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161. A Policymakers' Guide to Dutch Disease

Author:
Owen Barder
Publication Date:
07-2006
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
It is sometimes claimed that an increase in aid might cause Dutch Disease—that is, an appreciation of the real exchange rate which can slow the growth of a country's exports— and that aid increases might thereby harm a country's long-term growth prospects. This essay argues that it is unlikely that a long-term, sustained and predictable increase in aid would, through the impact on the real exchange rate, do more harm than good, for three reasons. First, there is not necessarily an adverse impact on exports from Dutch Disease, and any impact on economic growth may be small. Second, aid spent in part on improving the supply side—investments in infrastructure, education, government institutions and health—result in productivity benefits for the whole economy, which can offset any loss of competitiveness from the Dutch Disease effect. Third, the welfare of a nation's citizens depends on their consumption and investment, not just output. Even on pessimistic assumptions, the additional consumption and investment which the aid finances is larger than any likely adverse impact on output. However, the macroeconomic effects of aid can cause substantial harm if the aid is not sustained until its benefits are realized. The costs of a temporary loss of competitiveness might well exceed the benefits of the short-term increase in aid. To avoid doing harm, aid should be sustained and predictable, and used in part to promote economic growth. This maximizes the chances that the long-term productivity and growth benefits will offset the adverse effects—which may be small if they exist at all—that big aid surges may pose as a result of Dutch Disease.
Topic:
Economics, Health, and Humanitarian Aid
Political Geography:
Europe

162. Will Debt Relief Make a Difference? Impact and Expectations of the Multilateral Debt Relief Initiative

Author:
Todd Moss
Publication Date:
05-2006
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
The Multilateral Debt Relief Initiative (MDRI) is the latest phase of debt reduction for poor countries from the World Bank, the IMF, and the African Development Bank. The MDRI, which will come close to full debt reduction for at least 19 (and perhaps as many as 40) qualifying countries, is being presented as a momentous leap forward in the battle against global poverty. However, the analysis in this paper suggests that the actual gains may be more modest and elusive. This is not because, as some anti-debt campaigners fear, that the initiative is a mere accounting trick. Rather, the limited short-term financial impact of the MDRI on affected countries is because the debt service obligations being relived were themselves relatively insignificant. For example, in 2004 the average African country in the program paid $19 million in debt service to the World Bank, but received 10 times that amount in new Bank credit and more than 50 times as much in total aid. Just as importantly, finances are rarely the binding constraint on poverty and other development outcomes. This is not to say that the MDRI is futile. Indeed the impact could be considerable over the long-term, especially on the ability of creditors to be more selective in the future. But most of the impact of the MDRI will be long-term and difficult to measure. As such, expectations of the effect on indebted countries and development indicators should be kept modest and time horizons long.
Topic:
Debt, Development, Economics, and International Organization
Political Geography:
Africa

163. The U.S. External Deficit and the Developing Countries

Author:
William R. Cline
Publication Date:
03-2006
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
In the absence of US fiscal adjustment and a further correction of the dollar, the current account deficit is headed to $1.3 trillion by 2010 (8 to 8.5 percent of GDP) and net US foreign liabilities to over $8 trillion (50 percent of GDP). According to CGD/IIE Senior Fellow William R. Cline, the rising trade deficit and associated borrowing from abroad are now financing a decline in personal saving and a rise in the government deficit. This imbalance will increasingly put the US economy—and the developing countries—at risk. This working paper focuses on the impact that the US external deficit and a possible “hard landing” for the US and world economies will have on developing countries. Cline finds that these countries are at risk since they have relied heavily on a continuing expansion of trade surpluses with the United States as a source of demand. Developing countries with high borrowing abroad are also doubly sensitive to a spike in world interest rates—once directly from higher US interest rates, and once indirectly through higher risk spreads—that might be associated with a hard landing. This Working Paper is based on The United States as a Debtor Nation, a book published in 2005 by the Center for Global Development and the Institute for International Economics.
Topic:
Development, Economics, and Third World
Political Geography:
United States

164. The Economics of Young Democracies: Policies and Performance

Author:
Nathan Converse and Ethan Kapstein
Publication Date:
03-2006
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
Since the “third wave” of democratization began in 1974, nearly 100 states have adopted democratic forms of government, including, of course, most of the former Soviet bloc nations. Policy-makers in the west have expressed the hope that this democratic wave will extend even further, to the Middle East and onward to China. But the durability of this new democratic age remains an open question. By some accounts, at least half of the world's young democracies—often referred to in the academic literature as being “unconsolidated” or “fragile”—are still struggling to develop their political institutions, and several have reverted back to authoritarian rule. Among the countries in the early stages of democratic institution building are states vital to U.S. national security interests, including Afghanistan and Iraq.
Topic:
Democratization, Development, Economics, and Government
Political Geography:
Afghanistan, China, and Iraq

165. Back to the Future for African Infrastructure? Why State-Ownership Is No More Promising the Second Time Around

Author:
John Nellis
Publication Date:
02-2006
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
Too many African state-owned enterprises (SOEs), particularly those in infrastructure sectors, have a long history of poor performance. African governments and donors labored through the 1970s and 1980s to improve SOE performance through “commercialization”——i.e., methods short of ownership change. These generally failed, giving rise, in the 1990s, to much more heavy reliance on private sector participation and ownership. This approach produced some successes, but Africa's private participation in infrastructure (PPI) initiatives have been comparatively few and weak. A number of those that have been launched have run into problems, to the point where both investor and African government interest in the approach has waned in the last few years. The reform is not popular——surveys of public opinion in 15 African countries reveal that only a third of respondents prefer private to state-owned firms. Nonetheless, African states (and their supporters) should not jettison the PPI approach. Rather, they should acknowledge its limitations, and recognize the large scope and moderate pace of the preparatory measures required both to improve their investment climates and to make PPI work effectively.
Topic:
Development, Economics, and Non-Governmental Organization
Political Geography:
Africa

