Publications by Type: Unpublished

Many studies have replicated the finding that the forward rate is a biased predictor of the future change in the spot exchange rate. Usually the forward discount actually points in the wrong direction. But virtually all those studies apply to advanced economies and major currencies. We apply the same tests to a sample of 14 emerging market currencies. We find a smaller bias than for advanced country currencies. The coefficient is on average positive, i.e., the forward discount at least points in the right direction. It is never significantly less than zero. To us this suggests that a time-varying exchange risk premium may not be the explanation for traditional findings of bias. The reasoning is that emerging markets are probably riskier; yet we find that the bias in their forward rates is smaller. Emerging market currencies probably have more easily-identified trends of depreciation than currencies of advanced countries.

This paper argues that current account statistics may provide a poor indication for the real evolution of a country’s net foreign assets. This may be due to a series of factors including the mismeasurement of FDI, unreported trade of insurance or liquidity services and debt relief. Because of these problems we suggest estimating net foreign assets by capitalizing the net investment income and then estimating the current account from the changes in this stock of foreign assets. We call dark matter the difference between our measure of net foreign assets and that portrayed by official statistics. We find dark matter to be important for many countries and that it relates to FDI flows, domestic volatility, and debt relief. We also find that, once dark matter is taken into account, global net asset positions appear to be relatively stable. In particular, the exports of dark matter of the US appear to be fairly steady and large enough to keep the US net asset position stable, casting doubts on the need for a major adjustment of the dollar or a large rebalancing of the global economy.

This paper describes the results of initial work analyzing a panel of rural households in Peru between 1994 and 2004 to determine household responses to changes in relative prices of traditional versus export-oriented products. Our principal interest was to better understand how household responses to external economic shocks influenced rural welfare, income distribution and poverty. Since a large percentage of Peruvians living in poverty are located in rural areas, learning more about how these households respond to a changing external environment provides insights into the factors that influence their ability to improve their absolute and relative economic position.

The results of our analysis indicate that changes in relative prices had a significant impact on the adoption of new agricultural products, and the magnitude of response was mitigated by households’ degree of tenure security and access to regional and local markets. Analysis of household expenditures over the period indicate that those who adopted export crops experienced a significant growth in consumption proportional to the change in acreage devoted to exportable products, and were less likely to be classified as impoverished at the end of the period. Instrumental variables estimates suggest that this association is causal.

We study episodes where economic growth decelerates to negative rates. While the majority of these episodes are of short duration, a substantial fraction last for a longer period of time than can be explained as the result of business-cycle dynamics. The duration, depth and associated output loss of these episodes differs dramatically across regions. We investigate the factors associated with the entry of countries into these episodes as well as their duration. We find that while countries fall into crises for multiple reasons, including wars, export collapses, sudden stops and political transitions, most of these variables do not help predict the duration of crises episodes. In contrast, we find that a measure of the density of a country's export product space is significantly associated with lower crisis duration. We also find that unconditional and conditional hazard rates are decreasing in time, a fact that is consistent with either strong shocks to fundamentals or with models of poverty traps.

Governments are often urged to take steps to improve the health of their citizens. But there is controversy about how best to achieve that goal.1 Popular opinion calls for more investment in medical care and the promotion of behaviors associated with good health. But, across the developed countries on which we focus here, variations in the health of the population do not correspond closely to national levels of spending on medical care, and there remain many uncertainties about how governments can best promote healthy behavior.2 Expanding access to health care offers greater promise but, as many chapters in this book note, health care is only the tip of the iceberg of population health.

China and India are similar in many ways. Both are populous, physically large, socially diversified, economically poor countries. In 1978 they had roughly the same per capita GDP in terms of purchasing power parity (Maddison, p.304). But their labor forces have very different characteristics. A significantly higher fraction of China’s population is in economic employment, China is significantly more urbanized, less of China’s labor force is in agriculture, and in rural areas a significantly higher fraction of rural employment is non-agricultural. Population growth in both countries has declined significantly in recent decades, but the decline has been markedly sharper in China. India has significantly greater protection against imports than China, although it has lowered non-agricultural tariffs in recent years. India is less hospitable to foreign direct investment (FDI) than is China, and is more dependent on official foreign assistance. By 2000 India’s real per capita GDP had doubled from 1978; China’s had nearly quadrupled. These differences, and others, influence the degree of integration of these economies into the world economy, and in particular the role that their labor forces play in the world economy.

