Working Papers | G-24

Developing Countries and the Millennium Development Goals

15th September 2005 Abstract

Hazardous Inertia of Imbalances in the US and World Economy

20th August 2005 Abstract

Reforming the IMF: Back to the Drawing Board

16th August 2005 Abstract

The Global Implementation of Basel II: Prospects and Outstanding Problems

13th June 2005 Abstract

Prioritizing Economic Growth: Enhancing Macroeconomic Policy Choice

10th April 2005 Abstract

This paper spells out a logic for increasing macroeconomic policy space in order to prioritize the goals of growth, employment creation and poverty reduction.

First, there is the need to create additional policy instruments so that a greater number of policy goals can be addressed. Frequently, real economy goals get partly crowded out by financial objectives because there are too few instruments for too many goals. Second, the calibrated use of policy tools by degrees of commitment, deployment and assignment can create space for different policy-mixes. Selective capital controls, intermediate exchange rate regimes, and some monetary policy autonomy create the policy space within which a variety of policy combinations and mixes are possible and a greater number of instruments are available. Prioritization of real economy goals becomes both more feasible and more likely with a broader range of policy alternatives. Third, along with selective use of capital controls, fiscal policy-based stabilization instead of exchange rate-based stabilization delinks the exchange rate from the goal of internal financial stability to which it is yoked in a regime of fixed exchange rates. This delinkage enables the use of intermediate exchange rate regimes (soft pegs and managed floating). The use of these regimes in ìthe missing middleî between fixed and flexible exchange rates creates policy space where different mixes are possible generating a greater range of policy alternatives. Fourth, prioritizing real economy goals is also facilitated by the design of a larger strategic framework for accelerated development including institutions, norms, behaviours and governance. The larger strategic framework mobilizes more assets and power toward a dynamic growth trajectory that creates a more favourable context for macroeconomic policy. The impact of macroeconomic policies on growth, employment creation and poverty reduction is likely to be stronger when they are part of a wider effort to marshal resources for accelerated development. The examples of the East Asian success stories provide the evidence for this conclusion.

These four steps in the logic for increased macroeconomic policy choice ñ new policy tools, selective and pragmatic use of capital controls and exchange rate intervention, fiscal policybased stabilization, and strategic frameworks ñ reinforce each other in their capacity to create more policy space.

Purchasing Power Parities and Comparisons of GDP in IMF Quota Calculations

17th March 2005 Abstract

The governance of the IMF and the distribution of IMF quotas have come under much scrutiny in recent years. At issue is the question of the allocation of quotas and the attendant voting rights of member countries consistent with their relative size in, or contribution to, the world economy. Quota increases resulting from general quota reviews have fallen far short of the amounts needed to maintain their relationship to world GDP when the IMF came into being in 1945, and at the same time the distribution of quotas between the industrial and developing countries has been broadly maintained despite the enormous growth of the world economy over this period. However, on the basis of the formula that guides the IMF in deciding members’ quotas in these reviews, giving prominence to GDP as the primary variable, the share of developing countries would be appreciably greater if GDP were to be converted by purchasing power parities (PPPs), rather than by market exchange rates .For most inter country comparisons, GDP converted by PPP is seen as the appropriate measure, and this view has been enhanced by the recent strengthening of the quality of PPP data within the International Comparison Program. Market exchange rates, which continue to serve as the conversion factor in IMF quota calculations of members’ GDP, are regarded by statisticians and analysts alike as unsuitable because of their short term volatility. While a significant change in quota distribution involving a shift to the developing countries would require much more than a change in formula, the adoption of PPPs for the conversion of GDP would set that process in motion.

Governance in Bretton Woods Institutions

17th March 2005 Abstract

Improving IMF Governance and Increasing the Influence of Developing Countries in IMF Decision-Making

17th March 2005 Abstract

Measuring Vulnerability: Capital Flows Volatility in the Quota Formula

17th March 2005 Abstract

This paper discusses a proposal to include capital flows volatility as an additional variable in the quota formula. The motivation is to capture macroeconomic volatility associated with capital accounts shocks as well as countries’ vulnerabilities to balance of payment crisis. A proposal to this effect was requested by the G-24 Ministers in the Communiqué of October 2004 and also introduced in recent quota reviews at the IMF.

