THE COMMON AGRICULTURAL POLICY: A Review of Its Operation and Effects on Developing Countries

Policy changes in the European Community (EC)—the world'slargest importer and, since 1986, exporter of agricultural commodities—mayhave significant effects on world markets and developing countries.This article investigates the EC's Common Agricultural Policy(CAP), its history, mode of operation, and the prospects andpossibilities for change, to bring out the implications of thepolicy for developing country exporters and importers. The hypothesisthat evolves differs from that of many studies in proposingthat an agricultural liberalization in the EC is unlikely toeffect any great change in world market prices over the firstfew years. Developing countries' principal gain from a liberalizationof the CAP would derive from increased stability of world marketprices, improved access to export markets, and a reduction inthe uncertainty currently caused by discretionary measures inthe EC.      

THE ECONOMICS OF NATURAL RESOURCE EXTRACTION: A PRIMER FOR DEVELOPMENT ECONOMISTS

As developing countries become major consumers of the globalsupply of commercial energy, it is essential to understand thedeterminants of future energy prices. At the same time, manydeveloping countries are relying on exports of their own naturalresources—tropical hardwoods, oil, tin, gold, and otherminerals—to generate badly needed foreign exchange. Governmentpolicies influence how much of a resource is extracted todayand how much is saved for the future. Flawed policies needlesslywaste precious national wealth.      

Choosing a System of Unemployment Income Support: Guidelines for Developing and Transition Countries

Mounting evidence suggests that excessive job protection reducesemployment and labor market flows, hinders technological innovations,pushes workers into the informal sector, and hurts vulnerablegroups by depriving them of job opportunities. Flexible labormarkets stimulate job creation, investment, and growth, butthey create job insecurity and displace some workers. How canthe costs of such insecurity and displacements be minimizedwhile ensuring that the labor market remains flexible? Eachof the main unemployment income support systems (unemploymentinsurance, unemployment assistance, unemployment insurance savingsaccounts, severance pay, and public works) has strengths andweaknesses. Country-specific conditions—chief among themlabor market and other institutions, the capacity to administereach type of system, and the size of the informal sector—determinewhich system is best suited to developing and transition countries.      

Infrastructure Privatization and Regulation: Promises and Perils

Infrastructure is crucial for generating growth, alleviatingpoverty, and increasing international competitiveness. For muchof the twentieth century and in most countries, the networkutilities that delivered infrastructure services—suchas electricity, natural gas, telecommunications, railroads,and water supply—were vertically and horizontally integratedstate monopolies. But this approach often resulted in extremelyweak services, especially in developing and transition economiesand especially for poor people. Common problems included lowproductivity, high costs, bad quality, insufficient revenue,and shortfalls in investment. Over the past two decades manycountries have implemented far-reaching institutional reforms—restructuring,privatizing, and establishing new approaches to regulation.This article identifies the challenges involved in this massivepolicy redirection within the historical, economic, and institutionalcontext of developing and transition economies. It also reviewsthe outcomes of these policy changes, including their distributionalconsequences—especially for poor households and otherdisadvantaged groups. Drawing on a range of international experiencesand empirical studies, it recommends directions for future reformsand research to improve infrastructure performance.      

Counting the World's Poor: Problems and Possible Solutions

As recent discussions have made clear, the apparent lack ofpoverty reduction in the face of historically high rates ofeconomic growth—both in the world as a whole and in specificcountries (most notably India)—provides fuel for the argumentthat economic growth does little to reduce poverty. How confidentcan we be that the data actually support these inferences? Atthe international level, the regular revision of purchasingpower parity exchange rates plays havoc with the poverty estimates,changing them in ways that have little or nothing to do withthe actual experience of the poor. At the domestic level, theproblems in measuring poverty are important not only for theworld count but also for tracking income poverty within individualcountries. Yet, in many countries, there are large and growingdiscrepancies between the survey data—the source of povertycounts—and the national accounts—the source of themeasure of economic growth. Thus economic growth, as measured,has at best a weak relationship with poverty, as measured.      

