Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?

Governments the world over offer significant inducements toattract investment, motivated by the expectation of spilloverbenefits to augment the primary benefits of a boost to nationalincome from new investment. There are several possible sourcesof induced spillovers from foreign direct investment. This articleevaluates the empirical evidence on productivity, wage, andexport spillovers in developing, developed, and transition economies.Although theory can identify a range of possible spillover channels,robust empirical support for positive spillovers is at bestmixed. The article explores the reasons and concludes with areview of policy aspects.      

Spatial productivity spillovers from public infrastructure: Evidence from state highways

Is public-sector infrastructure a key determinant of productivity? Traditional, project-based analyses of benefits and costs typically do not find large rates of return. Proponents of infrastructure spending instead point to regressionbased analyses of the links between private productivity and public infrastructure that imply large productivity effects from public spending. The disparity in estimated returns is often attributed to geographic spillovers in productivity benefits that are not captured by disaggregated analyses. We examine the degree to which state highways provide productivity benefits beyond the narrow confines of each state's borders. Despite the fact that state highways-especially the interstate highway system-are designed at least in part with interstate linkages in mind, we find no evidence of quantitatively important productivity spillovers.     

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.      

STABILIZATION POLICIES IN DEVELOPING COUNTRIES

The article focuses on the design of stabilization measuresto correct excessive balance of payments deficits and moderatethe rate of inflation. It distinguishes three sources of balanceof payments difficulties—excessively expansionary aggregatedemand policies; domestic supply shocks stemming, for example,from increases in real wages in excess of productivity growth;and external terms of trade shocks. It also analyzes the effectsof devaluations. The second part of the article discusses policiesaimed at reducing the rate of inflation and summarizes the theoreticalliterature on the dynamics and the transitional costs of adjustmentto lower rates of inflation in closed economies. Evidence onthe adjustment costs of disinflationary policies is reviewed,and the discussion is extended to some recent analysis of adjustmentin open economies.      

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.      

HOUSEHOLD RESPONSES TO PUBLIC HEALTH SERVICES: COST AND QUALITY TRADEOFFS

The effectiveness of government investments in health care dependson the public's response to price and quality as well as onwhether these expenditures actually improve health outcomes.Consumers, even those in low-income households, are willingto pay fees for better health care if the fees translate intoimproved access and reliability. But when prices rise withouta concomitant improvement in services, malnutrition and childmortality rates increase. The availability of basic health carehas a relatively greater impact on households with low incomesor low education, or both, than does the provision of more specializedservices. This article describes the types of services for whichhouseholds indicate they are willing to pay increased fees.It also indicates the potential gains from improving these services,as well as the consequences of moving faster on cost recoverythan on providing improved or better-targeted services.      

PRODUCER TURNOVER AND PRODUCTIVITY GROWTH IN DEVELOPING COUNTRIES

The reallocation of resources, either across sectors or acrossproducers within a sector, can serve as a potential source ofproductivity growth. New research findings exploit comprehensivemicroeconomic data on the manufacturing sectors of Chile, Colombia,and Morocco to document resource shifts as producers enter,expand, contract, and exit operation. The micro-level adjustmentis substantial; between 25 and 30 percent of the total numberof manufacturing jobs turn over each year. In the short run,the productivity effects of this turnover are modest becausethe new plants that come on line are only slightly more productivethan the ones they replace—and both are typically small.In the longer term, however, the turnover generates more substantialincreases in productivity because the new firms that surviverecord substantial productivity gains in their early years.Moreover, firms that exit are typically on a downward productivityspiral and would probably have dragged down sectoral efficiencyfarther if they had continued in operation.      

EXCHANGE RATE MISALIGNMENT IN DEVELOPING COUNTRIES

This article analyzes the theory of equilibrium real exchangerates and defines misalignment as a deviation of the real exchangerate (RER) from its equilibrium level. The role of macroeconomicpolicies is then analyzed under three alternative nominal exchangerate regimes: predetermined nominal exchange rates, floatingnominal rates, and dual or black market nominal exchange rates.This discussion points out how inconsistent macroeconomic policiesoften lead to real exchange rate misalignment. Corrective measures,including nominal devaluations and several alternative approaches,are then evaluated.      

Privatization and Corporate Governance: Principles, Evidence, and Future Challenges

Unless developing countries embrace a corporate governance perspective,privatization is unlikely to provide the benefits of improvedperformance with accountability. This article introduces theconcept of governance chains that can constrain the grabbinghands of public and private actors by providing informationand accountability mechanisms to help investors monitor managers.Empirical data on established firms from 49 countries provideestimates of the relative importance and strength of privateand formal chains of governance. The framework and empiricalbenchmarks help explain the outcomes of past privatizationsand suggest certain steps that governments can pursue to besure to get the most out of future privatization activity.      

