Policy, Research working paper series : numbers 1248-1280

This paper contains a numerical listing of working papers prepared by the Policy, Research Complex. Each citation contains a brief abstract, and the contactpoint for the paper.Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,ICT Policy and Strategies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT

Policy, Research working paper series : numbers 1281-1302

This paper contains a numerical listing of working papers prepared by the Poilicy, Research Complex. Each citation contains a brief abstract, and the contact point for the paper.Public Sector Economics&Finance,Municipal Financial Management,Environmental Economics&Policies,Banks&Banking Reform,Economic Theory&Research

The structure, regulation, and performance of pension funds in nine industrial countries

The author offers an overview of issues relating to the development of funded pension schemes in industrial countries. The analysis applies the economic theory of pension regulation to experience with the structure, regulation, and performance of funds in nine countries - Canada, Denmark, Germany, Japan, Netherlands, Sweden, Switzerland, the United Kingdom, and the United States - seeking to shed light on the finance of old age security in developing countries and the reform of pension funds in industrial countries. The main points of the analysis follow. Pension funds are either defined benefit or defined contribution. The individual bears more risk with defined contribution plans because the pension benefit depends on asset returns. Conceptually, defined benefit funds offer better employee retirement insurance. Private defined benefit pensions are generally available only through companies and typically include some restriction of labor mobility. Because of some shortcomings of fully or largely funded plans, especially for income redistribution, governments have chosen to maintain at least basic levels of pay-as-you-go social security. The scope of such unfunded social security schemes is the key determinant of the scale of private retirement savings. The extent to which pension funds are used as a vehicle for retirement saving depends on the regulatory regime. Tax advantages are the most important incentive, but a wide range of other regulatory choices also make pension funds more or less attractive to firms and employees. And some regulations, such as those affecting the portability of pensions, may have important consequences for economic efficiency. Though countries differ widely in their regulation of pension funds, some suggestions for good practice can still be made. Whether pension funds are a cost effective way of providing pensions depends on the real asset returns that can be attained, in relation to the growth of real wages. Ideally, there should be a gap of 2 to 3 percent between them. Portfolio distributions and fund management are the key determinants of returns to pension funds, subject to the returns available in the market. Prudent diversification in domestic and foreign markets and indexation of much of pension funds'portfolios both appear to be important. Pension funds affect capital markets in many ways. They influence market structure and demand for securities; stimulate innovation, allocative efficiency, and market development; and have a positive effect on overall saving. They may also have some deleterious effects, such as increases in volatility, short termism, and weakening of the control exerted by investors and creditors over firms. Prospects for pension funds in industrial countries vary with the maturity of existing funds and the generosity of social security benefits. In countries such as France, Germany, and Italy, growth in coming decades could be sizable. The key recommendations for countries that are just starting pension funds are for a mix of social security and private funds; for separate funding rather than book reserves; for defined benefit plans, subject to appropriate regulation; and for company-based pension funds.Pensions&Retirement Systems,Insurance&Risk Mitigation,Environmental Economics&Policies,Insurance Law,Banks&Banking Reform

Human and physical infrastructure : public investment and pricing policies in developing countries