DEVELOPMENT, THE ENVIRONMENT, AND THE SOCIAL RATE OF DISCOUNT

This article examines the role of the discount rate in makingdecisions that will have significant implications for the environment.The authors begin by providing a rationale for discounting ingeneral and by describing the main factors that determine thediscount rate. These factors—the private and social ratesof time preference, the opportunity cost of capital, risk anduncertainty, and the interests of future generations—allhave an environmental dimension. The article goes on to examinethat dimension and to explore the connections between the choiceof the discount rate and environmental concerns, such as excessiveexploitation of natural resources, inadequate investment inconservation, and insufficient attention to the irreversibleloss of certain environmental resources. The authors conclude that, in general, environmental concernsare not best addressed by lowering the discount rate—anaction that might have both benefits and costs for the environment.A more promising course would be to incorporate a criterionof sustainability into certain aspects of decisionmaking. Howsuch a criterion could be made operational is touched upon butnot developed in this article.      

Competition and Scope of Activities in Financial Services

This article analyzes the costs and benefits of different degreesof competition and different configurations of permissible activitiesin the financial sector and discusses the related implicationsfor regulation and supervision. Theory and experience demonstratethe importance of competition for efficiency and confirm thata competitive environment requires a contestable system—meaningone that is open to competition—but not necessarily alarge number of institutions. A competitive banking system canimprove the distribution of consumer credit, enhance the corporatesector's access to financing, and mitigate the risks of financialcrises. In an open market, in which services and products areprovided in response to market signals, financial institutionsrespond by offering a wider scope of financial services. Theoptimal institutional design for supervisory functions is lessobvious.      

INTERPRETING RECENT RESEARCH ON SCHOOLING IN DEVELOPING COUNTRIES

Policymakers in developing countries have long been troubledby the undesirable, but apparently unavoidable, choice betweenproviding broad access to education and developing high-qualityschools. Recent evidence, however, suggests that this is a badway to think about human capital development. Grade repetitionand high dropout rates lead to a significant waste of resourcesin many school systems. Students in quality schools, however,respond in ways that reduce such inefficiencies, perhaps evensufficiently to recoup immediately investments in quality. Promoting high-quality schools, however, is more difficult thanmany have thought, in part because research demonstrates thatthe traditional approach to providing quality—simply providingmore inputs—is frequently ineffective. Existing inefficienciesare likely to be alleviated only by the introduction of substantiallystronger performance incentives in schools and by more extensiveexperimentation and evaluation of educational programs and schoolorganizations. Incentives, decentralized decisionmaking, andevaluation are alien terms to education, in both industrialand developing countries, but they hold the key to improvementthat has eluded policymakers pursuing traditional practices.      

THE DESIGN AND DIFFUSION OF IMPROVED COOKING STOVES

The poorer half of the world's people have long relied for theirenergy needs on woodfuels. Since the oil shocks of the 1970s,pressure on forest resources has increased and the costs oftraditional use of woodfuels have been growing—to thehouseholder, in cash or collection time, and to society in inefficientenergy use, deforestation, and local and global harm to healthand the environment. Modern, efficient stoves can alleviatesome of these problems; programs to design and disseminate themwould seem a worthwhile pursuit for development activity. But do such programs in fact warrant the investment? Why haveso many failed to catch on as expected? The authors find thatprograms have been most successful when targeted to specificareas where woodfuel prices or collection times are high. Fieldtesting, consumer surveys, and involvement of local artisansfrom the outset have been critical to the ultimate adoptionof the stoves. With these elements in place, external supportfrom governments and donors can be useful; lacking them, subsidiesmay succeed only in distributing stoves that ultimately molderaway unused. This article's review of what makes for successand failure is instructive for the design of stove programsin particular, and of development projects that propagate improvedmethods and technologies in general.      

WHEN DO HETERODOX STABILIZATION PROGRAMS WORK?: Lessons from Experience

What advantages and disadvantages does the heterodox strategyoffer to stabilization programs in countries with chronic highinflation? Heterodox stabilization programs, in our definition,are those that support orthodox policies— that is, tightfiscal policy and a fixed exchange rate—with the initial,temporary use of incomes policies— that is, price andwage controls. This evaluation, based on several heterodox programs,successful and unsuccessful, from the 1960s and 1980s in LatinAmerican countries and Israel, affords four principal lessons: * The rapid reduction in inflation at the beginning of heterodoxprograms (which usually comes about at small cost) is the easypart; the problem is to maintain price stability over time. * Incomes policies in heterodox stabilization programs are justifiedonly in countries with high chronic inflation, where persistentinflation is more pervasive and problematic. * There is a case for a bigger fiscal adjustment in heterodoxthan in orthodox programs because of the risk that a programwith price controls may be misperceived as a populist devicefor achieving price stability without adjusting. * The failure of a heterodox program is more likely to destabilizeinflation than is the failure of an orthodox program.      

