one quarter of the fall in unemployment during the period of study.     

EXPORT PROCESSING ZONES: The Economics of Enclave Manufacturing

Export processing zones (EPZS) are economics enclaves withinwhich manufacturing for export occurs under virtual free tradeconditions. Many developing countries have established EPZSin hopes of reaping economic gains through employment, foreignexchange earnings, and technology transfer. This article studiesthe benefits and costs of EPZS in Indonesia, the Republic ofKorea, Malaysia, and the Philippines and reviews the relationshipbetween the welfare effects of EPZS and the host country's economicpolicies. When the domestic economy is distorted, the EPZ conferslimited welfare gains. Nevertheless, EPZS are far from the "enginesof development" that some countries had initially hoped theywould become.