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Chapter 25 Foreign public capital flows
... White (1998, p. 86) notes the irony in the lack of a market-based approach. Similarly, Eaton (1989) observes that technical assistance raises the same issue as other transfers in kind: why not give money, so that recipient governments can decide what assistance to purchase at world prices? He notes that transfers in kind might be justified if the donor has more expertise in identifying and meeting the technical needs, if the donor has stronger incentives than private consultants to transfer relevant skills, and if the quality of external consultants is not readily observable to recipient governments. ...
... In order to limit its coverage to manageable dimensions, this survey will not discuss the roles and policies of specific institutions in detail, or various proposals for reform. Eaton (1989) and Moss (2007) include brief overviews of the history and roles of the World Bank and IMF, and Moss gives suggestions for further reading. Vreeland (2007) reviews various debates on the development role of the IMF, while Rodrik (1996) provides a conceptual discussion of the role of multilateral lending. ...
... So far, this section has sought to establish circumstances in which aid might transform the productivity of developing countries. A range of answers to the Bauer paradox are possible, and still others can be advanced (see Eaton, 1989). For some, however, the emphasis on transformation is the wrong place to start. ...
This chapter examines the conditions under which foreign aid will be effective in raising growth, reducing poverty, and meeting basic needs in areas such as education and health. The primary aim is not to draw policy conclusions, but to highlight the main questions that arise, the contributions of the academic literature in addressing them, and the areas where much remains unknown. After describing some key concepts and trends in aid, the chapter examines the circumstances under which aid might transform productivity, and when it can achieve things that private capital flows cannot. The chapter reviews the relevant theory and evidence. Next, it turns to some of the other considerations that might form part of a structural model linking outcomes to aid. These include Dutch Disease effects, the fiscal response to aid, and the important connections between aid and governance, both positive and negative.The second half of the chapter examines when donors should attach conditions to aid. It reviews the debates on traditional policy conditionality, and potential alternatives, including the ideas underpinning the new “partnership” model. This model gives greater emphasis to a combination of autonomy and accountability, for countries where governance is strong. In other cases, donors may seek to attach conditions based on governance reform, and introduce new versions of traditional policy conditionality. The chapter also discusses controversies over the appropriate role of country ownership of aid programs. It goes on to discuss some donor failings, the future roles of randomized trials and evaluation, and the scope for aid to meet basic needs. The chapter ends with a discussion of some of the most innovative ideas for the reform of aid, and a summary of the main conclusions.
... Moreover, some economists, for example, Fishlow (1985), Eaton (1989), Williamson (1989), Ahmed (1992), Lustig (1999), Hjertholm (2000) and Pattillo (2002), implicitly discuss the linkage between external debt and poverty. In nutshell, we can conclude that we have mixed nature of results as suggested by the empirical literature. ...
... Further more both the functions are specified alternatively in linear and log linear forms. Thus, we specify the following four econometric equations: Poverty = a 1 + a 2 (Y/POP) + a 3 The results of estimation are arranged in Tables 1 and 2. In both the tables, we observe that our specified models perform quite well in terms of overall explanatory powers of the models. The value of R 2 ranges from 0.76 to 0.84. ...
... They argued that, if the conditions for successful capital accumulation were in place, it would already have been accumulated. Versions of this idea are discussed by Eaton (1989), Temple (2010), Deaton (2013), and Carter (2014), among others. Carter (2014) studies its relevance in the neoclassical growth model. ...
... This result does not apply in overlapping generations models; seeEaton (1989) andDalgaard, Hansen and Tarp (2004). However, OLG models are less well suited for our purposes, because of the complexity associated with analyzing welfare effects in OLG settings.VIRTUOUS CIRCLES ...
It is sometimes argued that foreign aid leads to a virtuous circle in which growth becomes self-reinforcing. We study two versions of this argument, using a modified neoclassical growth model in which the effects of parameter changes and capital accumulation are amplified. Simulations are used to quantify the welfare benefits from aid transfers. We find that, contrary to expectations, amplification makes only a modest difference to the welfare benefits from aid. This is true even when aid allows a faster exit from a vicious circle or poverty trap.
... Multilateral aid is provided through international institutions such as the IMF, the World Bank and the various agencies of the United Nations. Aid can be provided for either self-interest or altruistic reasons (see Eaton, 1989). ...
... Apart from being a potential cause of Dutch diseasein particular, decline in the tradeable sectorsforeign aid may also have an impact on government expenditure patterns, money supply, inflation, domestic savings, investment and growth (see also Eaton, 1989;and Likwelile et at., 1994b). ...
This paper examines the relationship between foreign aid inflows and the real exchange rate and assesses the potential for the aid-induced Dutch disease in Tanzania. Using cointegration technique and an error-correction model, the study found that aid inflows, increased openness of the economy and devaluation of the local currency caused real depreciation while increased government expenditure caused real appreciation. The finding that aid inflows caused real depreciation in Tanzania refutes the proposition that foreign aid has caused Dutch disease in the country. Tanzania may thus continue receiving aid and use it for productive investment to stimulate a positive supply response.
... Èìååòñÿ äîâîëüíî ãëóáîêàÿ àíàëîãèÿ ìåaeäó ïðîöåññîì òðàíñïëàíòàöèè èíñòèòóòîâ è ãîðàçäî áîëåå èçó÷åííûì ïðîöåññîì çàèìñòâîâàíèÿ òåõíîëîãèé (Eaton, 1989). Îíà èñïîëüçóåòñÿ ïðè äàëüíåéøåì èçëîaeåíèè. ...
...  ðåçóëüòàòå (áåñïëàòíîé) ïåðåäà÷è áîëåå ýôôåêòèâíîé òåõíîëîãèè äîíîð ìîaeåò âûèãðàòü çà ñ÷åò ðåöèïèåíòà. Ýòî ÿâëåíèå, èçó÷àâøååñÿ âî ìíîãèõ òåîðåòè÷åñêèõ ðàáîòàõ (Eaton, 1989), íàçûâàþò ïàðàäîêñîì ïåðåäà÷è 8 . ...
