IMF conditionality: Conceptual problems and policy alternatives

This paper argues that the main issue damaging relations between developing countries and the International Monetary Fund is the latter's position that external disequilibria are always a consequence of excess aggregate domestic demand, caused by excessive credit expansion. As a result, Fund sponsored stabilization programs center on demand contraction through a credit crunch and may establish stricter domestic performance criteria than necessary to attain the balance-of-payments objectives. The author suggests that the IMF establish a two-tier conditionality system, which he calls the “hands-off” approach, with one tier composed exclusively of balance-of-payments or foreign exchange denominated variables, and the other of domestic currency denominated variables. The two-tier system would allow more flexibility in compliance assessment and might reduce substantially the number of breakdowns of Fund programs.A revised “hands-on” approach for the Fund is also suggested. The author critiques the recessive biases of the currently used financial analytical exercises and makes specific proposals to introduce “growth exercises” to establish the foreign credit requirements of a growth-oriented stabilization program and thus to introduce performance criteria for creditor countries and banks — a form of “reciprocal conditionality.”     

Is Devolution Democratization?

Recent attempts at introducing new forms of governance in forest management in India have focused on devolution to user-groups or village level “participatory committees.” Success or failure is attributed to the presence or absence of “social capital” among these groups. These groups have never existed outside the state, however, and social relations, including social capital, are continually being transformed by administrative and market forces. This paper argues that what matters is not the degree of government intervention, i.e., more or less devolution, or the degree of social capital among local communities, but state accountability. This can only be ensured through addressing questions of political reform.     

From Linear Fuel Switching to Multiple Cooking Strategies: A Critique and Alternative to the Energy Ladder Model

Promoting sustainable development requires evaluating the technical and policy options that will facilitate the adoption and use of energy efficient and less polluting cooking stoves and practices. The transition from traditional to modern fuels and devices has been explained by the “energy ladder” model that suggests that with increasing affluence, a progression is expected from traditional biomass fuels to more advanced and less polluting fuels. In this paper we evaluate the energy ladder model utilizing data from a four-year (1992–96) case study of a village in Mexico and from a large-scale survey from four states of Mexico. We show that an alternate “multiple fuel” model of stove and fuel management based on the observed pattern of household accumulation of energy options, rather than the simple progression depicted in the traditional energy ladder scenario, more accurately depicts cooking fuel use patterns in rural households. The “multiple fuel” model integrates four factors demonstrated to be essential in household decision making under conditions of resource scarcity or uncertainty: (a) economics of fuel and stove type and access conditions to fuels, (b) technical characteristics of cookstoves and cooking practices; (c) cultural preferences; and (d) health impacts. This model also allows better estimates of the expected fuelwood demand and indoor air pollution in rural households.     

Are Environmental Social Movements Socially Exclusive? An Historical Study from Thailand

Environmental social movements in developing countries are often portrayed as democratizing but may contain important social divisions. This paper presents a new methodology to analyze the social composition and underlying political messages of movements. Nearly 5 000 newspaper reports during 1968–2000 in Thailand are analyzed to indicate the participation of middle and lower classes, and their association with “green” (conservationist) and “red-green” (livelihoods-oriented) environmental values. Results show middle-class “green” activism has dominated forests activism, but lower-class “red-green” activism has grown for forests and pollution. Newspapers, however, portray all environmentalism as “democratization,” suggesting that the possible exclusiveness of some environmental norms is unacknowledged.     

A theory of the pre-modern British aristocracy

Between c. 1550 –c. 1880, a small group of individuals ruled England and oversaw her transformation from a small country to the British Empire—and in the process they became exceedingly wealthy. Known as aristocrats, their unusual lifestyles were the antithesis of modern secular values. Today aristocrats are often viewed as a hindrance to pre-modern growth and development because they appeared to operate so inefficiently. This paper argues that the aristocrats efficiently provided the valuable service of “trustworthy servant”, by investing their wealth in hostage capital. This theory explains terms of entry and exit out of the aristocracy, the strict family settlement, their education patterns, extravagant lifestyle, and their ultimate voluntary retreat from power.     

