Weak Links in the Chain II: A Prescription for Health Policy in Poor Countries

In an earlier article, the authors outline some reasons forthe disappointingly small effects of primary health care programsand identified two weak links standing between spending andincreased health care. The first was the inability to translatepublic expenditure on health care into real services due toinherent difficulties of monitoring and controlling the behaviorof public employees. The second was the "crowding out" of privatemarkets for health care, markets that exist predominantly atthe primary health care level. This article presents an approach to public policy in healththat comes directly from the literature on public economics.It identifies two characteristic market failures in health.The first is the existence of large externalities in the controlof many infectious diseases that are mostly addressed by standardpublic health interventions. The second is the widespread breakdownof insurance markets that leave people exposed to catastrophicfinancial losses. Other essential considerations in settingpriorities in health are the degree to which policies addresspoverty and inequality and the practicality of implementingpolicies given limited administrative capacities. Prioritiesbased on these criteria tend to differ substantially from thosecommonly prescribed by the international community.      

Is There a Case for Industrial Policy? A Critical Survey

What are the underlying rationales for industrial policy? Doesempirical evidence support the use of industrial policy forcorrecting market failures that plague the process of industrialization?This article addresses these questions through a critical surveyof the analytical literature on industrial policy. It also reviewssome recent industry successes and argues that public interventionshave played only a limited role. Moreover, the recent ascendanceand dominance of international production networks in the sectorsin which developing countries once had considerable successimplies a further limitation on the potential role of industrialpolicies as traditionally understood. Overall, there appearsto be little empirical support for an activist government policyeven though market failures exist that can, in principle, justifythe use of industrial policy.      

GOVERNMENT SPENDING IN DEVELOPING COUNTRIES: Trends, Causes, and Consequences

Throughout the twentieth century governments have been spendingever larger proportions of national income. Three issues arisein discussions about the growth of such spending as it pertainsto developing countries: How does it compare with expenditurein industrial nations? What explains the growth in spendingby developing country governments? And what are the effectson economic growth? Government expenditure as a share of GDPin low- and middle-income countries, on average, is lower thancomparable shares in industrial market economies and, with fewexceptions, is growing. Many factors, including ideology, demographics,a positive income elasticity for public goods, the rising costof public goods relative to private goods, and perhaps developmenttheory and practice, explain this growth. As for the relationshipbetween government expenditure and economic growth, the empiricalevidence does not reveal any strong correlation. The size ofgovernment may engender strong ideological debate, but the positionthat the aggregate level of government expenditure is a significantdeterminant of growth rates receives little support.      

ANIMAL HEALTH SERVICES: FINDING THE BALANCE BETWEEN PUBLIC AND PRIVATE DELIVERY

Growing fiscal deficits and greater awareness of the huge economiccost of often-inefficient government activities have renewedinterest in transferring the delivery of important servicesfrom the public to the private sector in developing countries.This article, drawn from a longer study, offers a frameworkfor determining the appropriate roles of the public and privatesectors in delivering animal health services, such as veterinarysurveillance, disease vector control, vaccination, clinicaltreatment of sick animals, inspection of livestock products,and veterinary research and extension. The profitability and therefore the supply of private veterinaryservices is governed by several factors arising from economiesof scale, such as the size of the livestock enterprises in thelocality, the nature of potential or actual diseases, and thetypes of animals raised in the production systems. Thus, inareas where private veterinary work is unprofitable or whereother types of market failure occur, economic or social concernsmay make some type of public intervention necessary. The transferof animal health services from the public to the private sectormust be done selectively, and government support may be neededto ensure the success of such transfers.      

Public Social Spending in Africa: Do the Poor Benefit?

Education and health care are basic services essential in anyeffort to combat poverty and are often subsidized with publicfunds to help achieve that purpose. This paper examines theeffectiveness of public social spending on education and healthcare in several African countries and finds that these programsfavor not the poor, but those who are better-off. It concludesthat this targeting problem cannot be solved simply by adjustingthe subsidy program. The constraints that prevent the poor fromtaking advantage of these services must also be addressed ifthe public subsidies are to be effective.      