The financial systems in most developing countries today have many features in common with the financial systems of the developing countries of the eighteenth and nineteenth centuries. Whether they had unlimited liability (as in Scotland in the eighteenth century), or limited liability and special charters, commercial banks dominated European and U.S. financial systems. Moreover, they were typically established by wealthy people and oriented toward busineses and other wealthy people - they effectively represented"banking for the rich by the rich."Insurance companies were underdeveloped and pension and mutual funds did not yet exist. As a result, middle- and low-income people had limited access to formal financial services and relied on informal arrangements for borrowing. Meanwhile, financial savings were unproductively hoarded under the mattress. In developing countries today this gap in the provision of financial services can be explained by the low level and unequal distribution of income and wealth, high information and transaction costs, and weak enforcement mechanisms. In Europe and the United States, over time, different types of institutions - including savings banks, credit cooperatives, building societies, and credit unions - emerged to fill this market gap. Many developing countries have created institutions that specialize in lending to the poor, but more must be done to help these institutions reach the poor in rural areas and assist small farmers, artisans, and traders. An integrated program to build solid institutions requires 5 elements for success: 1) strong leadership. (Support should be given to groups, such as the Church or local officials, likely to attract people with integrity, high ideals, and committment to the institution's success.); 2) a three tier structure; 3) strong emphasis on education and dissemination of information about the workings and benefits of the institution. (Culture can be an obstacle to a thrift institution's s
... There are few models, in which the impact of external debt on poverty is explicitly analyzed (Schinke 1994, Loko/Mlachila/Nallari/Kalonji 2003, Agénor/Fofack/Izquierdo 2003). Nevertheless, the linkage is implicitly present in the theoretical literature on external debt and foreign capital (Eaton 1989, Hjertholm 2000, Pattillo/Poirson/Ricci 2002). Thus we first discuss major insights from these models on pro-poor growth and debt sustainability. ...
... Frameworks with intertemporal optimization respond to the sustainable debt issue consequently in the neoclassical tradition. The optimal level of debt will be reached if the marginal benefit equals the marginal cost of the external capital (Hjertholm 2000, Eaton 1989). But the assumption of perfect capital mobility in these models seems at least to be arguable for developing countries. ...
To reveal effects and consequences of high indebtedness on income poverty, this paper explores empirically a linear and non-linear impact of external debt on pro-poor growth in developing and transitional countries. To examine this hypothesis, we test the distribution effect of external debt to GDP, external debt to exports, and debt services to exports on the poorest 20 and 20 to 40 percent in a cross-country approach. In addition, we estimate the total effect, i.e. the distribution and growth effect, to analyse potential trade-offs between the impact of unsustainable external debt levels on poverty through overall economic growth and via distribution. To test the poverty effects, we collect an irregular and unbalanced panel of time-series cross-country data on the first and second quintile of 58 developing and transitional countries for the period 1970 – 1999. We apply two econometric specifications, a growth equation and a system GMM estimation, to cover econometric issues, cross-country variation and dynamic aspects of within-country changes of the income of the poor. Empirical findings of the impact of the debt indicators on pro-poor growth have to be interpreted carefully due to inconsistent results of the sensitivity analyses. Thus results do not indicate an optimal external debt level with respect to pro–poor growth. On the contrary, higher external debt levels are associated with negative effects on the level of the income of the poorest 40 percent without exhibiting any significant effects on the growth rates. Thus concise policy recommendations with respect to debt sustainability levels and debt relief are difficult. A cautious conclusion would be that debt relief may affect the poor positively, but seems not to be a sufficient policy instrument for improved growth rates of the income of the poorest 40 percent. This policy proposal would be in line with calls for more poverty-targeted capital inflows, as even total debt relief would release only insufficient resources for poverty reducing activities. With this interpretation, however, we abstract from political economy and bad governance issues which may prevent poverty reducing debt relief initiatives.
... The question is then how to scale up, mobilize and allocate the funds -not just capital expenditure, but also operating expenditure -required to support the Sustainable Development Goals. Mobilization and allocation of finance to meet the enormous investment needs of developing countries is a traditional issue in development research and policy (Eaton, 1989;Boussichas and Guillaumont, 2015). Despite the rhetoric of "leaving no one behind", rising disengagement has hit LDCs hard one hand, there are many synergies among them, and they are mutually supportive, as in the case of poverty eradication (Goal 1) and hunger eradication (Goal 2). ...
... There are suggestions in the theoretical literature that foreign borrowing has a positive effect on investment and growth up to a certain threshold, beyond which its impact is adverse (Clements et al., 2003). The optimal level of debt is when the marginal benefit equals the marginal cost of the external capital (Eaton, 1989;Hjertholm, 2000). Researchers including Cohen (1993) and Agénor (2000) illustrate this relationship as a kind of 'Debt Laffer curve'. ...
Growth literature presents evidence that resource-abundant economies comparatively grow less than other economies, giving rise to the ‘Resource Curse Hypothesis’. Many researchers have developed several theories to explain the ‘Resource Curse’ but there are very few explicit considerations of ‘Debt Overhang’ in these explanations.
This study concentrates on the ‘Debt Overhang –Resource Curse’ link given the significant relationships between debt sustainability and other resource spending. It also implicitly seeks to test key competing theories. The key contribution is the evaluation of the ‘Resource Curse’ and ‘Debt Overhang’ phenomena simultaneously using mixed-methods analysis.
... There may be mainly three reasons for non-repayment of the external debt of a country (Eaton, 1989;Utkulu, 1994). These are illiquidity, insolvency and unwillingness to pay. ...
... The majority of this work is theoretical, and studies the effects of exogenous transfers rather than deriving their optimal time path. Some papers explore the transfer problem, and especially the possibility of transfer paradoxes driven by terms-of-trade effects;Eaton (1989)surveys the older literature. An alternative approach is taken by 110Chamon and Kremer (2009), who construct a multi-country model in which developing countries gradually integrate with the world economy. ...
This paper introduces a framework for studying the optimal dynamic allocation of foreign aid among multiple recipients. We pose the problem as one of weighted global welfare maximization. A donor in the North chooses an optimal path for international transfers, anticipating that consumption and investment decisions will be made by optimizing households in the South, and accounting for limits in the extent to which recipients can effectively absorb aid. We present quantitative results on optimal aid policy by applying our approach to a neoclassical growth model, where the scope for aid-funded growth is determined by the recipients’ distance from steady-state.
