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.      

Income Risk, Coping Strategies, and Safety Nets

Poor rural and urban households in developing countries facesubstantial risks, which they handle with risk-management andrisk-coping strategies, including self-insurance through savingsand informal insurance mechanisms. Despite these mechanisms,however, vulnerability to poverty linked to risk remains high.This article reviews the literature on poor households' useof risk-management and risk-coping strategies. It identifiesthe constraints on their effectiveness and discusses policyoptions. It shows that risk and lumpiness limit the opportunitiesto use assets as insurance, that entry constraints limit theusefulness of income diversification, and that informal risk-sharingprovides only limited protection, leaving some of the poor exposedto very severe negative shocks. Public safety nets are likelyto be beneficial, but their impact is sometimes limited, andthey may have negative externalities on households that arenot covered. Collecting more information on households' vulnerabilityto poverty—through both quantitative and qualitative methods—couldhelp inform policy.      

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.      

FINANCIAL MARKETS, PUBLIC POLICY, AND THE EAST ASIAN MIRACLE

Many factors contributed to the rapid growth of the economiesof East Asia in the past quarter century. This article examinesone important aspect of that growth—commonly referredto as the "East Asian miracle"—public policies affectingthe financial markets. East Asian governments intervened extensivelyin financial markets at all stages of their development. Whatsets their actions apart from those of other developing countriesthat have not fared as well? We do not have the informationto answer conclusively what effect particular actions had (thatrequires a counterfactual test of what growth would have beenwithout the particular intervention). But we can identify themarket failures the East Asian governments addressed, assesssome of the theoretical reasons why each policy might be growthenhancing, and provide some data attesting to the impacts ofthe policy. Several characteristics of financial sector interventionsin East Asia stand out: they incorporated design features thatimproved the chances of success and reduced opportunities forabuse; interventions that did not work out were dropped unhesitatingly;and policies were adapted to reflect changing economic conditions.      

Corporate Governance and Development

The literature shows that good corporate governance generallypays—for firms, for markets, and for countries. It isassociated with a lower cost of capital, higher returns on equity,greater efficiency, and more favorable treatment of all stakeholders,although the direction of causality is not always clear. Thelaw and finance literature has documented the important roleof institutions aimed at contractual and legal enforcement,including corporate governance, across countries. Using firm-leveldata, researchers have documented relationships between countries’corporate governance frameworks on the one hand and performance,valuation, the cost of capital, and access to external financingon the other. Given the benefits of good corporate governance,firms and countries should voluntarily reform more. Resistanceby entrenched owners and managers at the firm level and politicaleconomy factors at the level of markets and countries partlyexplain why they do not.      

EMERGING EQUITY MARKETS: GROWTH, BENEFITS, AND POLICY CONCERNS

Since the mid-1980s, stock market activity has increased substantiallyin many developing countries. This article first examines themain characteristics of emerging stock markets and illustratesthe evolution of equity prices in these markets during the lastdecade. It then discusses the reasons for the markets' growthand assesses the extent to which they have been affected bydomestic policies and external factors. The authors discussthe likely benefits of these markets, the effects any abruptcorrection in stock prices could have for the economy, and theways in which these markets can be made more efficient.      

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.      

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.      

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.      

Formal and Informal Markets for Water: Institutions, Performance, and Constraints

Water markets—either formal or informal—can be anefficient method for reallocating scarce water supplies. Atthe same time certain constraints can raise the transactioncosts of trading water. This paper reviews the conditions necessaryto establish successful water markets, identifies potentialproblems, and offers mitigating strategies. It also uses examplesof several informal and formal water markets already in operationto illustrate these problems and the solutions to them.      

FISCAL DEFICITS AND MACROECONOMIC PERFORMANCE IN DEVELOPING COUNTRIES

Although fiscal adjustment was urged on developing countriesduring the 1980s to lead them out of economic malaise, considerableuncertainty remains about the relations between fiscal policyand macroeconomic performance. To illustrate how financial markets,private spending, and the external sector react to fiscal policies,the behavior of holdings of money and public debt, private consumptionand investment, the trade balance, and the real exchange rateis modeled for a sample of ten developing countries. The studiesfind strong evidence that over the medium term, money financingof the deficit leads to higher inflation, while debt financingleads to higher real interest rates or increased repressionof financial markets, with the fiscal gains coming at increasinglyunfavorable terms. Consumers respond differently to conventionaltaxes, unconventional taxes (through inflation or interest andcredit controls), and debt financing, in ways that make fiscaladjustment the most effective means of increasing national saving.Private investment—but not private consumption—issensitive to the real interest rate, which rises under domesticborrowing to finance the deficit. Contrary to the popular presumption,in some countries private investment increases when public investmentdecreases. There is strong evidence that fiscal deficits spillover into external deficits, leading to appreciation of thereal exchange rate. Fiscal deficits and growth are self-reinforcing:good fiscal management preserves access to foreign lending andavoids the crowding out of private investment, while growthstabilizes the budget and improves the fiscal position. Thevirtuous circle of growth and good fiscal management is oneof the strongest arguments for a policy of low and stable fiscaldeficits.      