THE PUBLIC SUBSIDIZATION OF EDUCATION AND HEALTH IN DEVELOPING COUNTRIES: A Review of Equity and Efficiency

The public sector in developing countries has traditionallyplayed an important role in the financing of educational andhealth services. This review finds, however, that the shareof public subsidies in these two sectors is not progressive,that is, proportionately higher for individuals in the lowersocioeconomic groups. This distribution persists despite explicitpolicies of universal free provision in many countries. Thearticle argues that the extent and pattern of public spendingcontribute to underinvestment and to a misallocation of scarceresources within the education and health sectors.      

HOW DO MARKET FAILURES JUSTIFY INTERVENTIONS IN RURAL CREDIT MARKETS?

Understanding of the economic causes and consequences of marketfailure in credit markets has progressed a great deal in recentyears. This article draws on these developments to appraisethe case for government intervention in rural financial marketsin developing countries and to discover whether the theoreticalfindings can be used to identify directives for policy. Before debating the when and how of intervention, the articledefines market failure, emphasizing the need to consider thefull array of constraints that combine to make a market workimperfectly. The various reasons for market failure are discussedand set in the context in which credit markets function in developingcountries. The article then looks at recurrent problems thatmay be cited as failures of the market justifying intervention.Among these problems are enforcement; imperfect information,especially adverse selection and moral hazard; the risk of bankruns; and the need for safeguards against the monopoly powerof some lenders. The review concludes with a discussion of interventions,focusing on the learning process that must take place for financialmarkets to operate effectively.      

SHELTER STRATEGIES FOR THE URBAN POOR IN DEVELOPING COUNTRIES

Rapid growth in many developing-country cities is strainingthe capacity of their shelter delivery systems. Governmentshave chosen a variety of implicit and explicit policies to amelioratethese strains. However, these policies are not always consistentwith their objectives, often because of a lack of knowledgeof how housing markets actually work and how policies affectand are constrained by market behavior. This paper reviews recentresearch on housing market behavior in developing countries,including the demand for housing and the pattern of housinginvestment across countries, the financing of housing by low-incomehouseholds, and the willingness to pay for secure tenure. Commonhousing policies are then examined, including public housing,sites and services projects, and slum clearance versus upgrading.Rent controls, measures to improve the supply of finance andinfrastructure, and building codes and standards are also discussed.      

COMMODITY EXPORT BOOMS IN DEVELOPING COUNTRIES

This article surveys the experiences of commodity-exportingcountries faced with resource discoveries and widely fluctuatingworld prices. Favorable developments of the commodity exportmarket often prove to be a mixed blessing, as poor boom managementleads to major internal and external economic imbalances. Manydeveloping countries overconsume during boom periods. More oftenthan not, the unsustainable increases in spending are initiatedby the public sector. When the boom ends, tardiness in decreasinggovernment spending and in increasing revenues from nonboomingsectors creates fiscal deficits and monetary control problems. In the 1970s many booming economies allowed regulated pricestructures, and particularly exchange rates, to deviate substantiallyfrom free market levels, discouraging efficient resource allocationand greatly compounding the problems of adjustment to subsequentdrops in export prices. Countries that managed booms well weretypically those that (a) did not allow fiscal variables, exchangerates, agricultural producer prices, and wages to get badlyout of line, (b) avoided indulging in wasteful and inefficientinvestment or investment that involved burdensome recurrentcosts, (c) limited increases in government spending to levelsconsistent with long–term trends in revenue collection,and (d) maintained prudent external borrowing and foreign exchangereserve policies.      

Public education spending in a globalized world:

This paper studies the effect of globalization on public expenditures allocated to different stages of education. First, we derive theoretically that globalization’s influence on education expenditures depends on the type of government. For benevolent governments, the model suggests that expenditures for higher education will increase and expenditures for basic education will decline with deepening economic integration. For Leviathan governments, on the other hand, the effects of globalization on public education spending cannot be unambiguously predicted. In the second part of the paper, we empirically analyze globalization’s influence on primary, secondary, and tertiary education expenditures with panel data covering 104 countries over the 1992–2006 period. The results indicate that globalization has led in both industrialized and developing countries to more spending for secondary and tertiary and to less spending for primary education.     