The 2003 United Nations Global Report on Human Settlements estimates that 924 million people, or 31.6% of the world’s urban population, lived in slums in 2001. Although forecasts are difficult, it is generally agreed that this number could greatly increase in coming years in the absence of strong policy interventions. These trends underscore the importance of slum upgrading strategies for addressing the growing problems of urban poverty.

Upgrading projects focus on providing basic services to improve the well-being of low income communities, including a range of infrastructure interventions frequently undertaken in conjunction with social interventions, such as the regularization of areas with insecure tenure. Other infrastructure improvements include water, sanitation, waste collection, housing, access roads, footpaths, storm drainage, lighting, public telephones, schools, health posts and community centers. Social improvements can include better provision of health and education services, day care, training, and social protection programs. With the projected increases in slum population, the demand for urban upgrading interventions is expected to grow.

This paper clarifies how dark matter changes our assessment of the US external imbalance. Dark matter assets are defined as the capitalized value of the return privilege obtained by US assets. Because this return privilege has been steady over recent decades, it is likely to persist in the future or even to increase, as it becomes leveraged by an increasingly globalized world. Once this is included in future projections of US current accounts, the US external position looks much more balanced than depicted in official statistics.

Africa and Latin America secured their independence from European colonial rule a century and half apart: most of Latin America after 1820 and most of Africa after 1960. Despite the distance in time and space, they share important similarities. In each case independence was followed by political instability, violent conflict and economic stagnation lasting for about a half-century (lost decades). The parallels suggest that Africa might be exiting from a period of post-imperial collapse and entering a period of relative political stability and economic growth, as did Latin America a century and a half earlier.

Most models currently used to determine optimal foreign reserve holdings take the level of international debt as given. However, given the sovereign’s willingness-to-pay incentive problems, reserve accumulation may reduce sustainable debt levels. In addition, assuming constant debt levels does not allow addressing one of the puzzles behind using reserves as a means to avoid the negative effects of crisis: why do not sovereign countries reduce their sovereign debt instead? To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model calibrated to a sample of emerging markets. We obtain that the optimal policy is not to hold reserves at all. This finding is robust to considering interest rate shocks, sudden stops, contingent reserves and reserve dependent output costs.

Polities differ in the extent to which political parties can pre-commit to carry out promised policy actions if they take power. Commitment problems may arise due to a divergence between the ex ante incentives facing national parties that seek to capture control of the legislature and the ex post incentives facing individual legislators, whose interests may be more parochial. We study how differences in “party discipline” shape fi…scal policy choices. In particular, we examine the determinants of national spending on local public goods in a three-stage game of campaign rhetoric, voting, and legislative decision-making. We find that the rhetoric and reality of pork-barrel spending, and also the efficiency of the spending regime, bear a non-monotonic relationship to the degree of party discipline.

Not all of the judgements in A. J. P. Taylor’s The Origins of the Second World War, published forty-five years ago, have stood the test of time. Taylor was right about the Western powers: the pusillanimity of the French statesmen, who were defeated in their hearts before a shot had been fired; the hypocrisy of the Americans, with their high-faluting rhetoric and low commercial motives; above all, the muddle-headedness of the British. Where Taylor erred profoundly was when he sought to liken Hitler’s foreign policy to "that of his predecessors, of the professional diplomats at the foreign ministry, and indeed of virtually all Germans", and when he argued that the Second World War was "a repeat performance of the First". Nothing could be more remote from the truth. Bismarck had striven mightily to prevent the creation of a Greater Germany encompassing Austria. Yet this was one of Hitler’s stated objectives, albeit one that he had inherited from the Weimar Republic. Bismarck’s principal nightmare had been one of "coalitions" between the other great powers directed against Germany. Hitler quite deliberately created such an encircling coalition when he invaded the Soviet Union before Britain had been defeated. Not even the Kaiser had been so rash; indeed, he had hoped he could avoid war with Britain. Bismarck had used colonial policy as a tool to maintain the balance of power in Europe. Hitler was uninterested in overseas acquisitions even as bargaining counters. Throughout the 1920s Germany was consistently hostile to Poland and friendly to the Soviet Union. Hitler reversed these positions within little more than a year of coming to power.