However, the methodology put forward by IMF staff papers measures capital flows volatility in dollar terms. This measure does not fully captures vulnerabilities to balance of payment crises because it does not take into account the differential macroeconomic impact of volatility among developing and industrial countries. In particular, fluctuation in capital flows implies a bigger real adjustment for developing countries since capital flows to these countries represent a larger share of their economies and tend to be more volatile.

We propose an alternative measurement of capital flows volatility based on the volatility of net capital flows as a proportion of GDP and argue that it is a more appropriate measure to capture the economic effects of capital flows volatility. We also measure volatility in exports and capital flows altogether as a share of GDP to capture countries’ total vulnerabilities to balance of payment crisis arising not only from capital account shocks but also from current account shocks, i.e. commodity shocks.

The International Monetary Fund: Integration and Democratization in the 21st Century

17th March 2005 Abstract

The following outlines a mode to enhanced financial crisis prevention and management through better surveillance and transparency. In the absence of a Westphalian voting system in the International Monetary Fund, power tilts excessively towards creditor countries resulting in skewed crisis analysis and resource distribution. Consequently, exploring the democratic deficit within the governance structure of the Fund reveals needed changes in the quota regime and voting system of significant import. Expressly, the democratic deficit results from three factors (1) the decline of basic votes in the Fund’s quota regime has reduced the voice of smaller countries in the governance of the Fund; (2) biases in the calculation of economic strength have caused the IMF to neglect the strength of emerging market economies; and (3) the needless complexity and opacity involved in the calculation of quotas. As the governance structure of the Fund is a product of the political and economic agreements embodied in the quota regime, addressing the quota bias, the variable measurement and specification problems, will provide the means for a Fund that is in tune with the growing contiguous democratic consensus. Quota adjustments alone prove insufficient towards this democratic end and therefore we will explore: reassessing the Fund size given the pressing need for a larger Fund as the present size is too small when compared to the global GNP; readjusting access to the resources of the Fund in accordance with the gross financing need of the concerned country; reexamining the voting system and the veto market; restructuring the Executive Board so that every member of the Board is an elected member; and the establishment of an Economic Security Council.

Purchasing Power Parity (PPP) for International Comparison of Poverty

14th March 2005 Abstract

Malaysia’s September 1998 Controls

10th March 2005 Abstract

Unlike the other East Asian economies which sought IMF emergency credit facilities after borrowing heavily from abroad, the Malaysian authorities simply never had to go to the Fund as prudential regulations introduced earlier had limited foreign borrowings, especially short-term credit. Instead, its crisis was due to massive portfolio investment inflows into the stock market. With the crisis, currency depreciation and stock market declines formed a vicious cycle, exacerbated by contagion and policy responses as well as official rhetoric undermining market confidence, especially in the latter half of 1997. From December 1997, the adoption of more orthodox pro-cyclical policies made the downturn worse. Before mid-1998, new fiscal measures were adopted to reflate the economy, later augmented by the currency and capital control measures from September. Looking at the crisis in August 1998, when the United States still showed little inclination to do anything to improve the situation, the Malaysian measures made good sense. The September 1998 Malaysian controls were undoubtedly well designed and effective in closing down the offshore ringgit market without discouraging greenfield foreign direct investment. The Malaysian experience shows that imposing emergency capital controls on outflows did not have the disastrous effects its opponents claim it would. But, coming 14 months after the crisis began, they were too late to stem capital flight, which had already taken place, resulting in the 80 per cent collapse of the stock market index. The capital controls were amended in February 1999 and ended in September 1999. They prevented more capital from leaving owing to the uncertainty induced by the economic and political developments of early September 1998.