Imports under a Foreign Exchange Constraint

To assess proposed macroeconomic adjustment programs, policymakersmust estimate import demand relative to the foreign exchangeavailable. Traditional models estimate import demand as a functionof relative prices (the real exchange rate) and income (grossdomestic product) but omit changes in foreign exchange. In the1980s, however, declines in foreign lending and the terms oftrade and increased debt service costs reduced foreign exchangeavailability in most developing countries and limited importcapacity. In this article two import models are presented which incorporateboth the traditional variables and indicators of import capacity—foreignexchange inflows and international reserves. The first modelassumes that import prices are exogenous, but in the secondmodel import prices are endogenous—allowing for governmentattempts to reduce import demand by increasing the domesticimport price. The models are estimated using data for twenty-onedeveloping countries for 1970–83. The results suggestthat the import model presented here does a better job of explainingimport behavior than do the traditional model (which excludeschanges in foreign exchange) and the Hemphill model (which excludesrelative import prices and income).     

New Models for Old-Age Security: Experiments, Evidence, and Unanswered Questions

The escalating costs of traditional social security systemsare forcing countries to reevaluate the formal programs thatprovide income maintenance support to the aging. This articlesuggests a reform strategy built around three systems, or "pillars,"to provide old-age security—a public pillar with mandatoa private, mandatory savings plan, and a voluntary savings system.Three variations of this model are being implemented in differentcountries: the Latin American model, in which individual workerschoose an investment manager for their retirement finds; theOECD model, in which employers, union trustees, or both choosethe investment manager for an entire company or occupation;and the Swedish notional account model, a reformed pay-as-you-gofirst pillar that may be supplemented by a second, funded pillar.Preliminary empirical evidence on the efficiency and growtheffects of pension reform, mostly from Chile, indicates thatthe impact on national saving and financial market developmentand, through these, economic growth, has been positive and possiblylarge. Problems concerning high administrative costs and regulationsthat distort investment decisions remain to be resolved, however.      

Developing Countries' Changing Participation in World Trade

Recent years have seen substantial reductions in trade policyand other barriers inhibiting developing country participationin world trade. Lower barriers have contributed to a dramaticshift in the pattern of developing country trade—awayfrom dependence on commodity exports to much greater relianceon manufactures and services. In addition, exports to otherdeveloping countries have become much more important. Thesechanges have profound implications for the role played by developingcountries in the world economy and trade system.      

ALTERNATIVE FORMS OF EXTERNAL FINANCE: A SURVEY

For many developing countries, alternative forms of externalfinance—all forms of finance that are not guaranteed byor mediated through the public sector—have become increasinglyimportant as traditional financing to the public sector hasebbed. Yet a survey of the literature reveals few recent analyticalinsights about alternative financing, which includes foreigndirect investment, project lending, portfolio investment, closed-endequity funds, private nonguaranteed debt, licensing, joint ventures,quasi-equity contracts, and other forms of private, nonrecourselending to private borrowers. The literature offers little solidguidance for distinguishing between alternative and traditionalfinancing with respect to country risk, for establishing themost appropriate and efficient incentive structures and restrictionsin the host country, or for identifying the optimal financingmodes for international firms investing in developing countries.This gap in the analytical literature has important implicationsfor policy formulation. It is not always clear whether a countryis developing incentives and establishing safeguards (for ensuringadherence to project performance requirements) that are mosteffective in attracting alternative forms of finance.      

