Public sector motivation and development failures

This paper provides a theoretical analysis of the relationship between public sector motivation and development. In the model the public sector produces a public good and workers are heterogeneous in terms of public sector motivation (PSM). Wages in the private sector increase with the quality of the public good. In this context, public sector wage premia (PSWP) have two opposite effects: low PSWP helps screen workers with PSM into the public sector, while high PSWP helps motivate workers to be honest. Raising PSWP may not improve the quality of governance and multiple equilibria might arise. The model highlights that the relative importance of workers selection and provision of ”on the job” incentives in the public sector varies in systematic ways with wages in the private sector. We provide anecdotal and original empirical evidence consistent with the theoretical predictions and discuss some policy implications for public sector reforms in developing countries.     

Philippine Infrastructure and Connectivity: Challenges and Reforms

The Philippines has performed creditably well in the past few years. Ensuring better infrastructure and connectivity is crucial in attaining inclusive growth. This will require substantial investments in infrastructure. Various reforms to address the infrastructure lack were implemented but there is scope for more reforms: improving fiscal space, reforming budgetary processes, improving public‐private partnerships (PPPs) and the regulatory environment, and better policy coordination to address problems of connectivity and infrastructure. The Philippines has to continuously improve the governance framework, ensure stability and predictability of policies and regulations. Better coordination among a diverse set of governmental infrastructure bodies, and also between government and the private sector is needed to address infrastructure bottlenecks.     

Is there a “reform fatigue” in the euro area?

The absence of monetary policy within a currency union increases the need for structural reforms that make the participating economies more flexible. However, the absence of exchange rate risk with respect to the other members of the union may reduce the urgency for such reforms. A number of other considerations also suggest that theory is ambiguous about the impact of participating in a currency union on progress in structural reforms. This paper addresses this issue empirically for the euro area. The results suggest that reforms in the euro area seem to have decelerated following the introduction of the euro, but from a fast pace. The paper discusses a number of possible explanations, including “reform fatigue,” the absence of “market punishment,” and “good-times” complacency. Estimates from an empirical growth model suggest that the slowing of reforms may slow down annual output growth by up to 0.2%. However, the results are preliminary and depend on the area of reform considered. Furthermore, the reform dynamics may change with the euro area starting slowing at the end of 2007.     

Reforms that keep you at home: The effects of economic transition on migration

Theory asserts that individuals’ migration decisions depend more on their expectations about future income levels than on their current income levels. We find that the implementation of market-oriented reforms in post-communist countries, by forming positive economic prospects, has reduced emigration as predicted by theory. Our estimates show that migration flows are highly responsive to reforms supporting private enterprises and financial services, which provide individuals with strong signals about their future prospects. We show that reforms that improve the management of infrastructure services have no link with migration patterns, which may be an important lesson for government policy.     

Toward Myanmar's New Stage of Development: Transition from Military Rule to the Market

The economic reforms implemented by the Thein Sein government face several challenges, some of which continue from the past military regime and some of which are new. The government is starting to overhaul institutions in order to obtain market‐based macroeconomic policy tools, which will possibly eliminate a long‐lasting fundamental cause of economic instability. One essential challenge is to design policies to encourage private capital, and to promote the agricultural and manufacturing sectors, which have already shown a high potential. At the same time, a regulatory framework and a well‐functioning financial system, which are essential to encourage private capital with market discipline, must be developed. A recent rise in natural resources exports created both a fiscal cushion and balance‐of‐payments surplus, which seems to have promoted reforms. However, the government should be aware that the recent favorable conditions may not last for a long future.     