Stability and Growth Pact: issues and lessons from political economy

The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. Following a literature survey, the paper stresses the importance of appropriate incentives for rule compliance in an environment where national fiscal sovereignty precludes the option of centralised enforcement. In addition, the paper stresses the importance of clear and simple rules and in particular the 3% deficit limit in anchoring expectations of fiscal discipline and facilitating public and market monitoring of public finances. This, in turn, strengthens incentive for rule compliance. Moreover, the paper discusses the interests of the most important players in European fiscal rule formation and the importance of choosing the appropriate time for initiating a reform debate.Non-technical summary The EU fiscal framework as laid down in the Maastricht Treaty and the Stability and Growth Pact (SGP, the Pact) aims to preserve fiscal sustainability while allowing room for automatic fiscal stabilisation. These two objectives are also at the heart of the ECB’s interest in the EU fiscal framework because their attainment facilitates monetary policy making in the short and long run.The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. The literature review of the first part reveals that fiscal rules can help solve deficit/debt biases and time inconsistency problems by constraining the behavior of policy makers. But rules can also mitigate biases if they facilitate financial market and public scrutiny of fiscal policies.Thereafter, the paper analyses the institutional environment in which EU fiscal rules are applied. It argues that EU rules reflect a “contract” amongst countries that retain sovereignty on fiscal policies. Enforcement, therefore, ultimately has to be undertaken by the contracting parties. Due to this constraint, the rules can also be characterised as “soft” law (with the 3% limit being nevertheless a much “harder” constraint than the other elements). But this does not necessarily imply that the rules are ineffective (or “dead”). Soft law reduces political transaction costs (by improving transparency and providing a forum for peer pressure). Moreover, if well-designed, such law can boost incentives towards making the rules “self-enforcing”. Evidence speaks in favour of this view: while EU fiscal rules were bent in a number of cases and compliance is undeniably of concern, major and rapid fiscal balance deteriorations have been largely prevented since the start of EMU.The paper also looks at potential trade-offs between “complex” rules where a “fine-tuned” economic rationale may boost acceptance of the rules versus simple and clear rules that allow easy monitoring. It is argued that clarity and simplicity of rules are important especially when formal enforcement is limited (“soft law”) and public monitoring becomes more important. By facilitating public and market monitoring of compliance, clear and simple rules are also more costly to breach.The benefits of “complexity”, and in particular the use of administrative discretion to fine tune the rules to country situations have limits, in particular when it comes to the excessive deficit procedure (EDP). It is argued that the 3% deficit limit and the time frame for correcting excessive deficits already provide some room to accommodate economic circumstances. The 3% limit must be clear, simple and strictly implemented to anchor expectations of fiscal discipline and to facilitate public and market monitoring. Further discretion and relaxation would conflict with this need. From this angle, other risks (e.g., efforts not materializing, structural reforms producing surprise costs etc) are hard to justify as a reason for extending deadlines to correct excessive deficits.The preventive arm of the Pact with its requirement of close-to-balance-or-in-surplus budgetary positions defines sound medium term budget positions and adjustment paths. This may be appropriately fine-tuned to address concerns about the Pact’s underlying economic rationale. For example, a symmetric application in good and bad times and less time inconsistency would be desirable.Finally, the timing of a debate on fiscal rules needs to be carefully chosen. In the EU context (and perhaps in other contexts as well), there seems to be much inherent pressure to make the rules more “complex”. Moreover, for the debate initiated in summer 2004, there was also no willingness by countries to give up sovereignty nor was there a sense of urgency to strengthen public finances via tighter rule implementation and enforcement. In such an environment, it is likely that changes to fiscal rules make them more complicated, discretionary and, thereby, potentially less enforceable.The views expressed are those of the author and not of the ECB. Comments by Vitor Gaspar, Mark Hallerberg, Steven Keuning, Jose Marin, Richard Morris, Gilles Noblet, Hedwig Ongena, Luca Onorante, Rolf Strauch, Juergen von Hagen, an anonymous referee and valuable assistance by Anna Foden are much appreciated.     

Europe and East Asia in the context of regionalization: Theory and economic policy

Much academic interest has recently centered on economic regionalism as a framework of international economic relations. The European Community (EC) has been a focal point. Other regional economic organizations (APEC, NAFTA), have been subjects of debate.This paper discusses three principal arguments: (1) the “natural”/“optimal” regional grouping, (2) transaction cost advantage in a regional model, and (3) the balancing of intraregional and extra-regional economies. Indeed, the argument is most certainly for an international regime of an “open,” not a “fortress” economic regionalism.This paper examines the subject relative to economic theory and policy.     

From New Order to Regional Autonomy: Shifting Dynamics of “Illegal” Logging in Kalimantan, Indonesia

In recent years there has been a tendency to view the seemingly irremediable spread of “illegal” logging in Indonesia in isolation, or as a result of disassociated and premeditated criminal acts. This paper proposes a different view of the problem by discussing the changing dynamics of the “illegal” logging sector in the two districts of Berau, East Kalimantan and Kotawaringin Timur, Central Kalimantan. It suggests that “illegal” logging is not a simple case of criminality, but a complex economic and political system involving multiple stakeholders. Furthermore, “illegal” logging is not a stationary condition that can be effectively dealt with through coercive or repressive measures alone. Rather, it should be viewed as a dynamic and changing system deeply engrained in the realities of rural life in Indonesia. Regional autonomy has also created a supportive environment for the “illegal” logging trade and allowed it to gain resilience.     