166. Tax policies to promote private charitable giving in DAC countries

Author:
David Roodman and Scott Standley
Publication Date:
02-2006
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
Researchers have written hundreds of papers on the causes and consequences of official foreign aid, while paying almost no attention to private overseas giving, by individuals, universities, foundations, and corporations. Yet private giving is significant—some $15.5 billion/year, compared to more than $60 billion/year in public giving—and is in no small part an outcome of public policy. In most rich countries, tax deductions and credits lower the “price” of charity to donors. And governments with low tax revenue/GDP ratios leave more money in private pockets for private charity. To correct the near-complete lack of information on this de facto aid policy, we survey officials of 21 donor nations on the use of tax incentives to promote private charity. From the results, we develop an index of the overall incentive for private charity, expressed as a percentage increase over the hypothetical giving level absent incentives. France's tax code creates the largest price incentive while those of Austria, Finland, and Sweden offer none. Factoring in the income effect of the tax ratio, Australia, Ireland, Germany, and the United States move to the top, with combined price and income effects sufficient to double private giving. As a result, tax policy appears to have nearly doubled private overseas giving from donor countries in 2003, from a counterfactual $8.0 billion. Two-thirds of the $7.5 billion increase occurred in the United States. Of that, nearly 40% appears to be U.S. charity to Israel. According to 21-country scatter plots, countries with lower church attendance and more faith in the national legislature have lower taxes (stronger income effect), but average levels of targeted tax incentives. Income (GDP/capita) does correlate with private overseas aid/capita, but also with public aid/capita, so that the two aid flows are complementary in magnitude.
Topic:
Debt, Economics, Humanitarian Aid, and International Trade and Finance
Political Geography:
United States, Finland, Germany, Australia, Sweden, Ireland, and Austria

167. Stormy Days on an Open Field: Asymmetries in the Global Economy

Author:
Nancy Birdsall
Publication Date:
02-2006
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
Openness is not necessarily good for the poor. Reducing trade protection has not brought growth to today's poorest countries, and open capital markets have not been good for the poorest households in emerging market economies. In this paper I present evidence on these two points. First, countries highly dependent on primary exports two decades ago, despite their substantial engagement in trade and a marked decline in their tariff rates in the 1990s, have failed to grow. Second, within high-debt emerging market economies the financial crises of the last decade, whether induced by domestic policy problems or global contagion, have been especially costly for the poor (in welfare terms if not in terms of absolute income losses). I discuss the asymmetries in the global economy that help explain why countries and people cannot always compete on equal terms on the “level playing field” of the global economy.
Topic:
Economics, Globalization, International Trade and Finance, Poverty, and Financial Crisis

168. The Costs and Benefits of Front-loading and Predictability of Immunization

Author:
Owen Barder and Ethan Yeh
Publication Date:
02-2006
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
How can the international community save more children's lives faster and more effectively in the 21st century? This Working Paper analyzes the extent to which “frontloading” and predictable vaccine funding, as proposed by the International Finance Facility for Immunization (IFFIm), is more effective in impacting vaccine coverage than spending vaccine funds equally throughout the lives of projects. The IFFIm is an initiative of the Global Alliance for Vaccines and Immunization (GAVI), and supported by the governments of the United Kingdom, France, Sweden, Italy, Spain and Norway. An initial IFFIm investment of $4 billion is expected to prevent 5 million child deaths by 2015, and more than 5 million future adult deaths. Using a stylized model, the authors quantify the positive and negative effects of predictable vaccine funds and frontloading, and finds IFFIm's approach can increase the impact of vaccine coverage by 22%. This is because stable and long-term financing allows vaccine manufacturers and countries to plan for long periods of time, knowing that resources will be available. Front-loading helps to reduce the spread of disease and to immunize large groups of people faster.
Topic:
Economics, Health, Human Welfare, and International Cooperation
Political Geography:
United Kingdom, Norway, France, Spain, Italy, and Sweden

169. How Multinational Investors Evade Developed Country Laws

Author:
Theodore H. Moran
Publication Date:
02-2006
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
How effective are G-8 and OECD efforts to combat bribery and corrupt payments when multinational companies bid on concessions in the developing world? Have the rich countries – and the United States, in particular – done what is necessary to restrain multinational investors from paying off daughters of Presidents and cronies of Ministers to secure favors for their activities?
Topic:
International Relations, Corruption, and Economics
Political Geography:
United States

170. A Stability and Social Investment Facility for High Debt Countries

Author:
Nancy Birdsall and Kemal Derviş
Publication Date:
01-2006
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
A number of high-debt emerging-market economies face structural, long-term debt problems that tend to keep their growth rates low, that impart an unequalizing bias to the growth process, that severely constrain social spending and human development, and that make them vulnerable to capital flow reversals. Unless the nature and pace of growth can be improved in these lower-middle income countries, the Millennium Development Goals (MDGs) are unlikely to be met either in many of these countries, or globally. These high-debt emerging-market economies face an impossible choice between draconian and never-ending fiscal austerity, or crisis and a “debt event.” Both “bitter pills" impose high social and economic costs.
Topic:
Civil Society, Debt, Economics, and International Organization