THE IMPACT OF HEALTH AND NUTRITION ON EDUCATION

Child health and nutrition are strongly associated with educationalachievement. But associations do not necessarily indicate causality;estimates generally are likely to be biased in one directionor the other. As a result analysts and policymakers should havemuch less confidence in findings about the effect of healthon schooling success than has been claimed in previous surveys.The evidence is more nuanced and qualified than is often recognizedbut may still support the conclusion that health may have considerableeffects on postschooling productivity. Policy implications pointtoward providing public subsidies for the collection, analysis,and dissemination of information about the links between healthand education; and toward providing services to improve thehealth of poor children.      

Policies on Managing Risk in Agricultural Markets

Over the past dozen years, policymakers have largely abandonedlong-standing popular approaches for addressing risk in agriculturewithout fully resolving the question of how best to manage thenegative consequences of volatile agricultural markets. Thearticle reviews the transition from past policies and describescurrent approaches that distinguish between the trade-relatedfiscal consequences of commodity market volatility and the consequencesof price and production risks for vulnerable rural householdsand communities. Current policies rely more heavily on markets,even though markets for risk are incomplete in numerous ways.The benefits and limitations of market-based instruments areexamined in the context of risk management strategies, and innovativeapproaches to extend the reach of risk markets are discussed.      

Productivity Growth and Sustainability in Post-Green Revolution Agriculture: The Case of the Indian and Pakistan Punjabs

This article attempts to determine the long-term productivityand sustainability of irrigated agriculture in the Indian andPakistan Punjabs by measuring trends in total factor productivityfor production systems in both states since the advent of theGreen Revolution. These measurements over time and across systemshave resulted in three major findings. First, there were widespatial and temporal variations between the two Punjabs. Althoughoutput growth and crop yields were much higher in the IndianPunjab, productivity growth was higher by only a small margin.Moreover, the lowest growth in productivity took place duringthe initial Green Revolution period (as opposed to the laterintensification and post–Green Revolution periods) andin the wheat-rice system in both states. The time lag betweenadoption of Green Revolution technologies and realization ofproductivity gains is related to learning-induced efficiencygains, better utilization of capital investments over time,and problems with the standard methods of productivity measurementthat downwardly bias estimates, particularly during the GreenRevolution period. Second, input growth accounted for most ofthe output growth in both Punjabs during the period under study.Third, intensification, especially in the wheat-rice system,resulted in resource degradation in both Punjabs. Data fromPakistan show that resource degradation reduced overall productivitygrowth from technical change and from education and infrastructureinvestment by one-third. These findings imply the need for policiesthat promote agricultural productivity and sustainability throughpublic investments in education, roads, and research and extension;and that reduce resource degradation by decreasing or eliminatingsubsidies that encourage intensification of inputs.      

Cofinanced Public Extension in Nicaragua

How effective is agricultural extension? Is it worth the vastsums governments spend to provide it, mostly as a free service,to farmers worldwide? Relatively few studies exist that measureand compare the benefits of extension activities against theircosts. In the absence of such data, this pilot activity concentratedinstead on demand. Would demand for extension services be highif they were no longer free? The existence of solid demand wouldpresuppose some benefits from the service. Further, might chargingfor the service actually improve its quality and sustainability? The pilot program in Nicaragua described here set out to testwhether a truly demand—driven extension system aimed atfarmers with small-and medium-size holdings could be developed.The principal mechanism was a contribution by the farmer paidas a bonus to the extensionist: the aim was to introduce incentivesfor providers to improve the service through rewards linkedto the quality of their work and to establish direct accountabilityof extensionist to client. The outcomes showed that the cofinancingconcept can be successful. The article describes the design,implementation, and results in the expectation that the lessonslearned may be of interest elsewhere.      

The Costs and Benefits of Regulation: Implications for Developing Countries

The literature on the benefits and costs of regulation demonstratesthat this issue can be explored systematically using standardeconomic analysis. It also shows that regulation can have asignificant adverse impact on economic growth. Specifically,regulation aimed at controlling prices and entry into marketsthat would otherwise be workably competitive is likely to reducegrowth and adversely affect the average standard of living.In addition, process regulation can impose a significant coston the economy. Nonetheless, social regulations may have significantnet benefits for the average consumer if designed judiciously. There are several policies developing countries might consideradopting to improve their general approach to regulation. Theappropriate regulatory tools and framework will depend on manyfactors, including bureaucratic expertise, resource availability,political constraints, and economic impacts. There is a generalneed to enhance the capability for evaluating regulation atthe local and national levels.      

