Development Economics

This paper compiles alternative estimates of underground economies in twenty five transition countries during the transition decade and finds a disturbing lack of convergence between them, calling into question the reliability of GDP figures (which in varying degrees now include non-transparent imputations for the “non-observed economy”) as well as the macro model estimates of the unrecorded economy. A corollary of this finding is that substantive results from many studies examining the consequences of the radical transition from planned to market economies must be viewed with considerable skepticism. Underground (unobserved, non-observed, unrecorded) economic activities play a major role in transition economies. Evaluations of the success and failure of the transition experience should be based on estimates of total economic activity (TEA) namely, recorded plus unrecorded economic activity. We examine the conceptual and empirical relationships between new National Income and Product Accounts (NIPA) methods for obtaining “exhaustive” measures of total economic activity and the two most popular macro-model approaches (electric consumption and currency ratio models) for estimating the size and growth of the unrecorded sector. Our updated empirical results detailing the size and trajectory of unrecorded activities obtained from different estimation methods reveal a disturbing lack of convergence. Until these important differences are resolved, investigations of the relationship between economic reforms and economic outcomes during the transition decade must be viewed with considerable caution. Given the shortcomings of conventional macro model estimates of the underground economy and the lack of transparency and consistency of NOE estimates, it is high time that the profession acknowledges how little we really know about underground economies and their causes and consequences.

This paper examines the desirability and feasibility of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction (APT) tax. In its simplest form, the APT tax consists of a flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking/ payments system. The APT tax introduces progressivity through the tax base since the volume of final payments includes exchanges of titles to property and is therefore more highly skewed than the conventional income or consumption tax base. The wealthy carry out a disproportionate share of total transactions and therefore bear a disproportionate burden of the tax despite its flat rate structure. The automated recording of all APT tax payments by firms and individuals creates a degree of transparency and perceived fairness that induces greater tax compliance. Also, the tax has lower administrative and compliance cost. Like all taxes, the APT tax creates new distortions whose costs must be weighted against the benefits obtained by replacing the current tax system

In this paper we evaluate the impact of microcredit on indicators of women's empowerment in the urban slums of the Lahore district of Pakistan. A household level instrument that contains information on different dimensions of household decisions: child related, health, social mobility, economic and major household purchase decisions was specifically designed and implemented to explore the link between microcredit and women's empowerment. After controlling for endogeneity in our estimation by using proxies for initial levels of empowerment, matching the controls and treated units on observable characteristics and finally instrumenting for the treatment, this paper finds no difference between the level of empowerment of treated and control units. Participation in the microcredit program is found to be insignificant in explaining all the outcome indicators of empowerment for the sampled households.

This article begins by examining the overall impact of NAFTA on the U.S. economy and comparing this impact with what had been predicted in the early 1990s. We next examine the impact of NAFTA on the economy of Minnesota, focusing on the pattern of exports and production. We compare data on the performance of Minnesota exports with corresponding data for our neighboring state, Wisconsin, which has expanded its exports to Mexico far more than Minnesota has done. We ask the questions, "Is Wisconsin's greater success in expanding exports to Mexico due to a less Eurocentric attitude on the part of large firms that were already established exporters?" or "Was this greater success due to a greater willingness on the part small and medium-sized firms in Wisconsin to enter a new export market?" We find significant evidence for affirmative answers to both questions, especially the second, and we hypothesize that this greater willingness of small and medium-sized firms in Wisconsin to begin to export to Mexico may have been due to more aggressive export promotion policies on the part of the Wisconsin state government.

We examine the bilateral trade patterns of countries involved in significant trade liberalizations using detailed data on the value of trade flows by commodity. We find a striking relationship between a good's pre-liberalization share in trade and its growth subsequent to liberalization. The goods that were traded the least before the liberalization account for a disproportionate share in trade following the reduction of trade barriers. The set of goods that accounted for only ten percent of trade before the liberalization may account for as much as 40 percent of trade following the liberalization. This new finding cannot be accounted for by the standard models of trade, which rely on increases in previously traded goods to produce trade growth. We modify the standard Dornbusch-Fischer-Samuelson model of Ricardian trade to provide a model capable of delivering these new facts. Our specification improves on previous Ricardian models by providing a technology process that can be calibrated using data on intra-industry trade. ________________________________________________________________________ *© 2002, Timothy J. Kehoe and Kim J. Ruhl. We would like to thank

Theories of federal grants to states and localities suggest that these grants have a stimulative effect on spending, causing recipient governments to expand and contract programs along with changes in the grants. However, policymakers may respond differently to grant decreases than to grant increases because they face political and bureaucratic pressures to expand programs. These asymmetric reactions may depend on specific political structures. Pooled time-series regressions of data from the Aid to Families with Dependent Children program across 46 states from 1965 to 1994 demonstrate state government responses to grant changes. Bureaucratic pressures and proposals lead slates to expand their welfare benefits upon increases in federal grants, but not to contract them upon decreases in federal grants. With regard to the 1996 welfare reforms, this study indicates that the switch to block grants will lead to little or no state reduction in welfare payments.