Access to Financial Services: Measurement, Impact, and Policies

In many developing countries less than half the population hasaccess to formal financial services, and in most of Africa lessthan one in five households has access. Lack of access to financeis often the critical mechanism for generating persistent incomeinequality, as well as slower economic growth. Hence expandingaccess remains an important challenge across the world, leavingmuch for governments to do. However, not all government actionsare equally effective and some policies can even be counterproductive.This paper sets out principles for effective government policyon broadening access, drawing on the available evidence andillustrating with examples. The paper concludes with directionsfor future research. JEL Codes: D31, G20, G21, O12, O16     

FINANCING INFRASTRUCTURE IN DEVELOPING COUNTRIES: LESSONS FROM THE RAILWAY AGE

In recent years suggestions for reforming the provision andfinancing of infrastructure services in developing countrieshave focused on private participation. This alternative to publicfinancing is seen as a way both to minimize the inefficienciesof public administration and to avoid the need for externalborrowing. In fact, for much of the nineteenth century, infrastructureprojects were privately financed and built. This approach, however,did not obviate the need for government intervention and foreigncapital. Because of the difficulties of assessing projects,investors were reluctant to commit their funds, and governmentsturned to subsidies and loan guarantees to encourage investment.Often, however, government intervention only replaced one setof problems with another. Investors with government-guaranteedloans had no incentive to monitor the firm's performance—alimitation that led to the diversion of funds and frustratedthe public interest. This article draws out the implicationsof this experience for policymakers in developing countriestoday.      

The Role of Long-Term Finance: Theory and Evidence

Improving the supply of long-term credit to industrial firmsis considered a priority for growth in developing countries.A World Bank multicountry study looks at whether a long-termcredit shortage exists and, if so, whether it has had an impacton investment, productivity, and growth. The study finds thateven after controlling for the characteristics of individualfirms,businesses in developing countries use significantly less long-termdebt than their counterparts in industrial countries. Researchersare able to explain the difference in debt composition betweenindustrial and developing countries by firm characteristics;by macroeconomic factors; and, most importantly, by financialdevelopment, government subsidies, and legal and institutionalfactors. The analysis concludes that long-term finance tends to be associatedwith higher productivity. An active stock market and an abilityto enter into long-term contracts also allow firms to grow atfaster rates than they could attain by relying on internal sourcesof funads and short-term credit alone. Importantly, althoughgovernment-subsidized credit markets have increased the long-termindebtedness of firms, there is no evidence that these subsidiesare associated with the ability of firms to grow faster. Indeed,in some cases subsidies are associated with lower productivity.      

ECONOMIC ANALYSIS FOR HEALTH PROJECTS

This paper applies to the health sector a method of projectanalysis advocated recently by Devarajan, Squire, and Suthiwart-Narueput.A health project evaluation should establish a firm justificationfor public involvement; establish the counterfactual—whatwould happen with and without the project; and determine thefiscal effect of the project and the appropriate levels of feesin conjunction with project evaluation. The evaluation shouldalso acknowledge the fungibility of project resources and examinethe incentives both for high-level public servants to shiftgovernment resources away from project-funded activities tothose that have not been evaluated and for lower-level contractorsand civil servants to provide good or bad service. Market failuresin health services and insurance markets should serve as a startingpoint for economic analysis, not as a reason to ignore economicsin health projects. Project outputs should be predicted aftertaking into account the reaction of consumers and providersin the private sector as well as market structures of supply,demand, and equilibrium for health services.      

Deforestation and Forest Land Use: A Comment

Hyde, Amacher, and Magrath (1996) imply that deforestation andtimber rents (logging revenue minus logging costs other thantimber fees) are not subjects that justify policymakers' attention,arguing that market responses limit the scope of deforestationand that rents are usually small. But they fail to recognizethat land markets will not develop efficiently, nor will efficientlevels of forestry investments occur, when policy distortionsand other factors obstruct the conversion of open-access foreststo private or communal ownership. For these reasons rates ofdeforestation can be far above optimal levels. Contrary to theauthors' claims, timber rents often (although not always) arelarge in developing countries. Moreover, the allocation of rentsbetween loggers and the government owners of public forestscan indeed affect the profitability of forestry (and thus deforestation),the intensity of timber harvesting, and national welfare.      