Economic growth occurs as resources are reallocated from the traditional sector to the modern sector, which is more productive. It is also more vulnerable to political predation, however. Political risk can therefore hinder development. We analyze a politico-economic game between citizens and governments, whose type (benevolent or predatory) is unknown to the citizens. In equilibrium, opportunistic governments mix between predation and restraint. As long as restraint is observed, political expectations improve and the economy grows. Once there is predation, the reputation of the current government is ruined and the economy collapses. If citizens are unable to overthrow this government, the collapse is durable. Otherwise, a new government is drawn and the economy can rebound. Equilibrium dynamics are characterized as a Markov chain. Consistent with stylized facts, equilibrium political and economic histories are random, unstable and exhibit long—term divergence. Our theoretical model also generates new empirical implications on the joint dynamics of income inequality, output and political variables.

The construction of a European political economy through regional integration is a dramatic social change that raises critical challenges for the study of markets. Does regionalization drive convergence among integrating national economies, or does regionalization deepen existing macroeconomic inequalities? The dominant theoretical approaches are at odds: orthodox economic theory and the political-institutionalist approach to markets predict convergence, whereas world systems theory and its interpretation of integration as exploitation suggest divergence. Economic theory highlights market mechanisms, whereas the political-institutional approach privileges rules and scripts of the new regional social order. Existing evidence on the convergence debate is marked by contradictory findings and a general failure to measure regional integration. This paper reports results from a time series analysis of income dispersion among the 15 countries of the European Union for the 1950-2000 period. The central finding is that regional integration is associated with convergence. The effects of political integration are especially powerful, lending support to the political-institutional approach to regionalization.

On April 20, 1949, the New York Times carried three items about Japan. The most arresting headline was: "Japan’s War Cost Is Put at $31 Billion; 2,252,000 Buildings Razed, 1,850,000 Dead." Similar figures were produced in the post-war period for nearly all the combatant countries. In four countries—China, Germany, Poland and the Soviet Union—the death toll was even higher, or five if the mortality of the 1943 Bengal famine is attributed to the war. Altogether, the best available estimates suggest, somewhere in the region of 60 million people lost their lives as a result of the Second World War. In some countries the mortality rate was higher than one in ten. In Poland it approached one in five. No other previous war had been so catastrophic in relative, much less in absolute, terms. Nor was Japan unique in the scale of destruction its capital stock had suffered.

We study budget formation in a model featuring separation of powers. In our model, the legislature designs a budget bill that can include a cap on total spending and ear-marked allocations to designated public projects. Each project provides random bene…fits to one of many interest groups. The legislature can delegate spending decisions to the executive, who can observe the productivity of all projects before choosing which to fund. However, the ruling coalition in the legislature and the executive serve different constituencies, so their interests are not perfectly aligned. We consider settings that differ in terms of the breadth and overlap in the constituencies of the two branches, and associate these with the political systems and circumstances under which they most naturally arise. Earmarks are more likely to occur when the executive serves broad interests, while a binding budget cap arises when the executive’s constituency is more narrow than that of the powerful legislators.

The existence of social inequalities in health outcomes is well established in social science research. One strand of research focuses on inequalities in health within a single country. A separate and newer strand of research focuses on the relationship between aggregate inequality and population health across countries. Despite the theorization of (presumably variable) social conditions as "fundamental causes" of health (Link and Phelan 1995), the cross-national literature has focused on population health as the central outcome. Controversies currently surround macro-structural determinants of overall population health such as income inequality (Wilkinson 1996), the welfare state (Conley and Springer 2001), and economic development (Firebaugh and Beck 1994). We argue that these debates would be advanced by conceptualizing inequalities in health as cross-national variables that are sensitive to social conditions. Using data from the third wave of the World Values Survey, we examine cross-national variation in inequalities in health. The results reveal dramatic variation in variations in health according to income and education. We conclude by discussing the policy implications of significant cross-national variability in the socioeconomic gradient.

This paper explores export performance in South Africa over the past 50 years,and concludes that a lagging process of structural transformation is part of the explanation for stagnant exports per capita. Slow structural transformation in South Africa is found to be a consequence of the peripheral nature of South Africa’s productive capabilities. We apply new tools to evaluate South Africa’s future prospects for structural transformation, as well as to explore the sectoral priorities of the DTI's draft industrial strategy. We then discuss policy conclusions, advocating an 'open-architecture' industrial policy where the methods applied herein are but one tool to screen private sector requests for sector-specific coordination and public goods.