Policy induced increases in private healthcare financing provide short-term relief of total healthcare expenditure growth: Evidence from OECD countries

Healthcare reforms have long been advocated as a cure to the increasing healthcare expenditures in advanced economies. Nevertheless, it has not been established whether a market solution via private financing, rather than public financing, curb aggregate healthcare expenditures. To our knowledge, this paper is the first that quantifies the impact of reforms that significantly increases (decreases) the private (public) share of healthcare financing on total healthcare expenditures relative to income in 20 OECD countries. Our reform measure is based on structural break testing of the private share of total expenditures, and verification using evidence of policy reforms. To quantify the effect of these reforms we apply Propensity Score Matching and Inverse Probability Weighted regression analysis. Over a 5-year evaluation period the reforms lead to an accumulated cost saving 0.45 percentage points of GDP. The yearly effects of the reforms are largest in the first years in the post-reform period and decreases in size as a function of time since the reform. Our findings suggest that the investigated healthcare reforms have a relatively short-lived effect on aggregate health spending relative to GDP. The findings are robust to various sensitivity tests.     

Are complementary reforms a “luxury” for developing countries?

This paper investigates the impact of complementarity reforms on growth and how it depends on GDP per capita. Based on reform data for six policy areas compiled from various sources during the period 1994–2006 for over 100 countries, we compute composite indicators of reform level and complementarity. We provide qualitative justification for the existence of pair-wise complementarities among policy areas. We then use cross-section and panel data estimates to test the effect of reform level and complementarity on GDP per capita growth. We found reforms to be positively related and their dispersion (or the inverse of complementarity) negatively related to growth, controlling for initial conditions, monetary stability and other structural and institutional variables, as well as endogeneity of reform level and complementarity. We show that the effect of policy complementarity is a stronger condition for sustainable growth in developing than in advanced countries, to conclude that complementary reforms are not a ‘luxury’ for developing countries.     

Ownership transformation,firm performance and manufacturing growth in China

Many commentators and researchers have attributed the manufacturing success in China to its ownership reforms. Using a micro database from the Chinese National Bureau of Statistics, this paper documents and quantifies this development. With systematic and robust analyses, it shows that the development of private ownership indeed played an essential role in improving firm performance and the allocation and utilization of production resources in the Chinese manufacturing sector. In addition, the paper estimates the contributions of firms under different ownership to manufacturing growth, showing that the development of private ownership was the driving force of manufacturing growth in China. The strong credible evidence has important policy implications for further maintaining sustainable development in China.     

Changes in Development Finance in Asia: Trends,Challenges, and Policy Implications

There have been shifts in the composition and nature of development finance in Asia, such as the mainstreaming of private sources of finance and the emergence of domestic resources potentially available for development purposes. In parallel, new trends and challenges are identified in such areas as the transformation of development aid, public–private partnerships, and green finance. A common challenge is how to strengthen financial intermediaries for longer term sustainable financing from domestic and external sources for investment serving development purposes. To address this, policymakers should bear in mind policy coherence and consistency from macro, sector, and micro perspectives. For various financial resources to bring about tangible benefits, policymakers should take account of complementarities and synergies among the full range of available financial resources. The effective utilization of private sources of finance depends on commercial viability. The key to success is incentive design and risk mitigation measures.     

Producer price adjustment to commodity price shocks: An application of threshold cointegration

During the 1980s and 1990s, most developing countries in Sub-Saharan Africa and Latin America implemented structural adjustment reforms, which included the liberalization of export crop markets and the abolition of marketing boards. The emergence of new marketing systems may have altered price transmission mechanisms, especially if collusion behaviors have appeared among domestic stakeholders along the marketing chain. I use threshold cointegration tools to analyze the dynamics of world price transmission to coffee growers in three deregulated markets. The methods I use allow me to test the presence of a threshold in both the cointegrating relationship and its corresponding error correction model. Over the pre-reform period, I detect asymmetric price adjustments that appear favorable to producers - deviations from the long-run equilibrium resulting from largest increases in world prices being eliminated relatively quickly - and disappear in the post-reform period. On the contrary over the post-reform period, the results suggest that largest decreases in world prices may be transmitted relatively quickly to growers. These results can be seen as expressions of a favorable pricing policy over the pre-reform period and an unfavorable influence of new private agents over the post-reform period, meaning that in some cases reforms may have failed to create competitive market structures.     