PRIVATE INVESTMENT AND MACROECONOMIC ADJUSTMENT:A Survey

This article reviews theories of investment behavior and examinesempirical studies of investment in developing countries. Theemphasis is on understanding the interactions among macroeconomicpolicies, structural adjustment, and private investment. Thearticle deals with the effect of exchange rate policy on investment,the relationship between public and private investment, theimportance of market imperfections and financial constraintson capital formation, and the effect of economic instabilityon irreversible investment decisions.      

THE ROLES OF THE PRIVATE AND PUBLIC SECTORS IN ENHANCING THE PERFORMANCE OF SEED SYSTEMS

Seeds are crop-based agriculture's most important input, yetfew developing countries have succeeded in establishing efficientseed production and supply systems. In many developing countriesthe large-scale, centralized state farms and public seed corporationsestablished to multiply and disseminate improved seeds of selectedcrops have proved ineffectual, failing to meet the diverse cropand varietal requirements of farmers. Governments and assistingagencies are currently reassessing their strategies, payinggreater attention to the potential contributions of privatefirms, cooperatives, other nongovernmental organizations (NGOs),and farmers themselves. This article contributes to that reassessment. It defines thescope for involving the private sector in an array of seed-relatedactivities, identifies critical and complementary roles forthe public sector, and reviews seed system development in industrialand developing countries, with a primary focus on institutionaldimensions. The article advocates a phased withdrawal of thepublic sector from the commercial side of seed production andmarketing, while recognizing a continued important role forthe public sector in plant breeding research, germplasm andvarietal maintenance, training, quality control, and consumerprotection.      

Access to Financial Services: A Review of the Issues and Public Policy Objectives

This article reviews the evidence on the importance of financefor economic well-being. It provides data on the use of basicfinancial services by households and firms across a sample ofcountries, assesses the desirability of universal access, andprovides an overview of the macroeconomic, legal, and regulatoryobstacles to access. Despite the benefits of finance, the datashow that use of financial services is far from universal inmany countries, especially developing countries. Universal accessto financial services has not been a public policy objectivein most countries and would likely be difficult to achieve.Countries can, however, facilitate access to financial servicesby strengthening institutional infrastructure, liberalizingmarkets and facilitating greater competition, and encouraginginnovative use of know-how and technology. Government interventionsto directly broaden access to finance, however, are costly andfraught with risks, among others the risk of missing the targetedgroups. The article concludes with recommendations for globalactions aimed at improving data on access and use and suggestionson areas of further analysis to identify constraints to broadeningaccess.      

Opting Out of Public Insurance: Is It Socially Acceptable?

The privatization of social services is being increasingly discussed. The market of social services is often characterized by market failures, like informational asymmetries, externalities, distributional problems, which all justify public intervention. But the quality of services provided by public authorities or by private insurers in the context of health insurance is different and could be observable. The public reimbursement of health care is often conditional on rules, like the choice of the physician or the hospital, that induce a disutility of using social insurance instead of private insurance. An alternative solution to a complete privatization is to allow some individuals to opt out. We can imagine that the government allows and even in some cases favors part of the population leaving the public health insurance system. We analyze the situations where the opting out is welfare improving. We then study the optimal policy depending on the characteristics of the economy considering a Rawlsian criterion.     

Geographic Cross-Sectional Fiscal Spending Multipliers and the Role of Local Autonomy: Evidence from European Regions

Using a panel of 268 European regions during 1990–2014, we document that the degree of local government's autonomy, measured with the “Local Autonomy Index,” has a significant positive effect on the fiscal spending multiplier. The estimated geographic cross-sectional fiscal spending multiplier is on average close to zero in countries with the lowest degree of local autonomy, and around unity in countries with the highest degree of local autonomy. Multipliers are state-dependent: larger when gross domestic product is below trend and when there is slack in the labor market; in those states, local autonomy has a particularly large positive effect on the multiplier. To interpret the empirical findings, we build a Dynamic Stochastic General Equilibrium (DSGE) model where both local and central government spending contribute to a public good that enhances private labor productivity. Local governments are more efficient in producing the public good and the multiplier is higher in countries where local government spending has a larger share in the production of the public good.