... For a thorough review of the earlier literature on both capital flows and aid transfers seeEaton (1989), particularly sections 4.2 -5.1 and section 7. For recent comments on the Burnside-Dollar work seeEasterly 2003. 2 Aid is here defined as international transfers, and is not to be confused with capital flows driven by differences in the marginal product of capital across countries, which present a separate set of theoretical challenges(Barro and Sala-i-Martin 2003 Chapter 3). ...
Obstfeld (1999) has analysed the impact of development aid on the steady state and rate of convergence in a standard infinite-horizon neoclassical growth model. He found that when aid was disbursed as unconditional transfers to households, it had no effect on steady-state capital stock and output, but accelerated the pace of transition and raised steady-state consumption by the full amount of the aid inflow. We use the same model to analyse the outcome when aid is disbursed in the form of investment subsidies. We find that under this policy rule, the growth model has two saddle-path-stable steady states, one below and one above the no-aid benchmark. In an economy that is developing (in the sense of being below its steady state when aid commences), aid raises short-run consumption but the economy converges to a steady state below the no-aid case. In an economy that is initially above its no-aid steady state, aid causes convergence to a higher steady state. One implication is that conditional aid flows might cause divergence of capital stock and output per capita between poor and rich countries. A consequent implication for policy is that conditionality, in the sense of targeting aid to supplement investment, can have perverse effects on the long-run growth of poor countries. We thank colleagues in the School of Economics and Finance at Victoria University for helpful comments and suggestions.
... A possible existence of a foreign exchange shortage in the South African economy was long noted by the Central Economic Advisory Service (NEM, 1993) and equally discussed by the Macroeconomic Research Group (MERG, 1993). Bliss (1989), Eaton (1989) and Bacha (1990) have examined the main binding constraints of faster growth of economies and conclude that the shortage of savings or foreign exchange will inevitably negatively affect the economic growth of a nation. Bacha (1990: 282), in particular, demonstrates that most developing countries are hooked by a foreign exchange constraint rather than a savings constraint. ...
... For a thorough review of the earlier literature on both capital flows and aid transfers seeEaton (1989), particularly sections 4.2 -5.1 and section 7. For recent comments on the Burnside-Dollar work seeEasterly 2003. 2 Aid is here defined as international transfers, and is not to be confused with capital flows driven by differences in the marginal product of capital across countries, which present a separate set of theoretical challenges(Barro and Sala-i-Martin 2003 Chapter 3). ...
... The realm of macro debt management is closely interrelated with fiscal policies as the government fiscal stance directly affects the level and growth rate of government debt. The stance of fiscal policy is often influenced by political 7 For an excellent discussion of sustainability and related issues on sovereign debts in developing countries, see Eaton (1989), Eaton et al (1986), Cohen (1991 and1995), among others. For the application and analysis of Korea's external debts around the financial crisis, see Hahm (1999). ...
... The link between foreign lending, or foreign aid, as an export promotion policy at the bilateral level has been discussed widely in the context of trade relations between industrialized and developing countries. Developing countries usually receive export credits from industrialized countries with the explicit requirement that they use them to buy goods from the latter (Fleisig and Hill, 1984; Eaton, 1989; Basu and Morita, 2007). This issue has also been linked with the phenomenon of " loan pushing " 10 , most evident in the years preceding the 1982 debt crisis, when multinational banks practically forced money on the less-developed countries (Kindleberger, 1989; Basu, 1991). ...
We examine the effects that a country’s net capital flows have on the (border) prices that a country pays for its imports of goods. Using data from 2000 to 2009 for 11 euro area countries we utilize a pricing-to-market specification to study exporters’ pricing behavior to the rest of the countries in the sample, at the industry level, for 900 goods disseminated at the 4- digit Standard International Trade Classification (SITC- revision 3) level. This allows us to construct a panel dataset which contains observations across exporters, importers, industries and time, ending up with a total of 594,327 observations. We find a strong influence of the importing country’s net capital inflows on the border prices of its imports of goods. This result is robust across different specifications of the underlying model, as well to different sample dis-aggregations across types of capital flows, product categories, and exporters.
... Thus there is substantial debate on the effect of foreign financial aid on economic growth. In an early survey, Mosely (1980) presented a historical review of the related literature and found that foreign aid stimulates economic growth. However, Vos (1988) showed that foreign aid has depressed the growth of recipient countries. Eaton (1989) showed that the effect of foreign aid on savings depends on the pattern of its disbursement. Disbursement across older generations decreases savings and disbursement among younger generations increases savings. While Hansen and Tarp (2000) in a review of the literature on the aidsavings relationship found that aid leads to an increase i ...
Does foreign aid contribute to economic growth? If so, is the impact of aid conditional on good policies? This is a controversial issue. While the World Bank (1998) contends that the aid is effective only if recipient governments have good policies, others refute this view and argue that aid enhances economic growth regardless of the type of policies. This paper proposes new measures of policy that are more directly controlled by recipient governments. Using data from the World Bank, five panels of four-years covering the period 1974-1993 for 56 aid-receiving developing countries examine whether any significant relationship exists between foreign aid, government policies and economic growth. It is revealed that foreign aid has a positive impact on real growth per capita and this effect is not contingent upon the type of economic policies adopted by the recipient countries. It is also revealed that the log of the initial level of income is statistically significant, thus indicating conditional convergence among the countries in the sample, which contradicts the general findings of previous studies.
... 18. Obstfeld (1998). See also Schmidt-Hebbel and Serv6n (1995) and Eaton (1989). ...
Comment: This paper by Barry Bosworth and Susan Collins is a welcome contribution to the capital flows literature in that it investigates whether there are important behavioral differences across types of flows and their effects on economic activity, saving, and investment. Previous studies examining the links between growth and capital flows had largely ignored distinctions among the different types of flows, despite evidence of very different characteristics as regards volatility.