Almost by definition, the basis for development is infrastructure - whether services for human infrastructure (health, education, nutrition) or physical infrastructure (transport, energy, water). Although the infrastructure sectors are diverse, what they have in common is that public policy has had a great deal to do with how these services are provided and financed in almost all countries. The author reviews the recent literature on two key aspects of that involvement: investment and pricing. While the quality of the econometric evidence varies, recent literature reinforces the view that human and physical infrastructure are critical for economic growth and the reduction of poverty. And the state is recognized as playing a key role in ensuring the efficient, equitable allocation of resources for infrastructure. Despite many sound theoretical reasons for such public involvement, however, recent studies have shown that it leaves much to be desired in efficiency and equity. One symptom is underinvestment in key subsectors that have high economic returns and that help the poor the most, such as primary education and rural health clinics, in relation to more expensive interventions, such as tertiary education and urban hospitals. Another common malaise is the poor use of scarce resources, leading to low quality (students learning little) and reliability (irregular power and water flows), poor maintenance (dilapilated roads), and inappropriate input use (too many school adminstrators or health workers and not enough books or drugs in producing education health outcomes). Just as market failures necessitate government intervention in the infrastructure sectors, so government failures should be considered in deciding the depth and extent of that intervention. The literature has made some advances in diagnosing these problems in poor countries and proposing solutions. But information gaps remain, particularly in developing robust methodologies for: 1) making intersectoral comparisons across the wide range of infrastructure services; 2) crafting more diverse policies about the public-private balance in infrastructure investment, depending on the nature of"public goods"characteristics for various types of infrastructure services, or even across activities for the same service (for example, power transmission versus distribution); and 3) taking issues of political economy into account, such as the vested interests of those with large financial interests in infrastructure. The author also highlights public pricing as a policy initiative that has recently gotten much attention.After briefly reviewing the basic concepts of pricing, he focuses on the literature about pricing reform. Most commonly, the public sector is the main provider of infrastructure services, usually free or at subsidized prices. But the recent literature has aired a rethinking of the balance between public and private financing of infrastructure. The debate in this area is often heated. Health and education are traditionally provided free and some recent literature argues for positive prices, at least for higher tiers of service. The principle of public pricing has been more widely accepted in transport, energy, and to a lesser extent water, but often the levels are too low and do not provide the appropriate incentives for efficient and equitable use.Environmental Economics&Policies,Banks&Banking Reform,Health Monitoring&Evaluation,Public Sector Economics&Finance,Economic Theory&Research

Unstable inflation and seignorage revenues in Latin America : How many times can the government fool people?

In the past 20 years, high and extremely volatile inflation rates in Latin America have generally been associated with unstable monetary policies and the (temporary) use of inflationary revenues to finance fiscal deficits. There seems to be a consensus that high inflation is bad for economic development and growth, so it is unclear why governments have adopted unstable monetary policies they have known to be unsustainable in the long run. This paper argues that Latin America governments have followed unstable monetary policies principally to maximize their inflationary revenues. Explanations based on irrationality or on institutional and political shock are only partially convincing. A government maximizes inflationary revenues by adopting temporary unstable monetary policies because people tend to revise their expectations (slower) faster in periods of (dec-) accelerating inflation as the cost of collecting information (rises) falls compared with other welfare losses. When the rate of inflation is relatively high, a restrictive monetary policy is implemented so people can reconstitute monetary balances. When the inflation rate is low, an expansive monetary policy is adopted to confiscate existing real balances. Governments may appear for some time to succeed in fooling people, by adopting temporary reforms and restoring confidence, but their reputation is damaged when they repeatedly do so. Utlimately, private agents react so quickly and with such sophistication that even small fiscal gaps produce precipitous declines in money demand. Over time, private agents learn to anticipate the relationship between unstable inflation and monetary policy and progressively reduce their real monetary balance. In the end, the optimal inflation rate tends toward its steady-state value, as Friedman found 20 years ago. The author develops a small dynamic model to stylize these facts and applies it to Argentina.Economic Theory&Research,Environmental Economics&Policies,Public Sector Economics&Finance,Inflation,Banks&Banking Reform

