Judicial Reform and Economic Development: A Survey of the Issues

Acknowledging the importance of sound judicial systems to goodgovernance and economic growth, the World Bank and several otherdonor organizations have funded judicial reform projects inmore than two dozen developing countries and transition economiesduring the past few years. Yet little is known about the actualeffect of judicial reform on economic performance or even aboutwhat elements constitute a sound reform project. This articlesurveys a wide range of current studies on judicial reform andfinds some surprising results.      

Agricultural Extension: Good Intentions and Hard Realities

What considerations lead policymakers to invest in agriculturalextension as a key public responsibility, and what factors andagency incentives explain differences in extension system performance?To help answer these questions, this article provides a frameworkoutlining farmers' demand for information, the public goodscharacter of extension services, and the organizational andpolitical attributes affecting the performance of extensionsystems. This conceptual framework is used to analyze severalextension modalities and their likely and actual effectiveness.The analysis highlights the efficiency gains that can come fromlocally decentralized delivery systems with incentive structuresbased on largely private provision, although in most poorercountries extension services will remain publicly funded.      

INCENTIVES AND THE RESOLUTION OF BANK DISTRESS

Unlike prudential regulations that are put in place prospectivelyto develop banks, procedures for dealing with banks in distressare generally determined on an ad hoc basis. Often the lackof clarity in the policy framework creates incentives for bankmanagers, shareholders, depositors, and regulators that undercutprompt resolution of financial distress. The result is ofteninaction, the accumulation of bad debts, and ultimately theassumption of losses by the state. This article argues thatgovernment intervention to relieve financial distress shouldbe institutionalized in a set of regulations that forces theauthorities to comply with reporting and decisionmaking processes.Only in this way can inherent disincentives for dealing withdistress be curtailed.      

Poverty in Russia during the Transition: An Overview

It is no surprise that the breakup of the Soviet Union and theoverall demise of the planned economy has had a profound effecton the welfare of the Russian people. But the absence of reliablesurvey data has constrained our understanding of the impactthat transition has had on the distribution of income. Thisarticle draws upon several rounds of a nationally representativehousehold survey to document the sharp increases in the incidenceand severity of poverty that have occurred during the transition.We investigate the routes by which macroeconomic and structuraldevelopments have been transmitted through the labor marketand examine the performance of an increasingly overburdened,unfocused, and inadequate system of social protection. Thereis no evidence to suggest that the poor have shared in Russia'semerging economic recovery, and the emergence of a core groupof long-term poor appears to be a distinct possibility.      

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.      

AID IN THE DEVELOPMENT PROCESS

This article examines the economic effects of aid and the relationshipsamong private capital flows, official flows, and concessionalassistance. It considers whether official and concessional flowsimprove the welfare of both recipient and grantor, and it outlinesthe economic rationale for concessional assistance. The impactof aid on a recipient's growth performance is analyzed, andsome criticisms of aid are evaluated.      

Using International Institutions to Improve Public Procurement

The World Trade Organization's voluntary rules on governmentprocurement are a useful mechanism for ensuring that publicprocurement procedures are efficient. They also provide an opportunityto reduce the uncertainty of participants by increasing transparencyand accountability. Yet most developing countries have chosennot to subject their procurement policies to international disciiplinesand multilateral surveillance. Their reasons may include anunfamiliarity with the government procurement agreement (GPA);a perception that the potential payoffs are small; a desireto discriminate in favor of domestic firms; or the successfulopposition of groups that benefit from the current regimes.Although the economic rationales for abstaining from the GPAare not compelling, a quid pro quo for accession may be neededto overcome opposition by special interests. Developing countryprocurement markets are large enough that governments may beable to make accession to the GPA conditional on temporary exceptionsto multilateral disczplines or on better access to export markets.      

Growth and Institutions: A Review of the Evidence

Africa's disappointing economic performance, the East Asianfinancial crisis, and the weak record of the former Soviet Unionhave focused attention on the role of institutions in determininga economic growth. This article critically reviews the literaturethat tries to link quantitative measures of institutions, suchas civil liberties and property rights, with growth of grossdomestic product across countries and over time. An importantdistinction is made between indicators that measure the performanceor quality of institutions and those that measure politicaland social characteristics and political instability. The evidencesuggests a link between the quality of institutions and investmentand growth, but the evidence is by no means robust.      