This paper develops a new instrumental-variable (IV) approach to estimate the effects of di¤erent exchange rate regimes on bilateral outcomes. The basic idea is that the characteristics of the exchange rate regime between two countries (exchange rate variability, …xed or ‡oat, autonomous or common currencies) are partially related to the independent decisions of these countries to peg -explicitly or de facto-to a third currency, notably that of a main anchor. Our approach is to use this component of the exchange rate regime as an IV in regressions of bilateral outcomes. We illustrate the methodology with one speci…c application: the economic e¤ects of currency unions. The likelihood that two countries independently adopt the currency of the same anchor country is used as an instrument for whether they share or not a common currency. Three …ndings stand out. First, sharing a common currency enhances trade, supporting previous work by Rose [2000]. Second, a common currency increases price co-movements; this …nding is consistent with the observation that a large part of the variation in real exchange rates is caused by ‡uctuations in nominal exchange rates. Finally, a common currency decreases the co-movement of shocks to real GDP. This is consistent with the view that currency unions lead to greater specialization.

We revisit Western Europe's record with labor-productivity convergence and tentatively extrapolate its implications for the future path of Eastern Europe. The poorer Western European countries caught up with the richer ones through both higher rates of physical capital accumulation and greater total factor productivity (TFP) gains. These (relatively) high rates of capital accumulation and TFP growth reflect convergence along two margins. One margin (between industries) is a massive reallocation of labor from agriculture to manufacturing and services, which have higher capital intensity and use resources more efficiently. The other margin (within industries) reflects capital deepening and technology catch-up at the industry level. In Eastern Europe the employment share of agriculture is typically quite large, and agriculture is particularly unproductive. Thus, there are potential gains from sectoral reallocation. However, quantitatively, the betweenindustry component of the East's income gap is quite small. Therefore, the East seems to have only one real margin to exploit: the within-industry one. Coupled with the fact that within-industry productivity gaps are enormous, this suggests that convergence will take a long time. On the positive side, however, Eastern Europe already has levels of human capital similar to those of Western Europe. This is good news because human capital gaps have proved very persistent in Western Europe's experience. Hence, Eastern Europe does start out without the handicap that is harder to overcome.

Although economists have long been aware of Jensen's inequality, many econometric applications have neglected an important implication of it: under heteroskedasticity, the parameters of log-linearized models estimated by OLS lead to biased estimates of the true elasticities. We explain why this problem arises and propose an appropriate estimator. Our criticism of conventional practices and the proposed solution extend to a broad range of applications where loglinearized equations are estimated. We develop the argument using one particular illustration, the gravity equation for trade. We …nd signi…cant di¤erences between estimates obtained with the proposed estimator and those obtained with the traditional method.

This paper proposes a simple framework to study incentives and matching in the market for teachers. The framework is used to investigate the consequences of introducing incentive pay for teachers when contracts have both a matching and an incentive effect. Our analysis suggests that school competition and teacher incentives cannot be studied in isolation from one another. (JEL: D73, I20, J45, L31)

There has been a dramatic change in the division of responsibility between the state and the private sector for the delivery of public goods and services in recent years with an increasing trend toward contracting out to the private sector and "public-private partnerships." This paper analyzes how ownership matters in public good provision. We show that if contracts are incomplete then the ownership of a public good should lie with a party that values the bene ts generated by it relatively more. This is true regardless of whether this party is also the key investor, or other aspects of the technology.

Financial interlinkage, in the form of cross-holding of equity and debt between rms, characterizes business groups in many countries. We suggest that such nancial interlinkage can be viewed as a way to solve credit rationing caused by asymmetric information. If rms possess better information about each other than a bank, then business groups can be a mechanism to induce rms to sort on the basis of this information. Banks can offer a menu of contracts that vary in the extent of nancial interlinkage to induce rms to self-select on the basis of the equilibrium composition of the business groups they can form.

We analyze optimal contract choice in agriculture when there is joint moral hazard on the part of the farmer in the supply of effort and the riskiness of the technique of cultivation. In the presence of limited liability, high-powered incentive contracts such as fixed rental contracts will induce the farmer to adopt techniques of cultivation that are too risky from the point of view of the landlord. On the other hand, low-powered incentive contracts such as fixed wage contracts will induce the farmer to supply too little effort. We show that sharecropping contracts emerge as a natural solution to balance these two conflicting considerations. q M. Ghatak . 0304-3878r00r$ -see front matter q 2000 Elsevier Science B.V. All rights reserved.