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.      

USING RANDOMIZED CONTROL DESIGNS IN EVALUATING SOCIAL SECTOR PROGRAMS IN DEVELOPING COUNTRIES

Seven case studies—from Bolivia, Colombia, Indonesia,Mexico, Nicaragua, Taiwan (China), and Turkey—demonstratethe feasibility of conducting rigorous impact evaluations indeveloping countries using randomized control designs. Thisexperience, covering a wide variety of settings and social programs,offers lessons for task managers and policymakers interestedin evaluating social sector investments. The main conclusions are: first, policymakers interested inassessing the effectiveness of a project ought to consider arandomized control design because such evaluations not onlyare feasible but also yield the most robust results. Second,the acute resource constraints common in developing countriesthat often make program rationing unavoidable also present opportunitiesfor adopting randomized control designs. Policymakers and programmanagers need to be alert to the opportunities for buildingrandomized control designs into development programs right fromthe start of the project cycle because they, more than academicresearchers or evaluation experts, are in the best positionto ensure that opportunities for rigorous evaluations are exploited.      

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.      

A BENEFIT-COST ANALYSIS OF NUTRITIONAL PROGRAMS FOR ANEMIA REDUCTION

Using benefit-cost analysis, this article evaluates potentialprograms for reducing iron deficiency anemia, one of the mostprevalent nutritional disorders. It discusses the origins andprevalence of anemia and reviews the literature on consequencesof anemia for work capacity, output, learning, and other variables.Costs and benefits are estimated for two types of programs—medicinalsupplementation and fortification of food with iron—andfor three cases—Indonesia, Kenya, and Mexico. Estimatesof benefits are calculated to include the value of additionalwork output in labor-surplus societies. Under a wide range of assumptions, the benefit-cost ratios arefound to be substantially greater than 1: for dietary fortificationratios ranged between 7 and 70 for the three illustrative countries;for dietary supplementation, the range was from 4 to 38 on themost reasonable set of assumptions. The study concludes thatfield trials should be carried out to see if the findings ofthis study are supported in particular cases.      

PARALLEL EXCHANGE RATES IN DEVELOPING COUNTRIES

Dual exchange rates and black markets for foreign exchange arecommon in developing countries, and a body of evidence is beginningto emerge on the effects that such parallel foreign exchangesystems have on macro-economic performance. This article presentsa simple typology of parallel systems, discusses their emergence,and looks at why countries prefer these arrangements to themain alternatives. The article examines the ability of parallelmarkets to insulate international reserves and domestic pricesfrom shocks to the balance of payments. Drawing on the findingsfrom eight detailed case studies, the authors discuss the determinationof the parallel premium in the short and long terms, the relationshipbetween the premium and illegal transactions, and the fiscaleffects of parallel rates. They compare the experiences of countriesthat have attempted to unify their foreign exchange marketsand discuss the implications for policy alternatives.      

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.      

Crisis, Adjustment, and Reform in Thailand's Industrial Firms

New data on Thailand's industrial firms shed light on the originsof the East Asian financial crisis and on the response of themanufacturing sector to the structural adjust-ment program supportedby the international financial institutions. Before the crisis,Thai firms had declining profitability, but they neverthelessmaintained high levels of investment, often in domesticallyoriented areas (notably the auto sector). Thai firms financedthese investments with short-term borrowing from financial institutions,which in turn borrowed short term on foreign markets. That only40 percent of firms provided audited financial statements totheir banks meant that the financial sector had poor informationfor assessing the true riskiness of these investments. The financialstructure was thus vulnerable even to small shocks. How well did the adjustment program deal with the crisis? Thaifirms had difficulty increasing their exports quickly becauseof investment in the wrong sectors, a decline in regional demand,and bottlenecks that included red tape and poor customs administration.Because of the poor export response, the brunt of adjustmenthad to come through compression of demand and of imports. Inretrospect, the macroeconomic program— which assumed quickexport recovery— was too tight.      

MACROECONOMIC ADJUSTMENT TO CAPITAL INFLOWS: LESSONS FROM RECENT LATIN AMERICAN AND EAST ASIAN EXPERIENCE

Capital inflows to some developing countries have increasedsharply in recent years. Impelled by better economic prospectsin those countries, lower international interest rates, anda slowdown of economic activity in the capital-exporting countries,the inflows have furnished financing much needed to increasethe use of existing capacity and to stimulate investment. Butcapital inflows can bring with them their own problems. Typicalmacroeconomic repercussions have been appreciation of the realexchange rate, expansion of nontradables at the expense of tradables,larger trade deficits, and, in regimes with a fixed exchangerate, higher inflation and an accumulation of foreign reserves. Should government intervene to limit some of these side effects—andif so, how? The question is especially pressing in the wakeof the Mexican crisis of December 1994. This article looks foranswers in the experience of four Latin American and five EastAsian countries between 1986 and 1993, examining the effectsof the capital inflows on the economy and comparing the differentways in which these countries responded to the problem of "toomuch" capital.      

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.