In this paper we review the literature on sovereign debt with particular emphasis on indexation and maturity and the main policy proposals related to these topics. We also advance some implications derived from our work. In Alfaro and Kanczuk (2005a, b, c), we modeled sovereign debt as a contingent claim following the framework developed by Grossman and Van Huyck (1988). Our framework, however, recognizes that contingent debt might be associated with incentive problems. Applying this framework to the study of the sustainability of sovereign debt, the tradeoff between nominal and indexed debt, and the optimal debt maturity, we find some of the proposals advanced in the literature regarding lengthening debt maturity and issuing nominal debt to be unsustainable in emerging (volatile) economies.
To meet the dire need for housing created by the devastation of Hurricane Katrina in August 2005, Mayor Ray Nagin of New Orleans and the staff of the Federal Emergency Management Agency (FEMA) worked to create lists of potential sites for trailer parks. This procedure took place within an environment of Not In My Back Yard-ism, or NIMBYism, where a number of communities and individuals expressed their opposition to hosting such trailer sites both publicly and privately. We analyze the final list of city-approved sites to track which factors were correlated with larger (or smaller) numbers of trailers and trailer sites per zip code bloc. Our data show that areas which displayed greater levels of social capital, as evidenced by voluntaristic activities such as turning out to vote, were slated for fewer trailers, controlling for race, income, flood damage, area, population density, and other relevant factors. Despite theories uncritically connecting denser social capital with more rapid rebuilding, areas of strong civil society weakened the city’s ability to recover quickly by forcing it to invest more effort in locating amenable sites for temporary housing.
In this chapter, I examine a topic inadequately addressed in current discusssions about education in developing countries: teaching quality. I argue that teaching quality is important if schools are to help students develop capabilities of consequence to improve their life chances, especially if students cannot develop those capabilities in other institutions. I further argue that we need to think about teaching quality as a complex process, on that incorporates both normative and positive elements and that integrates what teachers do with how students make meaning and understand what their teachers do. The focus of this paper is on the relationship between teaching quality and the literacy skills of marginalized children. In supporting these arguments with empirical analysis of a nationally representative sample of sixth graders in Mexico, I address two research questions: How do variations in the literacy skills of various groups of sixth graders relate to the different circumstances they experience at home? How do their literacy skills relate to the teaching they experience in schools? I conclude that teaching quality, as reported by students, is as related to learning outcomes as parental educationand other home advantages. This finding is important: While the intergenerational transmission of educational advantages within families is widely accepted as a sociological and psychological fact, the importance of instructional quality and the conceptualization of teaching quality are not as widely established or accepted.
Many low skilled jobs have been substituted away for machines in Europe, or eliminated, much more so than in the US, while technological progress at the “top”, i.e. at the high-tech sector, is faster in the US than in Europe. This paper suggests that the main difference between Europe and the US in this respect is their different labor market policies. European countries reduce wage flexibility and inequality through a host of labor market regulations, like binding minimum wage laws, permanent unemployment subsidies, firing costs, etc. Such policies create incentives to develop and adopt labor saving capital intensive technologies at the low end of the skill distribution. At the same time technical progress in the US is more skill biased than in Europe, since American skilled wages are higher.
The globalization debate has largely been fought between those who prophesize a "race to the bottom" in government expenditure and those who foresee continued divergence, with some states better shielded from global economic volatility. However, over the past few decades there has, in fact, been "upward convergence" in the percentage of national income governments devote to public education, albeit amidst considerable cross–national variance. This phenomenon has an enormous distributional impact, yet it has been largely neglected by political scientists. What explains this tremendous shift? This paper argues that two forces in particular shape the aggregate pattern of human capital expenditure: the level of democracy and the level of openness of any given state. By developing a model of the political economy of education investment, and testing its implications over a dataset of 115 countries from 1960 to 2002, this paper provides a first cut at explaining this critical issue.
Two contemporary issues provide reason to focus on national saving and investment: the debate over public pensions, and pensions more generally, in all rich countries; and the large global current account imbalances, conceptually the difference between national savings and domestic investment. Are we all saving enough to provide adequate retirement income for rapidly ageing populations—especially Americans, whose household savings seems to have disappeared altogether in 2005? And are the countries with large external deficits—notably the United States—mortgaging the income of future generations inappropriately, not to mention courting financial calamity in the meantime?