Effective representation and the role of coalitions within the IMF

28th February 2005 Abstract

The IMF is governed by a 24-member Executive Board which represents 184 countries. Although often prized as a small and efficient decision-making body, the Board represents some countries more effectively than others. This is due to the institutional structure and incentives within which the Board operates. Prime among them is a system of constituencies which have formed and evolved as countries have sought to improve their position in the organization. These groups vary in size, shared interests, and distribution of power. Their effectiveness is not only affected by these attributes. It is also determined by decision-making rules across the institution, by the lack of formal accountability of Board members, and by the strength of other coalitions of countries acting informally within the institution. The analysis implies that representation on the IMF Board could be improved without altering the size of the Board.

Issues on IMF Governance and Representation: An Evaluation of Alternative Options

10th February 2005 Abstract

The current realities of the global economy are far from being reflected in the Fund’s quota structure, with emerging market economies accounting for the bulk of the underrepresentation. This paper explores the characteristics of the representation distortions using cross-section regression analysis and the results indicate that economic growth, population, credit rating and dummies for the US and China, explain most of them. To the extent that the faster growing countries are not recognized as such in their IMF quotas, the distortions will continue to increase. Eliminating such distortions requires adjusting the quota structure in line with the relative participation in global economic activity, but to the extent that individual quotas cannot be reduced, a large increase in total IMF quotas would be required. Simulations performed under the assumption that all advanced economies over represented would accept to reduce their quotas indicate that only about one half of the rate of increase in total quotas would be required. As an initial step towards the elimination of distortions in representation rules for a professional IMF board are proposed, including that all Executive Directors should be elected and be independent from the influence of a permanent employer, that all countries with a common currency be represented by the same ED, and that each chair should represent at least three member countries and at most fifteen. In a scenario using these rules and attempting to preserve the existing regional representation, Advanced Economies would lose three chairs, Emerging Markets would gain two, and Developing Countries gain the remaining one.

Voting Power Implications of a Unified European Representation at the IMF

12th January 2005 Abstract

We consider some of the implications of a proposed reform of the voting system of the IMF in which EU countries cease to be separately represented and are replaced by a single combined representative of the European bloc. The voting weight of the EU bloc is reduced accordingly. We analyse two cases: the Eurozone of 12 countries and the European Union of 25. Using voting power analysis we show that the reform could be very beneficial for the governance of the IMF, enhancing the voting power of individual member countries as a consequence of two large countervailing voting blocs. Specifically we analyse a range of EU voting weights and find the following for ordinary decisions requiring a simple majority: (1) All countries other than those of the EU and USA unambiguously gain power (measured absolutely or relatively); (2) The sum of powers of the EU bloc and USA is minimized when they have voting parity; (3) The power of every other non-EU member is maximized when the EU and USA have parity; (4) Each EU member could gain power - despite losing its seat and the reduction in EU voting weight - depending on the EU voting system that is adopted; (5) The USA loses voting power (both absolutely and relatively) over ordinary decisions but retains its unilateral veto over special majority (85%) decisions (as does the EU bloc).

Country Ownership of Reform Programmes and the Implications for Conditionality

10th January 2005 Abstract

The essence of ownership is the acceptance of full responsibility for the consequences of a programme. Ownership matters because of the expectation that programme design will be more appropriate and country authorities will be resolute in taking steps domestically to ensure full implementation of the programme. The steps include seeking proper domestic legitimation, which will prevent certain ìpolitical economyî factors from disrupting programme implementation. That programme success is correlated with degree of ownership and that ownership is correlated with implementation, which in turn is correlated with programme legitimation, are supported by available evidence. Ex ante selectivity is easily made preferable to ex post, and for financial support a recipient country must satisfy the donor country or organization team as to the reality of ownership, soundness of the programme (policies and outcomes), and adequate implementation capacity. From a positive perspective, forces operating on both the demand and supply side of aid should inevitably bring about a new equilibrium regime in the aid relationship that excludes traditional conditionality