... 1974;Fieleke 1978;Kenen 1978;McKinnon 1981;Dale 1984;Cooper 1985;Williamson 1985;Frenkel and Mussa 1985;Shaw 1986;Scammell 1987:Ch.7;Williamson and Lessard 1987;Kindleberger 1987;MacDonald 1988;Muscatelli and Vines 1989;Currie and Wren-Lewis 1989;Eaton 1989Eaton :1332Eaton -1333Mathieson and Rojas-Suarez 1990;and Dornbusch and Giovannini 1990). 22. Up to a point, rising interest rates compensate lenders for increased risk. ...
... Absent these, there is no transfer paradox. The static literature expanded in several directions (and, indeed, continues to do so) 1 but in the context of the Latin American debt problem it was felt that transfers affected saving--as well as investment--decisions and thus a dynamic formulation would be more appropriate (see Eaton (1989)). The first attempts to construct a dynamic analysis of the transfer problem made use of a one-sector overlapping generations model. ...
This paper explores the steady state welfare implications of permanent transfers in a two-country, two-sector overlapping generations model. At the golden rule and with Walrasian stability, we demonstrate that the change in the (static) terms of trade always works in favor of a transfer paradox. The conditions under which the transfer paradox is obtained are independent of factor intensity rankings and also whether the donor or recipient has the higher savings propensity. In contrast, conditions under which a change in the intertemporal terms of trade delivers a Pareto-improving transfer depend upon both of the above and also on the initial position of the world capital-labor ratio relative to the golden rule.
This paper analyzes the dependence pattern of net debts inflows on the sovereign debts rating and the fiscal balance, on accounting for the productivity growth rate. The cross-section evidence on a sample of 149 economies for the period from 1990 to 2019 uncovers that a higher sovereign debts rating, a lower fiscal balance or a higher productivity growth is associated with more net debts inflows. Thus, the debts flows are underlined by the store of wealth accumulation across economies. Moreover, there exists a nonlinearity on the pattern of debts flows, for which the fiscal balance determines the impact of sovereign debts rating on the net debts inflows. The results are robust for panel data regression as well as case study of three economies including Japan, Thailand and Vietnam.
This study acknowledges the lack of foreign exchange as the main obstacle to economic growth in South Africa. It is noted that many studies have only focused on exports and export expansion alone as a means to eradicate this economic dilemma. This study considers the import component of the balance of payments, because together with exports the demand for imports determines the behaviour of the current account of the balance of payments as a whole. The focus of this paper is on the estimation and interpretation of results of the aggregate and disaggregated import demand elasticities for South Africa. The import demand model is estimated by a means of cointegration analysis. The major finding is that the import elasticity with respect to income is more significant than the price elasticity of demand for imports. Given this result, critical policy implications and areas for further research are highlighted.
2000 yılında Birleşmiş Milletler ’in öncülüğünde 189 ülkenin katıldığı zirvede, aşırı yoksulluk ve açlığa son vermeyi amaçlayan Binyıl Bildirgesi’ne dayanan Binyıl Kalkınma Hedefleri(BKH) belirlenmiştir. Bu hedeflerin 1990-2015 yılları arasında gerçekleştirilmesi planlanmıştır. Hedeflerin içerdiği temel konular ise yoksulluk ve açlığın giderilmesi, herkes için temel eğitimin temini, toplumsal cinsiyet eşitliğinin sağlanması ve kadının sosyal ve ekonomik anlamda güçlendirilmesi, çocuk ölümlerinin azaltılması, anne sağlığının iyileştirilmesi, HIV/AIDS, sıtma ve diğer salgın hastalıklarla mücadele, çevresel sürdürülebilirliğin sağlanması ve kalkınma için küresel ortaklığın geliştirilmesidir. Bu çalışmanın amacı, 1970li yılların sonunda piyasa ekonomisine işlerlik kazandırmaya yönelik girişimlerde bulunan ve özellikle 2001 yılında Dünya Ticaret Örgütü’ne üyeliğini tamamladıktan sonra dünya ticaretinde söz sahibi olmaya başlayan Çin Halk Cumhuriyeti’nin nasıl bir büyüme stratejisi izlediğinin ve BKH doğrultusunda nasıl bir gelişme sergilediğinin ortaya konulmasıdır. Bu kapsamda öncelikle Çin’in tarihi süreç içerisindeki iktisadi yükselişine sebep olan faktörler literatür taraması kapsamında açıklanmaya çalışılmış ve daha sonra yoksulluk, eğitim, sağlık, çevre ve cinsiyet eşitliği konularında kaydedilen ilerlemeler Dünya Bankası verileri ışığında, Euro Bölgesi, OECD ve Dünya genelindeki durumla kıyaslamalı olarak ele alınmıştır. Yapılan karşılaştırmalar ışığında, BKH kapsamında belirlenen 8 hedef konusunda Çin’in oldukça başarılı olduğu sonucuna varılmıştır. Bu başarıda piyasa ekonomisine geçiş sürecinde gerçekleştirilen düzenlemelerin, uluslararası kurumlar tarafından dayatılan standart düzenlemeler olmaması, bunun yerine hazırlanan kalkınma planları dahilinde ve ekonomisinin ihtiyaçları doğrultusunda bir değişime gidilmiş olmasının önemli yeri bulunmaktadır. Ayrıca ticaretle elde edilen gelirler yanında hane halkı ve firmaların tasarruf oranlarının yüksek olması ve milli gelirin yarısının tasarruf ediliyor olması, büyüme ve kalkınma hedeflerinin gerçekleştirilmesi açısından önemli olan bir diğer faktör olmuştur.
A financial transfer of wealth between countries necessitates adjustments in expenditure, production, and relative prices that collectively comprise the transfer problem. Since the 1920s the transfer problem arising from war reparations and other unrequited transfers has occupied the attention of Keynes, several Nobel laureates, and other distinguished economists. The early literature centred on static two-country models of transfers, while more recent research has highlighted the intertemporal dimension of the transfer problem.
The interest in predicting stock prices or returns is probably as old as the markets themselves. Fama (1970) reviews early work and provides some organizing principles. This article concentrates selectively on developments following Fama’s review. In that review, Fama describes increasingly fine information sets in a way that is useful in organizing the discussion. Weak-form predictability uses the information in past stock prices. Semi-strong form predictability uses variables that are obviously publicly available, and strong form uses anything else. While there is a literature characterizing strong-form predictability (for example, analysing the profitability of corporate insiders’ trades), this article concentrates on the first two categories of information.