This paper will not answer either question definitively, but I hope to shed some light on them, especially the second. The focus of attention will be the United States, but in an increasingly globalized economy it is increasingly anachronistic to focus on domestic factors alone, and it is simply inappropriate when the issue is the country's external deficit—equal attention must be devoted to the counterpart surpluses elsewhere in the world.
Can a country grow faster by saving more? We address this question both theoretically and empirically. In our model, growth results from innovations that allow local sectors to catch up with the frontier technology. In relatively poor countries, catching up with the frontier requires the involvement of a foreign investor, who is familiar with the frontier technology, together with effort on the part of a local bank, who can directly monitor local projects to which the technology must be adapted. In such a country, local saving matters for innovation, and therefore growth, because it allows the domestic bank to cofinance projects and thus to attract foreign investment. But in countries close to the frontier, local firms are familiar with the frontier technology, and therefore do not need to attract foreign investment to undertake an innovation project, so local saving does not matter for growth. In our empirical exploration we show that lagged savings is significantly associated with productivity growth for poor but not for rich countries. This effect operates entirely through TFP rather than through capital accumulation. Further, we show that savings is significantly associated with higher levels of FDI inflows and equipment imports and that the effect that these have on growth is significantly larger for poor countries than rich.
Why do countries delay stabilizations of large and increasing budget deficits and inflation? And what explains the timing of reforms? We use the war of attrition model as a guidance for our empirical study on a vast sample of countries. We find that stabilizations are more likely to occur when time of crisis occur, at the beginning of term of office of a new government, in countries with "strong" governments, (i.e. presidential systems and unified governments with a large majority of the party in office), and when the executive faces less constraints. The role of external inducements like IMF programs has at best a weak effect, but problems of reverse causality are possible.
We examine the empirical role of different explanations for the lack of flows of capital from rich to poor countries–the "Lucas Paradox." The theoretical explanations include differences in fundamentals across countries and capital market imperfections. We show that during 1970–2000 low institutional quality is the leading explanation for the lack of capital flows. For example, improving Peru?s institutional quality to Australia?s level, implies a quadrupling of foreign investment. Recent studies emphasize the role of institutions for achieving higher levels of income but remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long–run development.
Fiscal policy is procyclical in many countries, and especially in developing ones. We explain this policy failure with a political agency problem. Procyclicality is driven by voters who seek to "starve the Leviathan" to reduce political rents. Voters observe the state of the economy but not the rents appropriated by corrupt governments. When they observe a boom, voters optimally demand more public goods or fewer taxes, and this induces a procyclical bias in fiscal policy. The empirical evidence is consistent with this explanation: procyclicality of fiscal policy is more pronounced in more corrupt democracies.
Why were capital controls orthodox in 1944, but heretical in 1997? The scholarly literature, following the conventional wisdom, focuses on the role of the United States in promoting capital liberalization. Although the United States encouraged capital liberalization bilaterally, US policy makers never embraced multilateral rules that codified the norm of capital mobility. Rather, European policy makers wrote the most important rules in favour of the free movement of capital. Paradoxically, French policy makers in particular played decisive roles. For the debates that mattered most—in the EU, OECD, and IMF—the United States was, respectively, irrelevant, inconsequential and indifferent. Europe did not capitulate to global capital. Rather, French and other European policy makers created today’s liberal international financial regime. French and European policy makers have promoted a rule-based, "managed" globalization of finance, whereas US policy makers have tended to embrace an ad hoc globalization based on the accumulation of bilateral bargains. Once liberal rules were codified in the EU and OECD, they constituted the policy practices of "European" and "developed"’ states, for which capital controls are no longer considered a legitimate policy tool. During the middle of the 1990s, the IMF debated new, universal rules in favour of capital freedom, but the proposal was defeated, primarily by the US Congress, after the financial crises of 1997–98. By then the vast majority of the world’s capital flows were already governed by the liberal rules of the EU and OECD.