Aid, policy and growth in post-conflict societies

Countries emerging from civil war attract both aid and policy advice. This paper provides the first systematic empirical analysis of aid and policy reform in the post-conflict growth process. It is based on a comprehensive data set of large civil wars, and covers 17 societies that were in their first decade of post-conflict economic recovery. We first investigate whether the absorptive capacity for aid is systematically different in post-conflict countries. We find that during the first 3 post-conflict years absorptive capacity is no greater than normal, but that in the rest of the first decade it is approximately double its normal level. Thus, ideally, aid should phase in during the decade. Historically, aid has not, on average, been higher in post-conflict societies, and indeed it has tended to taper out over the course of the decade. We then investigate whether the contribution of policy to growth is systematically different in post-conflict countries, and in particular, whether particular components of policy are differentially important. For this we use the World Bank policy rating database. We find that growth is more sensitive to policy in post-conflict societies. Comparing the efficacy of different policies, we find that social policies are differentially important relative to macroeconomic policies. However, historically, this does not appear to have been how policy reform has been prioritized in post-conflict societies.     

Unit roots and infrequent large shocks: new international evidence on output

The nature and magnitude of the economic shocks that have affected the per capita GDP of 16 OECD countries are analyzed over a long period using the outlier method. Strong proof of infrequent large permanent and transitory shocks were found, essentially resulting from the two major wars in the twentieth century, the recession in the 1920s, the Great Depression, among others. We also examine the nature of the output trend by combining different tests of non-stationarity on different GDP series corrected by the outliers detected. It is shown that the per capita GDP series cannot reject the unit root hypothesis in 13 of the 16 countries examined. No conclusion could be drawn for the other countries because the test results were contradictory.     

Dividend Omissions and Intraindustry Information Transfers

We examine potential information transfers from companies that announce dividend omissions to their industry rivals. Specifically, we examine the abnormal stock returns and abnormal earnings forecast revisions of rivals after a company makes a dividend‐omission announcement. Our results show negative and significant abnormal stock returns and negative and significant abnormal forecast revisions for rival companies in response to the announcement, and a significant and positive relation between the two. We conclude that a dividend‐omission announcement transmits unfavorable information across the announcing company's industry that affects cash flow expectations and ultimately stock prices.     

Political credibility and economic growth in less developed countries

While the mainstream of economic development theory focuses on the efficiency of policy measures, the role of the credibility of these measures is rarely analyzed. In this paper we argue that in less developed countries the problem of establishing the credibility of policy measures is at least as important as the problem of choosing the efficient policy solution. We claim that many of the difficulties less developed countries face can be understood in terms of lack of effective control on the discretionary power of governments, which ultimately leads to policies that are not credible. The private sector anticipates large swings in policies and reacts by withholding its resources. Symptoms of these credibility problems in less developed countries include the size of the informal sector, capital flight, and the reluctance of investors to commit capital. All of these reactions contribute to the slow economic growth in these countries. This paper concludes that establishing strategies for the control of state discretionary power is a crucial precondition for overcoming these problems and generating long term economic growth.     

Hard Times or Great Expectations? Dividend Omissions and Dividend Cuts by UK Firms*

This paper uncovers an increasing proportion of quoted UK companies omitting cash dividends. Using a large panel of quoted UK firms, we estimate panel data probit models for the incidence of dividend omissions and cuts as functions of financial characteristics including cash flow, leverage, investment opportunities, investment and company size. These variables account for most of the increase in omission since 1995. There is relatively little evidence to link this to the major tax reform of 1997 that abolished tax refunds on dividend income payable to tax‐exempt institutions. Significant persistence effects indicate companies are slow to adjust their balance sheets through their dividend.     

Wealth and Risk Effects of Adopting Deposit Insurance in Canada: Evidence of Risk Shifting by Banks and Trust Companies

This paper confirms that adopting explicit deposit insurance expanded risk-shifting incentives for Canadian Banks and Trust Companies. By transferring responsibility for monitoring non-systematic risk to the Canadian Deposit Insurance Corporation (CDIC), deposit insurance eliminated the compensation previously paid to large-block stockholder monitors. This transfer fueled a redistribution of insured-institution stock from poorly diversified large-block shareholders to diversified investors. Also, subsequent changes in market volatility support the hypothesis that CDIC insurance and the absorption of catastrophic risk it provided reduced systematic risk in the stock market as a whole even as it increased non-systematic risk in the banking and trust-company sector.     

Patenting,intellectual property rights and sectoral outputs in Industrial Revolution Britain, 1780–1851

Patenting rose sharply during the British Industrial Revolution. Utilizing time series methods, we investigate the causal relationships between 16 industries and patented inventions. The results show that increased patenting was essentially a consequence of fast growth in the cotton, iron, and mining sectors, which increased the value of protecting intellectual property. Conversely, protecting intellectual property was not a cause of the Industrial Revolution.     

Estimating a generalized correlation coefficient for a generalized bivariate probit model

In this paper we consider semiparametric estimation of a generalized correlation coefficient in a generalized bivariate probit model. The generalized correlation coefficient provides a simple summary statistic measuring the relationship between the two binary decision processes in a general framework. Our semiparametric estimation procedure consists of two steps, combining semiparametric estimators for univariate binary choice models with the method of maximum likelihood for the bivariate probit model with nonparametrically generated regressors. The estimator is shown to be consistent and asymptotically normal. The estimator performs well in our simulation study.     

Inflation, investment and economic performance: The role of internal financing

This paper studies a link between inflation and economic activity that is built on two hypotheses. First, firms mitigate informational frictions in financial markets by accumulating retained earnings over a period of time. Second, firms allocate earnings among three competing uses - dividends, current investment, and the accumulation of internal funds - and inflation directly distorts this allocation decision as well as the real value of accumulated internal funds. The model predicts that the level of inflation - both unanticipated and expected inflation - as well as the variability of inflation distort firms’ internal financing decisions, increases frictions in financial markets, reduces the level and efficiency of investment, and reduces aggregate output. The marginal effects of inflation are increasing in the inflation rate.     

THE RELATIONSHIP BETWEEN THE BLACK MARKET AND OFFICIAL EXCHANGE RATES: AN EXAMINATION OF LONG-RUN DYNAMICS IN INDIA

This study is the first to use Johansen's cointegration approach for India in the analysis of the long‐term dynamics between the black and official exchange rates for the period 1953–1993. The study also estimates the long‐run elasticity of the official rate with respect to the black market rate. As monthly data over 40 years are used, and a more robust methodology is employed, the results are likely to be more reliable as compared with the earlier work on India. The results of our study suggest that while there is a long‐term relationship between the two rates, the direction of causality is from the black rate to the official exchange rate. This is plausible in the Indian context where policy has generally lagged behind events in the black market. The hypothesis of a constant black market premium is rejected, implying that there is a mismatch between the percentage change in the official exchange rate and the percentage change in the black market rate.