Neo-Corporatism and Territorial Economic Development: The Ecuadorian Indigenous Movement in Local Government

This article argues that the democratization of local governments that has been led by indigenous movements in Ecuador can best be described as “neocorporatist”. The article, based on the evidence from two cases of indigenous local governments in the Andes, argues that the forms of “neo-corporatism” created by the Ecuadorian indigenous movement on its entry into government are designed as participatory institutional frameworks that also serve as channels for the expression of social movements’ demands. The neocorporatist practices deployed by indigenous movements in these areas have had mixed results, both in terms of their implementation and of their capacity to foster viable income-generating activities for poor rural areas. On balance, while the forms of neocorporatist government fostered by the indigenous movement can have positive impacts on economic development, there are still two broad limitations. First, it continues to be difficult to foster a process of territorial economic development that effectively addresses the distinct interests that exist among different community organizations. Second, the negative effects of the wider economic context in which local territories find themselves remain beyond the control of the local government.     

Patterns of industrialization and the flying geese model: the case of electronics in East Asia

We use the “flying geese” framework to study the change in the geography of comparative advantages in the electronics sector in East Asia, China and the USA. Doubts have been raised about the capacity of the “flying geese” model to interpret the most recent phases of Asian development, in particular as far as progress in the electronics sector is concerned. This paper takes issue against these negative conclusions on both theoretical and empirical grounds. On the theoretical side, the paper takes up the formulation proposed by Kaname Akamatsu, arguing that some of the critical observations raised against the model look to a distorted and simplified version of Akamatsu's original theory. Analyzing the behavior of the “revealed comparative advantage index” per products and area, it is concluded that the “flying geese model” is compatible with manifold industrial development models, increasing interdependence in an integrated area which crucially also includes the US, and that asymmetries and hierarchical order persist across the countries.     

Wage comparison by gender and the effect of job segregation: The case of Taiwan

This paper examines the wage differential between the genders in a newly industrialized economy-Taiwan. The objective is to verify the existence and magnitude of the Taiwanese wage differential (or discrimination as some would term it) and contrast it with findings in the United States.The gender gap was estimated for the private sector and the public sector respectively. It was found that wage discrimination against females does exist. The magnitude of the “discrimination” falls within the same range as the empirical estimates for the U.S. In Taiwan, however, the wage discrimination appeared to be slightly more severe in the public sector.A measure for the discriminatory effects of the “occupational segregation” was proposed and implemented. Contrary to common belief, the “occupational segregation” was not an important factor in wage discrimination. Nor did the disparity of jobs distribution in terms of “industry” generate any significant level of wage discrimination. The main source of gender discrimination (in terms of wage rates) came from the lower returns to the “productivity” characteristics (experience, education, tenure, etc.) and not from seemingly popular hypotheses of occupational segregation (or, in more general terms, job segregation). This is in sharp contrast to previous studies.     

A behavioral model of work-trip mode choice in Shanghai

This paper analyzes travelers' choice behavior by using combined revealed preference/stated preference (RP/SP) survey data on work-trip mode choice in Shanghai, taking into consideration different scales across the two data sources. Several versions of a multinomial choice model are specified and estimated. The estimation results suggest that the utility function with money cost divided by income by equivalence scale be chosen as the preferred model. Based on the preferred model, values of time and sample aggregate elasticities of choice probabilities are calculated. The results show that values of “in-vehicle time” and “out-of-vehicle time” are 64 and 82% of the sample mean wage, and that in terms of elasticities, “in-vehicle time”, “out-of-vehicle time” and “money cost” are the most important attributes for bus, subway and taxi passengers, respectively. The conditional elasticities given low, middle and high income levels indicate that bicycles seem to be an inferior good for all income levels. Bus and subway transport are inferior goods for people at middle and high income levels but normal goods for those at a low income level. Taxis are a normal good only for low income levels; for middle and high income levels, they are a luxury good. The results obtained may be used for transportation policymaking in Shanghai.     

Holding company risk in China: a final step of state-owned enterprises reform and an emerging problem of corporate governance

Public Enterprise Reform in China has reached a plataeu, and is awaiting the last step of privatization. Most of non-regulated industries in China has improved their competitiveness thorough a hard and intense competition, particularly in the home appliance industry. However, it still happened that excellent companies with nationwide brands suddenly fall into severe difficulties and suddenly disappears in the industry, as we seen in the early 1990's. Author argues that this is caused by structure of corporate governance in China, which can facilitate to enhance the control right of the controlling shareholder, that is the government for the most of listed company in China, compared to their holding cash flow right. This corporate structure, which is called “pyramiding” allows an implicit controller of the company, the municipal government, to exploit. In the cases of listed company in China, the “holding company” is the conduit of this risk. Experiences of 2 companies from home appliance industries in China will be documented here.     