Contagion: Understanding How It Spreads

Much of the current debate on reforming the international financialarchitecture is aimed at reducing the risks of contagion—bestdefined as a significant increase in cross-market linkages aftera shock to an individual country (or group of countries). Thisdefinition highlights the importance of other links throughwhich shocks are normally transmitted, including trade and finance.During times of crisis, the ways in which shocks are transmitteddo seem to differ, and these differences appear to be important.Empirical work has helped to identify the types of links andother macroeconomic conditions that can make a country vulnerableto contagion during crisis periods, although less is known aboutthe importance of microeconomic considerations and institutionalfactors in propagating shocks. Empirical research has helpedto identify those countries that are at risk of contagion aswell as some, albeit quite general, policy interventions thatcan reduce risks.      

CASH FLOW OR INCOME?: The Choice of Base for Company Taxation

Cash flow and equity income (or income) are two alternativebases advocated for taxes on businesses throughout the world.Although in practice most tax systems are hybrids with elementsof both types of taxes, recent literature has stressed the meritsof the cash flow tax because it is simple in concept and itdoes not distort decisions about capital expenditures and financing.But international issues and administrative complexities—particularlytax evasion—present problems that must be sorted out beforea cash flow tax can be implemented.      

WHO WINS AND WHO LOSES FROM VOLUNTARY EXPORT RESTRAINTS?:The Case of Footwear

Voluntary export restraints have been a popular resort of industrialcountries faced with increasing competition from exports ofdeveloping countries. As a strategy for circumventing the rulesof the GATT (whose regulations preclude increases in tariffs),these nontariff barriers have been rather successful; whetherthey have been as successful in their aim of protecting andstimulating the industry concerned is another matter. This article looks at what happened when industrial countriesimposed—and then removed—voluntary export restraintson the footwear industry during the 1970s and 1980s. Why didprotectionism spread so fast and then dissipate almost as rapidly,and what effects did this coming and going have on the exportingcountries We suggest that industrial countries removed the restraintsbecause they found ?them either superfluous (the expected employmenteffect failed to materialize) or ineffective (the principalexporters maintained their market share during the height ofthe restrictions), or else because the industry was able toadjust by importing footwear at a profit. Predicting the effect of VERs, and determining how best to managethem, are critical questions for developing countries strugglingto improve their export performance in the 1990s. The resultsof detailed study of a representative industry, summarized here,may assist in the prediction and determination.      

ENTREPRENEURS AND ENTREPRENEURSHIP IN AFRICA

The article examines the widespread belief that indigenous entrepreneurshipis less well represented in African countries than in otherparts of the developing world. The evidence shows no dearthof ability among Africans to identify business opportunitiesand to act upon them—the two quintessential characteristicsof entrepreneurship. But the management problems these businesseshave sometimes encountered suggest that there may be a continuingrole for expatriates, provided the industries are fundamentallysound. Small businesses appear to have a better chance of successand are more viable than some of the heavily protected and subsidizedtransnational enterprises. The article finds that successful industrial entrepreneurs havecome from a variety of religious, cultural, and educationalorigins. It casts doubt on the efficacy of training programsto teach entrepreneurial skill and argues instead that a liberaleconomic regime is more likely to encourage entrepreneurship.Equally important is a well-grounded and widely dispersed growthof income, especially among small-scale cultivators, which leadsto a growth of demand for what small businesses produce.      

THE COSTS AND BENEFITS OF AGROFORESTRY TO FARMERS

Deforestation, growing scarcity of tree products, and environmentaldegradation have created serious problems for rural land usein many developing countries. Agroforestry, a system in whichwoody perennials are grown on the same land as agriculturalcrops or livestock, has been increasingly enlisted in the campaignto meet these threats to the rural economy. Case studies of twenty-one agroforestry projects in six CentralAmerican and two Caribbean countries formed the empricial basisfor the study described in this article. A focal point of analysiswas the profitability of agroforestry for farmers as a crucialincentive to adoption. The findings indicate that many agroforestry practices are profitableunder a broad range of conditions and are therefore likely tobe widely applicable. Successful projects have worked with localcommunities, responding to local needs and preferences and offeringfarmers a broad basket of species and systems from which tochoose. Demonstration plots and the use of paratechnicians havebeen low-cost and effective means of technology transfer, andapplied research has been important in identifying techniquesand practices suited to the region. Other findings have identifiedgovernment regulation of tree harvesting and insecurity of tenure—thoughnot lack of title in itself—as disincentives to adoption.