One of the most intriguing puzzles in international finance is the Feldstein-Horioka proposition (Feldstein and Horioka, 1980). As is well known, Feldstein and Horioka showed that in cross-country data, saving and investment rates have a correlation of nearly one. This, they interpret, is indicative of the international immobility of capital. If capital were fully mobile, then the level of investment in a (small) country should be largely determined by the international supply and demand for capital and not necessarily restricted by the domestic supply of capital, domestic saving. The increase in saving in one country should not change the international supply of capital noticeably; therefore, for a truly open economy, the level of investment in a country should not be affected greatly by its own saving rate. Feldstein and Bacchetta (1991) call the correlation coefficient of the investment rate on the saving rate, the ‘savings retention coefficient’.
We examine the effects that a country's net capital flows have on the (border) prices that a country pays for its imports of goods. Using data from 2000 to 2009 for 11 euro area countries we utilize a pricing-to-market specification to study exporters' pricing behavior to the rest of the countries in the sample, at the industry level, for 900 goods disseminated at the 4-digit Standard International Trade Classification level. This allows us to construct a panel dataset which contains observations across exporters, importers, industries and time. We find a strong positive influence of the importing country's net capital inflows on the border prices of its imports of goods. This result is robust across different specifications of the underlying model, as well to different sample dis-aggregations across types of capital flows, product categories, and exporters.
This paper presents a group of models showing the strikingly different implications of foreign aid to the private sector and public sector. In the first model, with decentralized decision-making and without optimal choices of fiscal policies on behalf of the government, foreign aid to the private sector has no effect on the long-run capital accumulation and it raises private consumption one to one; whereas foreign aid to the government leads to more public spending and higher private capital accumulation. In another model with optimal choices of both fiscal and monetary policies, foreign aid to the private sector gives rise to higher inflation and income taxation. Although aid to the private sector raises private money holdings and consumption, it reduces capital accumulation. However, when foreign aid is provided to the public sector, the government cuts both the inflation rate and the income tax rate, raises public spending, and provides more incentives for private capital accumulation and money holdings. In the long run, aid to the public sector leads to more private capital accumulation, consumption, money holdings, and welfare.
Given the persistent problems in the balance of trade in LDCs, the limited effect of foreign aid, and the difficulties of borrowing, the often huge amounts of migrant remittances can substitute for the inadequacies of these forms of foreign exchange. As market flows of foreign exchange, remittances have complex positive and negative effects on development. In this paper, I deal with this role of migrant remittances in the theoretical framework of development economics, as related to the importance of foreign exchange as an indispensable factor of growth and structural change in LDCs. Various channels transmitting the impact of remittances on development are investigated based on the experience of countries from both sides of the Mediterranean basin.
The early literature explained aid's macroeconomic impact in the context of the dual gap model, showing a clear link between aid and growth. Many now believe that the empirical evidence shows there to be no such relationship. This paper critically reviews the different theoretical perspectives ‐the dual gap model, the savings debate, recipient fiscal response, and aid as Dutch disease — and the empirical debates on aid, savings and growth. The basis for denying a relationship between aid and growth is shown to be weak, though more recent areas of research offer promising directions for future work.
In models of trade with monpolistic competition, firms set prices above marginal cost. An example is provided in this paper in which, because of this, a growth in the labor force lowers welfare per capita.
The economic enrichment of a sector may make other sectors as a whole better or worse off. However, for the benchmark case of proportionate enrichment, other sectors tend to gain. This result is shown using offer curves, supply and demand analysis, Cobb-Douglas utility functions, and a more general case. Allowing the enriching sector to be monopolistic does not affect the result. Semi-economic enrichment through migration and population growth also makes others better off. Most enrichments also tend to be equalizing in their effects on others.
The traditional view that natural riches increase the wealth of nations has been recently challenged by empirical findings that point out that natural inputs are negatively related to growth. This paper shows, within a two-sector neo-classical growth model with international trade in goods, that these two views can be reconciled. Natural inputs directly affect both long-run income and tran-sitional growth. These two effects can be positive or negative depending on input elasticities. Furthermore, they go in opposite directions, creating a ten-sion that complicates the interpretation of estimated-coefficient signs in growth regressions. Quantitative results show that the two effects can be significant.
Purpose
This research has been carried out to look into the long run impact of the controls on capital inflows imposed during the years 1998‐2001 in Malaysia. The paper intends to capture the long‐term impact of capital controls in changing the composition of capital flows into Malaysia and to examine whether the controls have been able to divert the short‐term capital inflows to longer‐term investments.
Design/methodology/approach
The autoregressive first differenced ordinary least square models have been used to examine whether the controls have been able to divert the short‐term capital inflows to longer‐term investments.
Findings
The capital controls have been successful in the short run in switching some of the short‐term capital inflows into longer‐term portfolio investments, without jeopardizing the Malaysian investment environment in the longer‐term. Such controls did not have an impact on the decisions of foreign investors in the long run even if the rating agencies downgraded the Malaysian investments immediately after the controls were imposed. This paper suggests that capital flows into Malaysia were more a result of interest rate differentials between the domestic and the US interest rates and hardly depended on the Malaysian risk adjusted returns.
Research limitations/implications
One of the limitations of this research is the ephemeral nature of the econometric analysis. All the variables, except government spending, are first differenced, in order to overcome the problem of spurious regression. However, while taking the first difference, there is a possibility of losing valuable long‐term relationship between the capital flows and the explanatory variables. Further, the analysis was carried out without much reference to the derivative market, which might have disguised some of the capital flows.
Social implications
Capital controls are adopted to prevent the volatility in domestic markets caused due to capital flight. The capital flight has huge macroeconomic implications on a society, including unemployment, interest rate volatility and subsequent economic slowdown and recession. If adopted with an intention to provide a temporary breathing space, it might help the countries manage their domestic imbalances.
Originality/value
This paper provides a fresh look at the implications of capital controls with longer‐term data that also include the period after the controls were withdrawn. The study is expected to be independent of market distortions, which might arise with narrow time frames that cover periods during and/or immediately after the crisis.