Institutions that rely on joint liability to facilitate lending to the poor have a long history and are now a common feature of many developing countries. Economists have proposed several theories of joint-liability lending that stress various aspects of its informational and enforcement advantages over other forms of lending. This paper analyzes how joint-liability lending promotes screening, monitoring, state verification and enforcement of repayment. An empirical section draws on case studies to highlight how joint liability works in practice. q

This paper analyzes how group lending programs use joint liability to utilize local information that borrowers have about each other's projects through self-selection of group members in the group formation stage. These schemes are shown to lead to positive assortative matching in group formation. Faced with the same contract, this makes the effective cost of borrowing lower to safer borrowers: because they have safer partners, conditional on success their expected dues to the lender are lower than that of riskier borrowers. The resulting improvement in the pool of borrowers is shown to increase repayment rates and welfare. q

time diaries and expenditure data for the United States for 1985 and 2003, I examine how income and time prices affect time and goods inputs into eating. Both inputs increase with income, and higher time prices reduce time inputs. Between 1985 and 2003 the goods intensity of eating increased, especially lower in the income distribution, and average time inputs dropped, particularly time spent shopping, preparing, and cleaning up after meals. The results are consistent with relatively difficult goods-time substitution in eating that becomes more difficult as household production expands.

This paper analyzes firm panel data to examine how export demand shocks associated with the 1997 Asian financial crisis affected Chinese exporters. We construct firm-specific exchange rate shocks based on the pre-crisis destinations of firms' exports. Because the shocks were unanticipated and large in magnitude, they are a plausible instrument for identifying the impact of exporting on firm productivity and other aspects of firm performance. We find that firms whose export destinations experience greater currency depreciation have slower growth in exports and that export growth increases firm productivity as well as other measures of firm performance. Consistent with the "learning-by-exporting" hypothesis, the productivity impact of export growth is greater when firms export to more developed countries. Southern California, the World Bank, and the NBER conference "Firms and the Evolving Structure of Global Economic Activity".

In spite of India's rapid economic growth, there has been a sustained decline in per capita calorie consumption during the last twenty-five years. While the decline has been largest among better-off households, it has taken place throughout the range of household per capita total expenditure. For both adults and children, anthropometric indicators of nutritional status in India are among the worst in the world. While these indicators have shown improvement over time, the rate of progress is slow relative to what might be expected based on international and historical experience. This paper presents the basic facts about growth, poverty and nutrition in India, it points to a number of puzzles, and it sketches a preliminary story that is consistent with the evidence. The reduction in calorie consumption cannot be attributed to declining real incomes, nor to any increase in the relative price of food. Our leading hypothesis, on which much work remains to be done, is that, as real incomes and wages have increased, leading to some nutritional improvement, there has been an offsetting reduction in calorie requirements due to declining levels of physical activity and possibly also to various improvements in the health environment. If correct, this analysis does not imply that Indians are currently adequately nourished; nothing could be further from the truth. Calorie intake has serious limitations as a nutritional intake; while calories are extremely important, there are too many sources of variation in calorie requirements for standard, invariant, calorie-norms to be usefully applied to large sections of the population. We conclude with a plea for better, and more regular, monitoring of nutritional status in India.

This is an important book for many reasons. It gives us a perspective of the constraints under which our public sector works -multiple constraints in operations but being evaluated on market-based parameters. It tells us a story of what is possible within these constraints. It tells us about the human side of banking and brings something not very fashionable in banking circlesbranding and marketing. It tells us how banking could grow, even when banking is not the focus. What the book does not tell us (and this is a significant void) is the objective evaluation of Khandelwal's possible failures. Yes, he does narrate the constraints, but surely there must have been some of his plans that just did not work. With some introspection, he would have realized the existence of some pitfalls. That is missing in the book. It possibly needs more distance and time and a different style to bring it in.

This is a more rigorous and detailed version of a paper written for a Journal of Economic Perspectives symposium on consumption and saving behavior, for publication in the summer of 2001. The JEP version of the paper is intended for a general audience; the version here would be more appropriate for the consumption segment of a first-year graduate course, or more generally as an introduction to modern consumption theory for someone interested in beginning to pursue research in this area. To help new researchers get up to speed, the Mathematica programs that produced all of the theoretical results in this paper are available on the author's website, www.econ.jhu.edu/people/carroll.