The role of Provincial Government Spending Composition in growth and convergence in China

China’s development policy since 1978 has differed across regions. With rapid aggregate growth has come widening regional inequality. The fiscal decentralisation reforms in 1994 shifted political pressure onto provincial officials to boost local growth through local public investments. These investments affect regional convergence by counteracting regulatory frictions in factor accumulation, and can also determine steady-state growth. However, the effect of public spending allocations across physical and human capital on growth and convergence processes is empirically unexplored for Chinese provinces. We take provincial time-series data on public spending by category, finding local public spending and its components augment convergence rates differently across regions. Spending on education and health contributes significantly more to growth and convergence than capital spending, confirming that the public capital-spending bias is not a local growth-optimising strategy. We suggest a policy of aligning local government promotion incentives to human capital targets to correct local resource misallocation.     

The Pattern of IMF Lending: An Analysis of Prediction Failures

In a constantly changing economic environment, a country's ability to undertake institutional reforms is crucial to maintain economic growth and to promote the welfare of its citizens. A wide range of determinants for institutional reforms have been identified. However, the impact of trust on reforms has not been fully addressed. We provide theoretical arguments why trust should influence institutional changes and test the relationship empirically. We find a significant positive relation between trust and the success of reforms with regard to government size, the legal system, and deregulation of private businesses and the labor market. Other policy fields are ambiguous.     

Chaebol and Industrial Policy in Korea

Although the degree of sectoral targeting changed dramatically from the 1960s to the 1970s and then from the 1980s onward, Korea maintained an outward‐oriented, bottom‐up, and integrated approach to industrial policy, relying on close public–private consultation and international benchmarking. The government and the chaebol systematically studied what had to be done to fill the missing links in the domestic value chain and move up the quality ladder, through technology acquisition, human resource development, and construction of optimal‐scale plants aimed for the global market. As the capacity of the private sector increased and sectoral targeting became a more difficult proposition, Korea shifted to a more sector‐neutral approach, which provided support for industry rationalization and R&D regardless of sectors. This was in line with a larger shift from industrial policy to competition and corporate governance policy, starting with the enactment of the Monopoly Regulation and Fair Trade Act in 1980.     

Modinomics: Design,Implementation, Outcomes,and Prospects

This paper presents an analysis of the key elements of Modinomics, defined as “everyone's participation, everyone's progress.” It investigates the reasons why Modinomics was necessary, the key elements of Modinomics, and how this policy was implemented. It argues that India's economic policy has had continuity since the economic reform package of 1991, so Modinomics has involved a high component of better implementation. Nevertheless, there have been some major policy changes as well. The paper discusses the deep structural reforms of demonetization and a Goods and Services Tax as well the new Insolvency and Bankruptcy Act. The paper examines the record of economic growth under Modi as well as new welfare and employment programs to make economic growth more inclusive. Finally, the paper examines the medium and long‐term growth prospects for India.     

The Contribution of Small and Medium Enterprises to Economic Development in Ukraine and Belarus: Some Policy Perspectives

The paper considers the development of small and medium enterprises (SME) in two transition economies where market reforms have been slow (Ukraine and Belarus), focusing specifically on the role of government in the process. Empirical data from a study on SMEs and economic development in Ukraine, Belarus and Moldova are used to consider the contribution of SMEs to different aspects of transformation whilst data from a second project are used to show the support needs of SMEs.Following the introduction, which summarises the aims and methodology, the second section presents brief profiles of the context for SME development in each country. Part 3 summarises some of the main empirical findings, focusing on those aspects that have potential policy significance, specifically with respect to employment, innovation, and market orientation, whilst the fourth section considers survey evidence of the support needs of SMEs. The final section draws out the main policy implications of the findings, whilst also setting out an agenda designed to increase the contribution of SMEs to economic development in the future.On the whole, the empirical results demonstrate that some SMEs have developed in Belarus and Ukraine despite the actions of governments, although the number of private enterprises per capita remains small and their qualitative characteristics often reflect the difficult operating conditions. As a result, their contribution to economic and social change is less than it could be, mainly due to an unstable environment and an institutional context that has yet to establish the framework conditions for sustainable private sector development. In terms of policy priorities, the survey data suggest that reform of the distorted legal and financial infrastructures that exist in these countries is the highest priority need.     