THE ECONOMICS OF MALARIA CONTROL

Ideally, in devising and assessing policies to control disease,the rules and reasoning of economics should be combined withcomprehensive epidemiological information to arrive at the bestdecisions. Simple economic concepts can be of great practicalassistance to policymakers in disease control. This articledescribes the economic principles to be applied and the kindof information needed to make informed choices about the optionsfor controlling malaria. In this context, the article surveysthe research on the costs that malaria imposes on people andeconomies, discusses how to assess the costs and effects ofinterventions used to combat the problem, and identifies theconceptual difficulties and gaps in information that must bebridged before the marriage of the two disciplines can be effectivelyconsummated.      

What Have We Learned from a Decade of Manufacturing Enterprise Surveys in Africa?

In the early 1990s the World Bank launched the Regional Programon Enterprise Development (RPED) in several African countries,a key component of which was to collect data on manufacturingfirms. The data sets built by these and subsequent enterprisesurveys in Africa generated considerable research. This articlesurveys the research on the African business environment, focusingon risk, access to credit, labor, and infrastructure, and onhow firms organize themselves and do business. It reviews theresearch on enterprise performance, including enterprise growth,investment, and exports. The article concludes with a discussionof policy lessons.      

THE COSTS AND BENEFITS OF BEING A SMALL, REMOTE, ISLAND, LANDLOCKED, OR MINISTATE ECONOMY

Any index of smallness is somewhat arbitrary, but common practicehas been to use population and income criteria. Experience suggeststhat smallness is neither a necessary nor sufficient conditionfor poor development performance. This paper considers the problemsthat small economies are most often alleged to face, includingabsence of economies of scale, vulnerability, remoteness, reducedaccess to capital markets, problems of macroeconomic policydependence, and overstatement of real income. The paper concludesthat many of the alleged problems of small economies are eithernot peculiar to small economies or can be addressed throughsuitable policy measures.      

MANAGEMENT OF PUBLIC INDUSTRIAL ENTERPRISES

This study indentifies the factors that influence the performanceof state industries.Based on a review of thirteen countries,the authours isolate three qualities in the business and managerialenvironment that distinguish successful public enterprises fromthe others. These are (a) the degree of competition that publicenterprises are exposed to; (b) the degree of financial autonomyand accountability under which public enterprises operater;and (c) the extent and manner in which managerial autonomy andaccountability are ensured. It is impossible, and perhaps misleading,to assess statistically the importance of each of these factors.Where all three exist, however, the performance of public enterprisesis significantly better than in those cases where most or allthese factors are absent.      

MACROECONOMIC ADJUSTMENT IN DEVELOPING COUNTRIES

The short-run adjustment problem in developing countries involvesboth the improvement of the current account and the reductionof inflation. In both cases, the usual reason for adjustmentis shown to be the fiscal deficit. The article distinguishesprimary adjustment costs, which are inevitable, from secondarycosts, which result, for example, from failure to devalue orfrom real wage rigidity. The article then analyzes the effectsof expenditure reduction and currency devaluation on varioussectors of the economy. Reducing inflation involves both aninflation tax replacement and a price adjustment problem, and"heterodox" policies designed to deal with the latter are discussed.If the fiscal deficit cannot be reduced, the article argues,improving the current account may be at the cost of increasinginflation and likewise reducing inflation may be at the costof worsening the current account.      

Walking up the Down Escalator: Public Investment and Fiscal Stability

When growth-promoting spending is cut so much that the presentvalue of future government revenues falls by more than the immediateimprovement in the cash deficit, fiscal adjustment becomes likewalking up the down escalator. Although short-term cash flowsmatter, too tight a focus on them encourages governments toinvest too little. Cash-flow targets also encourage governmentsto shift investment spending off budget by seeking private investmentin public projects, irrespective of its real fiscal or economicbenefits. To deal with this problem, some observers have suggestedexcluding certain investments (such as those undertaken by publicenterprises deemed commercial or financed by multilaterals)from cash-flow targets. These stopgap remedies may help protectsome investments, but they do not provide a satisfactory solutionto the underlying problem. Governments can more effectivelyreduce the biases created by the focus on short-term cash flowsby developing indicators of the long-term fiscal effects oftheir decisions, including accounting and economic measuresof net worth, and, where appropriate, including such measuresin fiscal targets or even fiscal rules. JEL codes: O23, E62, H60, H54     

STUDENT LOANS: AN EFFECTIVE INSTRUMENT FOR COST RECOVERY IN HIGHER EDUCATION?