Conflict and cooperation in managing international water resources

Water is often not confined within territorial boundaries so conflicts may arise about shared water resources. When such boundaries lie within a federal state, conflicts may be peacefully and efficiently resolved under law, and if the state fail to reach an agreement, the federal government may impose one. Similar international conflicts are more difficult to resolve because no third party has the authority to enforce an agreement among national states, let alone impose one. Such international agreements must be self-enforcing. Efficient outcomes may emerge, but are not guaranteed. International law may emphasize the doctrine of"equitable utilization"of water resources, but there is no clear definition of what this implies. In the Colorado River case, the polluter (the United States) agreed to pay for all the costs of providing the downstream neighbor (Mexico) with clean water. In the Rhine River case, the downstream country (the Netherlands) agreed to pay part - but not all - of the costs of cleanup. In Colombia River Treaty case, both parties agreed to incur construction costs on their side of the border and share evenly the gross (not the net) benefit. This division may well have yielded a smaller net benefit to the United States than unilateral development would have, but the United States ratified the treaty. Negotiated outcomes need not to maximize net benefits for all countries. To some extent, inefficiencies can be traced to the desire to nationalize resources rather than to gain from cooperative development. The Indus Waters Treaty, for example, divided the Indus and its tributaries between India and Pakistan, rather than exploit joint use and development of the basin. Both efficiency and equity should be considered in agreements for managing international water resources. The 1959 Nile Waters Agreement between Egypt and Sudan did not reserve water for upstream riparians - notably, Ethiopia. A basinwide approach could make use of Nile waters more efficient and benefit all three riparians: Egypt, Ethiopia, and Sudan. Construction of dams in Ethiopia would give that country irrigation, would eliminate the annual Nile flood, and would increase the total water available to Ethiopia and Sudan. In negotiations over use of the Nile, the net benefits of basinwide management, and the ways these three riparians could share equitably in gains, should be demonstrated. In the 1980s, Egypt did not run short of water because Sudan did not take its full allocation and because Ethiopia did not withdraw any water from the basin. Increased water demand will inevitably create tension between the states.Water Supply and Sanitation Governance and Institutions,Town Water Supply and Sanitation,Water Law,Water Resources Law,Water and Industry

Trade, aid, and investment in sub-Saharan Africa

Trade, aid, and investment are more inextricably linked in sub-Saharan Africa than anywhere else in the world, contends the author, whose survey of sub-Saharan Africa's prospects for trade, aid, and investment lead to the following broad conclusions. Developing an outward orientation, improving competitiveness, and recapturing its lost share in world markets offers a higher potential payoff than any other strategy for growth and sustainable development in sub-Saharan countries. If the region had maintained internal competitiveness and retained its 1970 share of world exports, successfully defending against new entrants, its 1990 level of exports would have been at least $50 billion higher than actual earnings - assuming that the composition of sub-Saharan exports would have changed to reflect changes in world trade. If the region continued to rely on exports of commodity products alone, the relative gains would have been much smaller. In the last decade, sub-Saharan Africa has become increasingly dependent on external resource flows for investment, imports, and development. But there is little chance of sustained high levels of aid because of budget constraints in the OECD countries, competing demands from new claimants, and the new conditionalities imposed by bilateral donors (for democratization, reduced military spending, and improved human rights). Most African countries must mobilize domestic resources and increase domestic savings rates by reducing public sector dissavings, the financial losses of public enterprises, and other nonproductive spending. Certain low-middle-income African countries can attract a significant amount of foreign direct investment, but most resource-poor countries - especially in the Sahel and the Horn of Africa - will continue to depend on foreign aid. There must be a more durable solution to Africa's debt problem. Only half of the debt service due can be paid, suggesting the urgent need to reduce the debt stock and thus debt servicing obligations, in alignment with debt servicing capacity. Many current proposals under discussion, if implemented, can bring considerable relief. Several sub-Saharan countries can attractsignificant investment because of their location, low labor costs, natural resource endowments, and the size of their domestic market. But productive investment levels in most African countries have remained depressed, and even where economic policy reform has been implemented, the investor response - both domestic and foreign - has been poor. Uncertainty, fears of policy reversals, lack of credibility and continuity, the contagion effect, and more attractive opportunities elsewhere reinforce such structural weaknesses in sub-Saharan Africa as poor infrastructure, inefficient services, and a weak human resource base to deprive Africa of new investment.Trade Policy,Achieving Shared Growth,Economic Theory&Research,Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT

Eastern Europe's experience with banking reform : is there a role for banks in the transition?