AID, ECONOMIC FREEDOM, AND GROWTH

Foreign aid has often been intended by donors to entice recipient nations into policy and institutional reforms favorable to private sector economic development. In this study, we investigate the relationship between aid and changes to economic freedom in recipient nations over the 1990–2000 decade. The evidence is mixed. In general, we find that foreign aid has no significant effect on economic freedom overall. However, using a hedonic approach on the different categories of economic freedom, we find that aid has still managed to contribute toward a policy and institutional environment favorable to growth, as the different categories of economic freedom improved by aid more than offset those which are harmed by aid, in terms of their impact on growth . ( JEL 010, 019)     

State-led or market-led green revolution? Role of private irrigation investment vis-a-vis local government programs in West Bengal's farm productivity growth

We estimate the role of private investments in irrigation in farm productivity growth in West Bengal, India between 1982 and 95. Using a state-wide farm panel, we find that falling groundwater costs generated significant growth in value added per acre for farms. These resulted from investments in minor irrigation which was stimulated by tenancy registration programs implemented by local governments. This helps account for substantial spillover effects of the tenancy reform on non-tenant farms noted in an earlier study. Hence the West Bengal Green Revolution of the 1980s benefited from complementarity between private investment incentives and state-led institutional reforms.     

Human capital, economic growth, and regional inequality in China

We show how regional growth patterns in China depend on regional differences in physical, human, and infrastructure capital as well as on differences in foreign direct investment (FDI) flows. We also evaluate the impact of market reforms, especially the reforms that followed Deng Xiaoping's “South Trip” in 1992 those that resulted from serious hardening of budget constraints of state enterprises around 1997. We find that FDI had a much larger effect on TFP growth before 1994 than after, and we attribute this to the encouragement of and increasing success of private and quasi-private enterprises. We find that human capital positively affects output and productivity growth in our cross-provincial study. Moreover, we find both direct and indirect effects of human capital on TFP growth. These impacts of education are more consistent than those found in cross-national studies. The direct effect is hypothesized to come from domestic innovation activities, while the indirect impact is a spillover effect of human capital on TFP growth. We conduct cost-benefit analysis of hypothetical investments in human capital and infrastructure. We find that, while investment in infrastructure generates higher returns in the developed, eastern regions than in the interior, investing in human capital generates slightly higher or comparable returns in the interior regions. We conclude that human capital investment in less-developed areas is justified on efficiency grounds and because it contributes to a reduction in regional inequality.     

The Collective Household, Household Production and Efficiency of Marginal Reforms

Most research on the welfare properties of taxes employs the unitary model of the household, ignoring household production. A simple model provides expressions for the changes in individual utility given marginal reforms to government policy. It is shown that the burden of a higher tax on household goods falls on the household member that consumes more than they produce or purchase. Numerical calculations show that price substitution (complementarity) between home and market labor increases (decreases) aggregate efficiency costs of a marginal redistribution of income without impacting the intra-household distribution of utility changes. Modeling household goods as public versus private can alter the distributional consequences of marginal reforms.     

The “V-factor”: Distribution,timing and correlates of the great Indian growth turnaround

We analyze a panel of output series for India, disaggregated by 15 states and 14 broad industry groups. Using principal components (Bai, 2004; Bai and Ng, 2004) we find that a single common “V-factor” captures well the significant shift in the cross-sectional distribution of state-sectoral output growth rates since the 2nd half of the 1980s. The timing of the turnaround implied by the V-factor is more closely related to the pattern of policy reforms than has been found in previous research. Regression-based analysis also provides some insights into the uneven distribution of the turnaround across Indian states.