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

We develop a novel system of re-classifying historical exchange rate regimes. One difference between our study and previous classification efforts is that we employ an extensive data base on market-determined parallel exchange rates. Our "natural" classification algorithm leads to a stark reassessment of the post-war history of exchange rate arrangements. When the official categorization is a form of peg, roughly half the time our classification reveals the true underlying monetary regime to be something radically different, often a variant of a float. Conversely, when official classification is floating, our scheme routinely suggests that the reality was a form of de facto peg. Our new classification scheme points to a complete rethinking of economic performance under alternative exchange rate regimes. Indeed, the breakup of Bretton Woods had a far less dramatic impact on most exchange rate regimes than is popularly believed. Also, contrary to an influential empirical literature, our evidence suggests that exchange rate arraignments may be quite important for growth, trade and inflation. Our newly compiled monthly data set on market-determined exchange rates goes back to 1946 for 153 countries.

This paper examines the implications of Stoner-Weiss' ideas about governance in Russia's regions for political party party development and presents some statistical evidence that, in fact, a positive relationship exists between between socio-economic indicators that may result from good governance on the one hand, and weak political parties on the other.  It also suggest the use of a new statistical measure of party volatility, Coefficient of Variance, which resolves some issues of traditional volatility measures in extreme multiparty systems, like Russia.

Data on the individual export destinations of French …rms shed light on the nature of entry barriers to national markets. While …rms are very heterogeneous with respect to where they sell and how much they sell, the data reveal some striking regularities: (1) Looking across destinations, the relationship between market size, French market share, and the number of French …rms selling there is very tight, with the number of participants rising almost in proportion with respect to market share and with an elasticity of about two-thirds with respect to market size.

Using detailed survey data from Uganda, this paper examines whether co¤ee producers sell to itinerant traders or directly to markets, where they can get a higher price but must incur a transport cost. We …nd that selling to the market is more likely when the quantity sold is large and the market close by. Wealthy farmers are less likely to sell to the market, possibly because the shadow value of their time is higher. But if they have a large quantity of co¤ee for sale, they are more likely to sell it to the market. They are also more likely to travel to a distant market. These …ndings are consistent with their better ability to pay for public transportation. We …nd no evidence that the decision to sell at the farm-gate is driven by a self-control motive.

Using original survey data, we document the activities, resources, and governance structure of NGOs operating in Uganda. The NGO sector is funded primarily by international non-governmental organizations and bilateral donors. We …nd large di¤erences in size and funding across NGOs, with only a few NGOs attracting most of the funding. Most NGOs are small and underfunded and focus on raising awareness and advocacy. Few NGOs are faith-based. Most screening and monitoring is done by grant agencies. Some monitoring is also done internally by members and trustees. Little monitoring is done by government. NGOs do not …le an income tax returns and few respondents are able to provide coherent …nancial accounts.

This paper tests the efficiency of insurance markets in the Pakistan Punjab by examining how crop choices are affected by the presence of price and yield risk. We estimate reduced-form and structural models of crop choices. Although we cannot reject the hypothesis that village members efficiently share risk among themselves, production choices are shown to depend on risk. Existing risk sharing and selfinsurance mechanisms thus imperfectly protect Punjab farmers against village-level shocks. Results also indicate that households respond to consumption price risk, thereby suggesting that empirical and theoretical work on risk should avoid putting an exclusive emphasis on yield and output price risk.

Credit from suppliers is an important but often neglected source of finance for manufacturing firms. Zimbabwe is no exception. Unlike credit from financial institutions, trade credit does not rely on formal collateral but on trust and reputation. Contract enforcement is flexible.

This paper investigates the extent to which poor households are discouraged from making a non-divisible but profitable investment. Using data on irrigation wells in India, we estimate the parameters of a structural model of irreversible investment. Results show that poor farmers fail to undertake a profitable investment that they could, in principle, self-finance because the non-divisibility of the investment puts it out of their reach.

Does capital-embodied technological change play an important role in shaping labor market inequalities? This paper addresses the question in a model with vintage capital and search-matching frictions where costly capital investment leads to heterogeneity in productivity among vacancies in equilibrium. The paper Þrst demonstrates analytically 1) how technology growth affects equilibrium wage inequality, income shares and unemployment, and 2) how its impact depends on the presence of labor market institutions (welfare beneÞts, Þring taxes). Next, it applies the model to a quantitative evaluation of vintage capital as an origin of wage inequality: through labor market frictions, a 10-year age differential in capital translates into a 4% wage gap among exante equal workers. Finally, the model allows a U.S.-continental Europe comparison: a common embodied technological acceleration interacted with different labor market institutions can explain a substantial part of the differential rise in unemployment and capital share and some of the differential dynamics in wage inequality.