Are there lessons to be learned about how Eastern European countries have dealt with problems in their banking systems? What role have these countries assigned to banks during the transition? How have they used banks in dealing with the enterprise problem? The author addresses these questions by analyzing experience in Bulgaria, Hungary, Poland, Romania, and the former Czech and Slovak Federal Republic. Most of these countries have made substantial progress in restructuring their banking systems, but few have used their banking systems to improve the allocation of credit and hence stimulate the supply response. The author finds the following. The problem is not whether banks hold nonperforming loans but how banks can avoid accumulating more nonperforming loans. The underlying problem is how to close loss-making and nonviable enterprises. The countries that have encouraged the establishment of new private banks, that have introduced regulation and supervision, and that have tried to make banks more competitive have been more successful at improving the allocation of credit and achieving more control over loss-making enterprises. Banks must focus on assessing risk - and for this, capital, private ownership, and adequate regulation are crucial. How quickly banks achieve independence in credit decisions depends on how fast new governance structures can be introduced. In this, the five countries have been less successful. The objectives of bank recapitulation should be to prevent banks from accumulating more nonperforming loans (that is, dealing with the enterprise problem) and to give them the governance structure that would prevent them from incurring new nonperforming loans. This requires introducing a system of risk and reward - by making banks comply with capital adequacy requirements, by privatizing a critical number of banks, and by introducing strong regulation and supervision. Government should see that banks provide efficient payment systems, the basis for trust in banking systems. Introducing adequate regulation and supervision has been difficult as it requires knowing what the banks'role should be. Evidence strongly supports the need to recapitalize and privatize a critical number of banks. Authorities cannot rely on banks to exert control on enterprises early in the transition. In the early stages, control over state-owned enterprises should be exercised by a semipublic institution.Banks&Banking Reform,Financial Intermediation,Financial Crisis Management&Restructuring,Municipal Financial Management,Banking Law

The public finance of infrastructure : issues and options

Using economic principles, the author provides criteria for financing infrastructure services where consumption-related user charges can be levied effectively. In light of the suggested criteria, the author examines the experience of developing countries in financing publicly provided infrastructure services in transport (road), water, telecommunications, and power. In developing countries, most infrastructure is provided by the public sector, although the private sector has become increasingly involved. Because it is difficult to raise funds through general taxes, self financing of these services remains a desirable second-best policy, one that almost all developing countries endorse. But experience suggests that, except in telecommunications, full cost recovery is more the exception than the rule. Financing remains inadequate. The political economy of tariff setting is an important element in low improperly designed user charges, infrequent adjustments for inflation, and poor enforcement. Such sectors as water, power, and transportation drains funds from the treasury, although their impact varies from sector to sector. When it is difficult to get budget transfers to materialize - especially during a fiscal crisis - there is often a reduction in nonwage operations and maintenance expenditures. As a result, services deteriorate. The private provision of infrastructure services is often suggested as an alternative. The private provision of services can certainly reduce the public sector's financing requirement. For infrastructure services for which technological advances have made competition possible, the market system could ensure efficient private provision of services, which could be a relief to the public sector. But for services that require a single provider to achieve economies of scale and similar benefits, the private provision of services will work only if an appropriate rate of return is assured - and only if user charges cover costs.Urban Economics,Public Sector Economics&Finance,Environmental Economics&Policies,Town Water Supply and Sanitation,Banks&Banking Reform

Making a market : mass privatization in the Czech and Slovak Republics

The author assesses the Czechoslovak mass privatization program for speed, equity, and corporate governance. The program transferred claims on assets in 1,491 enterprises - assets worth about $10.7 billion - to the 8.5 million citizens who participated in the scheme. The entire cycle of project preparation, public information, and nationwide simultaneous bidding took 14 months. This was equivalent to privatizing more than three medium-scale and large-scale enterprises, on average, per day. Equity objectives were achieved by transferring equal claims (equivalent to about$1,250 per person) to all participants and by putting in place a transparent and decentralized process. The government's role was simple to provide a framework and a set of rules for potential firms, managers, and shareholders to find each other. The scheme's design - based on simultaneous sequential bidding rounds - worked to put information about enterprise values into the public domain by allowing increasingly informed bidders to interact. The structure of ownership that emerged will have very different implications for corporate governance. Enterprises in the Czech Republic, and those that sold for high prices in the bidding rounds, are characterized by a greater concentration of shareholdings. Those in the Slovak Republic, and those that sold for lower prices, have more diffuse ownership structures. The mass privatization scheme served to quickly differentiate the enterprises with favorable prospects from those with unfavorable prospects under current conditions. But enterprises that could have survived in some form, if they had been restructured before privatization, or enterprises that could have been viable but lacked effective governance, were sacrificed for the sake of speed and decentralization.Banks&Banking Reform,International Terrorism&Counterterrorism,Municipal Financial Management,Markets and Market Access,Economic Theory&Research