In an infinite-horizon model with endogenous time preferences, foreign aid, foreign borrowing, and domestic capital accumulation, a permanent increase in foreign aid leads to a reduction in long-run capital accumulation, a rise in domestic consumption, and an increase in foreign borrowing. Short-run analysis shows that an initial increase in foreign aid leads to a rise in investment, and a reduction in consumption and external borrowing. On the other hand, a temporal increase in foreign aid results in an increase in consumption and foreign borrowing, and a reduction in investment.
The paper examines the solvency of Turkey regarding its external debts. Recent economic crises Turkey faced in last decade raised concerns on the issue of external debt sustainability. Using the usual intertemporal budget constraint, a statistically testable measure of solvency is derived and the methodology of Hakkio and Rush (Hakkio, C.S., Rush, M., 1991. Is the budget deficit ‘too large’? Economic Inquiry 29, 429–445.) is followed to evaluate the sustainability of the external debt of Turkey. In addition to the conventional cointegration tests, Zivot–Andrews (Zivot, E., Andrews, D.W.K., 1992. Further evidence on the great crash, the oil price shock, and the unit root hypothesis. Journal of Business and Economic Statistics 10, 251–270.) unit root test and Gregory–Hansen (Gregory, A., Hansen, B., 1996. Residual based tests for cointegration in models with regime shifts. Journal of Econometrics 70, 99–126.) cointegration test are also employed to find out whether a possible structural break that may be due to the recent economic crises in Turkey changes the empirical results. The findings show that with or without considering any structural break, Turkish external debt is weakly sustainable.
This paper investigates how a country's specific-factor endowment affects its long-run economic performance. We build an open-economy version of the two-sector neoclassical growth model in which we introduce fixed industry-specific inputs in both activities. We show that differences in input shares between sectors can contribute to explain why nations that seem to have similar factor endowments can show very different income levels. In particular, under (productivity-adjusted) factor-price equalization, larger amounts of factors specific to the industry with a lower (larger) labor share lead the economy to enjoy larger (smaller) long-run income levels. The model can also account for overtaking episodes between countries along their development paths.
In the presence of a production subsidy (a tariff) and/or variable returns to scale, this paper shows that a capital inflow improves welfare under certain conditions, and that only temporary production subsidy (tariff) may be needed to generate capital inflows even if the domestic rental rate is initially lower than the world rental rate.
La mise en oeuvre d'une initiative de réduction de la dette des pays pauvres très endettés par les organisations internationales incite à approfondir les problèmes concernant la soutenabilité de la dette de ces pays. En effet, les choix techniques effectués conduisent à retenir certains pays, et à en écarter d'autres. Or les méthodes pratiques utilisées pour évaluer la soutenabilité de la dette de ces économies sont discutables, pour deux raisons : • le renouvellement des analyses de la croissance, notamment dans les cadres des diverses théories de la croissance endogène. • les économies les plus pauvres présentent des spécificités qu'il est difficile de laisser de côté lorsqu'on évalue leur solvabilité. Il faut notamment citer ce niveau le caractère très concessionnel des financements reçus, le fait que l'Etat soit le seul emprunteur à l'extérieur et qu'il n'ait accès qu'à des financements d'organismes spécialisés. Cette dernière caractéristique implique que l'analyse de l'impact de la dette doit porter sur une période très longue, car les remboursements seront étalés sur plusieurs dizaines d'années. Sur des périodes aussi longues, les approches modélisées de la croissance présentent des limites du fait qu’elles prennent difficilement en compte les modifications structurelles qui accompagnent le processus de développement. Ces modifications devraient normalement comprendre celles du financement extérieur. En effet, le développement, à partir d’un certain stade, devrait pouvoir ouvrir l’accès aux marchés internationaux des capitaux – et réduire le recours à l’aide publique au développement.. Tout ceci devrait inciter à n’utiliser qu’avec beaucoup de précautions les résultats d’études menées suivant les méthodes financières classiques, lorsqu’il s’agit d’établir un pronostic sur la soutenabilité de la dette des pays les plus pauvres. oui
Abstract In the context of a two-sector overlapping-generations model it is demonstrated that a steady-state transfer paradox may arise under commodity trade with stability and without distortions or bystanders. The existence of the paradox is due to the effect of the transfer on world capital accumulation, which is shown to always (i.e., for any ranking of factor intensities and savings rates) improve the donor's terms of trade. Transfers may also improve steady-state welfare for both donor and recipient and produce paradoxical welfare results along the transition path.
La littérature en statique du commerce international a conclu que, en l'absence de distorsions ou de tierces parties, les mouvements des termes d'échange induits par les transferts ne peuvent pas être suffisamment importants (quand il y a stabilité walrasienne) pour engendrer le paradoxe du transfert. On a tiré la conclusion de modèles dynamiques à un secteur que le paradoxe du transfert est possible, mais en comptant sur la mobilité internationale du capital et sur les mouvements dans le niveau mondial du taux d'intérêt plutôt que sur les prix et les marchés des biens. Dans un modèle dynamique à deux secteurs où les générations se chevauchent – ce qui permet des effets à la fois statiques et intertemporels dans les termes d'échange – le commerce des biens peut engendrer un paradoxe du transfert en régime permanent quand il y a stabilité walrasienne, sans distorsions et tierces parties. L'existence du paradoxe est attribuable à l'effet du transfert sur l'accumulation du capital qui toujours (pour tout ordre des intensités de facteur et des taux d'épargne) améliore les termes d'échange du donneur. Les transferts peuvent aussi améliorer le bien être du donneur et du récipiendaire en régime permanent, et produire des résultats paradoxaux de bien-être dans le sentier de transition.
Despite the lack of legal channels through which binding commitments can be made by the government, economic and political factors enable it to affect future outcomes. In practice, large transaction costs are associated with any significant change of policy, and therefore the current government can adopt policies so that certain outcomes are more likely to be realized by its successor. In this paper it is argued that transaction costs combined with electoral uncertainty are likely to drive the current government to adopt a policy which is extreme relative to the preferences of the existing political parties. This policy is adopted in order to ensure that due to transaction costs, the future government will not depart radically from the most preferred policy of the current government. If the current policy is likely to affect the election outcome, then, in addition to the above considerations, the electorate attitudes would have to be taken into account by the government. Hence, the current government confronts two factors in choosing its policies: the behavior of the future government and the behavior of the electorate. The interplay between the two factors determines the choice of the current policy. Copyright 1996 Blackwell Publishers Ltd..