EXPORT PROCESSING ZONES: The Economics of Enclave Manufacturing

Export processing zones (EPZS) are economics enclaves withinwhich manufacturing for export occurs under virtual free tradeconditions. Many developing countries have established EPZSin hopes of reaping economic gains through employment, foreignexchange earnings, and technology transfer. This article studiesthe benefits and costs of EPZS in Indonesia, the Republic ofKorea, Malaysia, and the Philippines and reviews the relationshipbetween the welfare effects of EPZS and the host country's economicpolicies. When the domestic economy is distorted, the EPZ conferslimited welfare gains. Nevertheless, EPZS are far from the "enginesof development" that some countries had initially hoped theywould become.      

The evolution of death rates and life expectancy in Denmark

From 1835 to date Denmark has experienced an increase in life expectancy at birth of about 40 years for both sexes. Over the course of the last 170 years, life expectancy at birth has increased from 40 to 80 years for women and from 36 to 76 years for men, and it continues to rise. Using a new methodology, we show that about half of the total historic increase can be attributed to the sharp decline in infant and young age death rates up to 1950. However, life expectancy gains from 1950 to date can be primarily attributed to improvements in the age-specific death rates for the age group from 50 to 80, although there is also a noticeable contribution from the further decline in infant mortality over this period. With age-specific death rates up to age 60 now at a very low absolute level, substantial future life expectancy improvements must necessarily arise from improvements in age-specific death rates for ages 60 and above. Using the developed methodology, we quantify the impact of further reductions in age-specific mortality. Despite being one of countries with the highest life expectancy at the beginning of the 20th century, and despite the spectacular historic increase in life expectancy since then, Denmark is, in fact, lagging behind compared to many other countries, notably the other Nordic countries. The main reason is an alarming excess mortality for cause-specific death rates related to ischaemic heart diseases and, in particular, a number of cancer diseases. Age-specific death rates continue to improve in most countries, and a likely scenario is that in the future Denmark will experience improvement rates at the international level or perhaps even higher as a result of a catch-up effect.     

HOW MUCH DOES TRADE WITH THE SOUTH AFFECT WORKERS IN THE NORTH?

Does trade with developing countries have a small and benigneffect on workers in industrial countries, as most economistshave maintained, or a large and adverse effect, as the generalpublic and advocates of protection believe? A review of theevidence suggests that neither of these positions is tenable.The methods that economists have conventionally used to measurethe effect of North-South trade are biased downward. The truesize of this effect remains uncertain, but some recent studiessuggest that it is much larger than previously estimated. Tradewith the South has probably significantly altered the sectoralcomposition of employment in the North, shifting workers outof manufacturing and into nontraded services. More important,it has probably significantly worsened the relative economicposition of unskilled workers in industrial countries, and mayalso have aggravated the problem of reconciling low inflationwith low unemployment. Even so, the adverse side effects oftrade with the South are much smaller than is popularly supposed.And the popular remedy—protection—is clearly wrong.What is needed instead is more action by governments to offsetthe reduction in the relative demand for unskilled labor throughtraining and education, job creation, and income redistribution.      

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.      

Managing Government Exposure to Private Infrastructure Risks

The privatization of infrastructure should lead to the developmentof new infrastructure, improvements in the operation of existinginfrastructure, and a reduction in budgetary subsidies. Whethercountries reap the full benefits of privatization, however,depends on how risks are allocated. If, as is often the casein developing countries, governments assume risks that shouldbe borne by investors, they may reduce incentives for efficiencyand incur significant liabilities. To solve these problems,governments need to improve their policies and restrict theirrisk bearing to certain political and regulatory risks overwhich they have direct control. When a government provides guarantees,it should attempt to measure their cost and improve the waythey are handled in the accounts and budgets. Measurement andbudgeting are critical to improving decisions about the provisionof guarantees, to improving project selection and contract design,and to protecting governments from unknowingly entering intocommitments that might jeopardize future budgets.      

Targeting Revisited

Public spending programs aimed at alleviating poverty can eitherbe broadly targeted at categories ofspending or narrowly targetedat types of people. Each approach has benefits and costs tothe poor. It is often claimed that narrow targeting of the poorwill allow governments to reduce pQverty more effectively andat lower cost. But narrow targeting often has hidden costs,and once these costs are considered, the most finely targetedpolicy may not have any more effect on poverty than a broadlytargeted one. Both approaches also have hidden benefits, althoughless is known about their impact. Targeting can help, but itis not a cure-all. Reducing poverty calls for broadly targetedsocial sector spending combined with narrower targeting of cashand in-kind transfers to spec groups. It is also important forgovernments to experiment with schemes that offer better incentives,to carefully monitor the costs and outcomes, and to be flexibleand pragmatic in their policy responses.