Governments and universities have trouble reconciling the goalof keeping higher education widely accessible with the needto retrieve some of its costs from students. Student loans offera plausible solution to the problem. But loan programs turnout in practice to have been a disappointing instrument of costrecovery: analysis of twenty-three programs found that studentsrepay only a small portion of the value of the original loan.Subsidies, high default rates, and high administrative costshave eroded the value of repayments. Sometimes loan programshave proved as expensive as outright grants. This article argues that most loan programs could be reformedto improve financial effectiveness—through targeting,charging positive real interest rates, designing repayment plansto take account of the likely pattern of graduate earnings,and ensuring that the oversight institutions can and will collect.Or governments could explore alternative devices for cost recovery,such as a graduate tax. This approach levies a higher incometax rate on beneficiaries of government-subsidized higher educationand thus preserves the idea, implicit in loan programs, of payingfor education with future earnings. As part of an effectivetax system, a graduate tax could bring in significantly morerevenue than traditional loan programs.      

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.      

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.      

CHARGING FOR ROADS

The article discusses two theoretical methods of measuring roaduse costs and designing a system of road user charges. The firststates that road damage externalities are zero and road damagecosts are equal to the traffic-related fraction of maintenanceexpenditure. The second states that, with constant returns andoptimal road capacity, congestion charges should recover theremaining total overhead costs. Vehicles should be charged thesecosts, and additional pure taxes on passenger vehicles shouldbe guided by principles of indirect taxation. Although roaduser charges alone may fail to cover the total highway budget,the additional pure taxation is likely to more than cover theshortfall. The article argues that an appropriate system oftaxes and charges can be devised to meet these requirementswithout adversely effecting the rest of the economy.      

Corporate Performance in the East Asian Financial Crisis

The sharp decline in the once-stellar performance of East Asiancorporations following the 1997 financial crisis has sparkedan intense debate. Some observers argue that external shocks,including a drop in aggregate demand and a shortage of workingcapital, explain the corporate sector's poor performance. Othersassert that the difficulties were apparent well before the crisisand that the risky financial policies pursued by these firmsleft them vulnerable. A survey of the literature shows littlemicroeconomic evidence to support either view. This article compares the growth and financing patterns of EastAsian corporations in the years before the crisis with thosein other countries. It finds little microeconomic evidence thatcorporate growth was weakening but some support for the argumentthat many firms had a weak financial structure that left themvulnerable to an economic downturn. Based on a sample of morethan 850 publicly listed firms in the four crisis countries—Indonesia, Malaysia, the Republic of Korea, and Thailand and—andtwo comparators, Hong Kong (China) and Singapore, it appearsthat firm specific weaknesses already in existence before thecrisis were important factors in the deteriorating performanceof the corporate sector.      

THE DEBT CRISIS: WHERE DO WE STAND AFTER SEVEN YEARS?

The past seven years have seen little improvement in the worlddebt situation. During this period, policymakers have shiftedtheir attention from demand reduction by debtor nations to supplyexpansion. Most recently, debt reduction has become the principalissue. This article reviews various ways of resolving the debt problem.There is widespread agreement among competing proposals thatan efficient solution requires both debt reduction and economicgrowth in debtor countries. Disagreement arises over whetherthe necessary debt reduction and consequent adjustment in policiesin developing countries can be generated by market forces alone.The alternative is usually thought to be intervention by governmentsand commitment of public funds. This article groups and analyzesproposed solutions according to their relation to these twopositions. The survey concludes that there is no clear-cut solution tothe problem. Methods vary widely in their implications for efficiencyand equity as well as in their capacity to improve the situationand to do so quickly. Inevitably, official policy will continueto be determined less by economic ideals than by exigencies.The more urgent the problem becomes, the more likely the balanceis to swing from reliance on the market to direct intervention.