Une grande partie des politiques de d�veloppement repose sur l'envoi de transferts aux �conomies connaissant des difficult�s de d�veloppement. Si ces aides semblent favorables au bien �tre des agents, leurs effets sur la croissance de long terme des �conomies restent ambigus ou parfois d�cevants. L'objectif de cet article est de contribuer � mieux cerner les cons�quences d'une politique de transferts sur la dynamique de long terme d'une �conomie. Pour cela, on utilise un mod�le � g�n�rations imbriqu�es, au sein duquel sont pr�sents un secteur d'accumulation du capital humain et un processus d'h�ritage de niveau de vie. L'analyse num�rique du mod�le permet de montrer que selon l'importance des transferts et la pr�f�rence des agents pour le loisir, la politique d'aide peut se r�v�ler favorable ou d�favorable � la croissance de l'�conomie.
The theoretical and empirical literature on the macroeconomic effects of capital inflows posits that a net inflow of foreign capital leads to an equilibrium real exchange rate (RER) appreciation through an expansion in aggregate demand. But this literature fails to distinguish between the different types of flows, or their specific mechanisms of influence. This paper analyses the adjustment process to FDI inflows in the case of Costa Rica, and focuses on whether, to what extent and through what mechanisms such adjustment requires a RER appreciation. It argues that a study of the process of macroeconomic adjustment to a net inflow of FDI -the transfer process- should not be detached from an investigation into the trade and financial practices of the foreign-owned firms towards which FDI flows. A two-sector model is developed to capture the basic interactions between foreign investment, domestic investment and the RER. It shows that the sectoral allocation of FDI, the response of domestic investment to exogenous changes in the foreign capital stock, the input composition of foreign capital, and the financial practices of foreign investors, are crucial determinants of the long-run equilibrium RER. The paper also includes two empirical parts. The first one provides an overview of the general trends of aggregate FDI inflows into Costa Rica between 1970-99, and analyses some data on the trade and financial patterns of foreign affiliates operating in the country. The second undertakes an econometric examination of the impact of FDI on output, investment, exports, imports and the RER, using cointegration techniques. The study is based on annual data for the period 1970-99. It is found that FDI exerts a strong negative impact on the equilibrium RER.
Une grande partie des politiques de développement repose sur l'envoi de transferts aux économies connaissant des difficultés de développement. Si ces aides semblent favorables au bien être des agents, leurs effets sur la croissance de long terme des économies restent ambigus ou parfois décevants. L'objectif de cet article est de contribuer à mieux cerner les conséquences d'une politique de transferts sur la dynamique de long terme d'une économie. Pour cela, on utilise un modèle à générations imbriquées, au sein duquel sont présents un secteur d'accumulation du capital humain et un processus d'héritage de niveau de vie. L'analyse numérique du modèle permet de montrer que selon l'importance des transferts et la préférence des agents pour le loisir, la politique d'aide peut se révéler favorable ou défavorable à la croissance de l'économie.
In recent years the policy debate on development aid has focused on aid’s effectiveness. There has been relatively little discussion of the justification for aid, as opposed to other rich countries’ policies that may help developing countries. Implicitly effectiveness is considered as not only a necessary but also a sufficient justification for aid.
In this paper we argue that the traditional justification for aid (the inability of poor countries to borrow in international markets) has lost much of its relevance. The paper suggests that there is a new case for aid in four areas. The justification is based on (a) asymmetric information on the policy environment in developing countries (b) the cost of taxation in recipient countries (c) the incentive effects of credible donor commitment to selectivity (d) the need for international public goods in the areas of conflict and risk. Ironically, while in these areas thee is a convincing case for aid, donors appear to have a preference for using aid in situations where there is no strong case for it.
This paper analyzes whether the foreign assistance provided for specific categories of expenditure is shifted among them, contrary to the wishes of donors. It also considers whether aid reduces the tax effort of recipient governments. Econometric results are presented for the Dominican Republic that show that the fungibility of aid has resulted in a thwarting of the intentions of donors. An attempt is made to account for the observed differences in behavior of individual countries in altering expenditures. Copyright 1993 by MIT Press.
The consensus of the literature is that international cross-sectional data do not reveal a stable relationship between foreign aid and economic growth, a conclusion which weakens the case for giving aid. However, previous econometric analysis has not made allowance for the fact that larger countries grow faster, but receive less aid. In this paper it is demonstrated that when due allowance is made for the effects of country size, a positive and significant relationship between aid and growth can be shown to exist.
The troublesome debts of a number of developing countries have spawned a large literature on why countries borrow, on the extent to which debt contributes to growth, on why countries repay, and on how debt problems should be handled. This article provides a basic introduction to some issues in sovereign debt. First, it presents the basic accounting concepts associated with debt. Second, it treats debt as a component of the intertemporal maximization of a borrower in a competitive loan market facing an intertemporal budget constraint. Third, it introduces debt into recent models of endogenous growth and examines what these models imply about the relationship between debt and growth. Fourth, it discusses issues arising from sovereign risk. Fifth, it examines incentives to repay. Sixth, it reviews the various options available to a creditor facing a debtor unwilling to meet current debt service obligations. Seveth, it examines debt buybacks. Copyright 1993 by Oxford University Press.
DURING THE PAST DECADE, the behavior of international capital flows, current account balances, and exchange rates have puzzled economists and preoccupied policymakers. The period has been marked by widely fluctuating exchange rates, huge OPEC surpluses, burgeoning debt of less developed coimtries (LDCs) and unprecedented current account deficits in many developed countries. The nature, direction, and scope of inter- national borrowing have also shifted dramatically. The proportion of private to official capital inflows to LDCs has grown substantially; the international money market has expanded dramatically; and capital con- trols have been liberalized in many economies. The need for analysis is greatest on two sets of questions. First, what factors have determined the size and direction of current account imbal- ances in recent years? Second, what has been the relation between the current account and movements in the exchange rate? Answers to the first question have tended to focus on OPEC price increases and sur- pluses. Observing that the large surpluses must be balanced in the aggre- This paper is part of a research project on the effects of OPEC price increases on macroeconomic adjustment in the world economy, in collaboration with Michael Bruno of Hebrew University, Jerusalem. I have benefited from discussions with Olivier J. Blanchard, Michael Bruno, Barry J. Eichengreen, Paul Krugman, and Robert Macauley, and from comments by the Brookings panel. I am indebted to Wing Woo for research assistance and to Joy Mundy for secretarial help.