Women and political participation in Africa: Broadening the scope of research

The article argues for a more flexible and inclusive approach to research on women and the state in Africa and, in particular, women's political participation. Inter alia it suggests moving away from restricted Western definitions of politics, from overly aggregated notions both of “the state” and of “women,” and from too centralized a focus on government; and moving to include a greater appreciation of informal organizations, unusual modes of participation, uneven tradeoffs and even manipulated politics. Its concern is to ensure that we do not overlook or close off those narrow spaces of participation which may, by default, have been allowed to women, or which women may have fashioned for themselves.     

Market supplanting versus market fostering interventions: China, East Asia and other developing countries

The paper investigates the relationship between growth and different types of government intervention by distinguishing “market supplanting” regimes from “market fostering” interventions. A lesson from the East Asian miracle was not that governments necessarily intervened less, but they intervened efficiently in a relatively transparent and flexible way that kept overall distortions in check. China's reforms can be considered a transition from a “market supplanting” regime where market signals are distorted over long periods, to “market fostering” interventions in which government acts like a gardener. Alternative measures of government interventions were used to construct two composite policy indexes. Preliminary analysis suggests that “market fostering” interventions seem to have facilitated growth in productivity, although the result is inconclusive due to data limitations. Compared with the East Asian NIEs, China still has a long way to go in reforming the role of government in the economy.     

On labor incentives and work norm in Japanese firms

In this paper, we argue that social/corporate norms play an important role in achieving higher productivity and better economic welfare. We define “social norm” to be a standard of behavior suggested by a social custom, i.e., a customary choice of actions in each social situation. We reinterpret the well-known Nash equilibrium as a “norm equilibrium.” A norm equilibrium is a stable social norm, stable in the sense that there is no incentive to deviate from the behavior suggested by the prevailing social norm. This interpretation requires less information than the traditional interpretation. Moreover, we need not be concerned with the problem of refinement because it is the social norm itself which refines the equilibria. We apply this concept to the labor market. The key assumption is that the level of an individual worker's effort is private information known to workers as a whole; i.e., all workers' efforts are known to their fellow workers as well as to the workers themselves. We show that different work norms may emerge in different corporations at an equilibrium. In “prestigious” firms cooperation is the prevailing work norm, while in “nonprestigious” firms noncooperation is the norm. Thus, the efficiency wage hypothesis holds without the existence of unemployment. Some implications of this interpretation for the Japanese labor markets are discussed.     

Capital markets and legal development: The China case

Recent research establishes a significant positive correlation between law and finance (and hence economic growth), restarting a debate on the “law matters” thesis. However, which way the causality goes is still not clear. The purpose of this paper is to use the ongoing reform experience of China, especially its capital market experience, to examine the direction of causality. First, we show that China's recent experience is largely consistent with Coffee's [Yale Law Journal 111 (2001, October)] “crash-then-law” interpretation of this correlation. Indeed, it is the large and clearly defined constituency of investors that has been a key driving force behind much of the recent legal progress. The rights and economic interests of this constituency have fundamentally challenged the traditional emphasis of the Chinese legal culture on administrative and criminal sanctions, but not on civil litigation law. Second, we compare the different contributions to legal change made by the stock market and the consumer product markets. We argue that capital markets are perhaps the most conducive to the formation of a politically powerful constituency and hence more aggressive legal change, because of (1) the higher degree of commonality among interested parties and (2) immediately measurable and tangible damages. These two characteristics not only allow investors to identify with each other more easily, but also create an ideal basis for more debate in the media, which in turn promotes the development of a legal culture.     

The economics of market coordination for the pre-Fed check-clearing system: A peek into the Bloomington (IL) node

On the basis of anecdotes centered on the alleged “circuitous routing of checks,” researchers focusing on the pre-Fed check-clearing system have usually argued that it was inefficient. In this paper we study a 1910 check remittance register from the State National Bank of Bloomington, Illinois—we dissect the way the bank forwarded checks to various destinations for clearing and collection. We find that the bank followed an orderly process of check remittance according to which checks tended to move in the “right direction.” This casts doubts on the alleged pervasiveness of cycling and circuitous routing of an extreme nature in the pre-Fed check-clearing process.     

Adjustment with a human face: Still relevant or overtaken by events?

This paper describes the extent to which the policy recommendations of “Adjustment with a Human Face” have been accepted. The concept has been accepted in principle, but large gaps remain in actual implementation. Some policy recommendations, such as the need for compensatory programs, have been more fully accepted and implemented than others, such as the need to stimulate productivity by poor households and to involve different social groups in policy making. The paper concludes that adjustment policies should be part of a long-term development strategy which emphasizes structural changes for countries to grow out of structural poverty. As such, the policy recommendations of “Adjustment with a Human Face” still remain valid, albeit with changes in emphasis on their various components.