In the traditional theory of international trade, it is customary to assume that the factors of production are prohibited from moving from country to country for some reason or another. This assumption of factor immobility has an important function, especially in the theory of comparative advantage. The standard Heckscher–Ohlin theory explains the pattern of commodity trade in terms of factor endowment proportions of different countries on the assumption that no factors of production are internationally mobile (for an excellent recapitulation and generalization of the doctrine, see Dixit and Woodland 1982). In reality, however, some factors are known to move across national borders, as exemplified by the international transfer of entrepreneurial resources and labor services (often through direct investment), as well as by international capital movements.
This chapter discusses the views of two-gap model and labor-income-floor (LIF) model in terms of capital, growth, and foreign exchange of developing countries. The labor-income-floor model is a hypothesis that stresses the resistance of powerful groups of the population to cuts in their per capita incomes. If production is very sensitive to prices and the balance of trade is fairly sensitive, the properties of the LIF model turn out to be close to those of the two-gap model. The properties of the two-gap model, which were initially analyzed in a linear programming framework, can also be interpreted in terms of fix price general equilibrium theory. The two-gap model was an intuitive understanding of the way the world works, which reflected an appreciation of both equilibrium and disequilibrium mechanisms. Linear programming provided a convenient mold in which to cast a theory that expressed this understanding, and it turns out that for the model studied, fix-price equilibrium theory does as well. But the understanding of reality will be satisfactory only when a theory is developed to account satisfactorily for both the equilibrium and disequilibrium aspects of the world.
This chapter reviews the role of equity in the international distribution of developmental aid. It presents a model in which the aid donors trade off an increase in the equality of incomes of recipient countries for an increase in the total incomes of these countries. This model is then estimated to obtain indices of absolute-inequality aversion and of relative inequality aversion, indices that are implicit in the distribution of aid. The model is developed to explore the donors' absolute and relative inequality aversion—and therefore the equity-productivity trade-off—implicit in the international distribution of aid. The approach has three strengths: one can explicitly proceed with an economic model that can distinguish between equity and efficiency; one can estimate relations based explicitly on the theoretical modeling; and the estimating forms are parsimonious in their data requirements. These estimates suggest there is significant donors' inequality aversion implicit in the international distribution of aid and that relative inequality aversion is more consistent with this experience than is absolute inequality aversion. In addition, these estimates are not only significant but also are large enough that international aid per capita is inversely associated with per capita incomes.
The three phrases in the title of this article are used frequently by practitioners of foreign aid. Although this terminology has wide currency, the professional economist is aware of ambiguities in each concept. The Round Table Conference on Capital Movements and Economic Development is an appropriate forum at which to air these difficulties and to attempt more precise definitions. The object of this paper is to take up these three concepts in turn and to see how far we can go in this direction. Furthermore, we will try to examine the operational content of these concepts, i.e. the extent to which ‘need’ for foreign resources, absorptive capacity and debt servicing capacity can be measured. Finally, we will attempt to elucidate significant relationships among these concepts and draw some conclusions regarding the rationale and strategy of foreign aid decisions.
This chapter discusses the economic growth and stages of the balance of payments. A well-known stylized fact in the theories of economic development and international trade is the notion that a country goes through a number of distinct balance of payments and balance of indebtedness stages in the process of growth. A typical classification defines four stages: (1) young and growing debtor, (2) mature debtor, (3) young creditor, and (4) mature creditor. A well-known model in the theory of international trade is the two-sector Heckscher–Ohlin model. The chapter describes the construction of a formal model of a growing economy with a Metzleric wealth-saving relationship to be used in analyzing the structure and development of both the balance of payments and its components, and the balance of indebtedness in the process of growth.
Reviews the major legislation and writing of the period, and concludes that the ideas behind these original development programmes largely mirror those held today. The people who framed the legislation and programmes understood that economic development was a long and complicated process that depended upon political, technical, and social, as well as economic factors. Their programmes concentrated primarily on small scale technical projects, which were the antithesis of the Marshall Plan.-from Authors
I. Introduction, 1. — II. The model, 3. — III. Full optimization and complete specialization, 8. — IV. Full optimization and
incomplete specialization, 10. — V. Optimal tax policy with free trade, 16. — VI. Optimal tariff policy with mobile capital,
23. — VII. Summary and conclusions, 31.
This book is a collective effort of the Economic Department of the International Bank for Reconstruction and Development. It is composed of three volumes. The first volume sketches an analytical framework. It views international capital flows and indebtedness as an aspect of the process of economic development. Volume two, a supplement to volume one, contains statistical data on international public indebtedness and on debt service payments. The third volume is a collection of essays that discuss economic growth and external debt. The book contains charts and tables which further illustrate the information presented in each volume.
I. Introduction, 65. — II. A model of long-run growth, 66. — III. Possible growth patterns, 68. — IV. Examples, 73. — V. Behavior
of interest and wage rates, 78. — VI. Extensions, 85. — VII. Qualifications, 91.
Since 1973, when the price of oil was raised very sharply, developing countries have incurred heavy debts. This paper looks at their ability to carry debt, first by examining the balance of payments and external borrowing of all developing countries that are not oil producers in general. It then focuses on a group of ten advanced developing countries (Argentina, Brazil, Chile, Colombia, Mexico, Peru, Phillipines, South Korea, Taiwan, and Thailand) that account for the bulk of the borrowing from private sources that has given rise to widely expressed concern. The analysis that follows leads to an optimistic conclusion about the capacity of the ten countries not only to carry their present debt but to expand it. It does not follow that decision makers in private financial markets will come to the same conclusion. Thus, attention is given also to supplementing private lending with resources supplied by the International Monetary Fund. Furthermore, questions are raised about what could go wrong--what international developments could make the outlook less rosy for the heavy debtors.