Up from Sin: A Portfolio Approach to Financial Salvation

10th January 2005 Abstract

In this paper, we develop a proposal with the potential to greatly improve the ability of developing countries to reduce their exposure to other countriesí interest rate and exchange rate volatility and to lower their cost of raising capital abroad. The key to achieving these goals is for developing countries to borrow in their own currencies and for investors to lend by creating portfolios of localcurrency government debt securities that employ the risk management technique of diversification to generate a return-to-risk that competes favourably with other major capital market security indices. We show, based on data from the early 1990s, that a portfolio of emerging market local currency debt can generate rates of return relative to risk that compete with those of major securities indices in international capital markets. It bears noting that the early 1990s witnessed several severe shocks to international capital markets, including the crises in East Asia, the Russian Federation and Brazil, and the failure of Long-Term Capital Management. We also analyse the implications of deploying such a policy for attracting capital to developing countries, the impact on the stability of their financial systems and on their costs of borrowing, and the implications for future development of local capital markets.

Stabilisation of Commodity Market of Interest to Africa

13th November 2004 Abstract

Microfinance Institutions in Nigeria: Policy, Practice and Potentials

13th November 2004 Abstract

This study examines the outreach performance of microfinance institutions (MFIs) in Nigeria, based on a survey of ten major MFIs. The findings indicate that the operations of MFIs have grown phenomenally in the last ten years, driven lagely by expanding informal sector activities and the relucance of banks to fund the emerging micro enterprises. The financial services provided by the MFIs have neither been given any publicity nor captured explicitly in the official financial statistics. The study also reveals that the sub sector faces a number of challenges which have been addressed in this paper. They include the urgent need to approve and implement a policy framework that would regulate and standardise MFI operations; accessing medium to long term sustainable commercial sources of fund, such as SMIEIES and DFI funds and increased mobilisation of savings; and shifting a good proportion of credit portfolio to the promotion of real sector activities, especially in agricultural and manufacturing.

Trip Wires and Speed Bumps

10th November 2004 Abstract

This paper investigates the shortcomings of the ìearly warning systemsî (EWS) that are currently being promoted with such vigour in the multilateral and academic community. It then advocates an integrated ìtrip wire-speed bumpî regime to reduce financial risk and, as a consequence, to reduce the frequency and depth of financial crises in developing countries.

Specifically, this paper achieves four objectives.

First, it demonstrates that efforts to develop EWS for banking, currency and generalized financial crises in developing countries have largely failed. It argues that EWS have failed because they are based on faulty theoretical assumptions, not least that the mere provision of information can reduce financial turbulence in developing countries.

External Financing for Development and International Financial Instability

31st October 2004 Abstract

Financing Africa’s Future Growth and Development: Some Innovations

13th October 2004 Abstract

External Financing for Development and International Financial Instability

10th October 2004 Abstract

Both academic and official policy discussions support the need for financial flows from developed to developing countries to effectuate the international transfer of real resources in support of economic development and the elimination of poverty. However, historical experience suggests that, far from being an anomaly, it is reverse flows of resources from developing countries to developed countries that are the rule. Since these reverse flows generally follow periods of financial crisis, policy has sought to reinforce the stability of developing countriesí domestic financial systems and to ensure that the domestic environment is attractive to high foreign investment flows.

While reverse flows are clearly detrimental to the amount of domestic resources available to increase living conditions and per capita growth rates in developing countries, they are the natural result of the use of relatively short-term lending by both multilateral and private financial institutions at market or penal interest rates.

Assessing the Risks in the Private Provision of Essential Services

10th October 2004 Abstract

Essential services, such as water and electricity, are public goods, in that their benefits extend well beyond the consumption of the individual. They are also critical for poverty reduction, and must be universally affordable and accessible in order to achieve the Millennium Development Goals. For these reasons, the standards that apply to investments in other sectors are insufficient for essential services.

Accordingly, the paper argues that private provision of utilities requires a higher burden of proof than policies reforming existing public services. It suggests that policy-makers considering options for reforming essential services should look beyond the efficiency. While these are clearly important, reform decisions should also be informed by social and ëoff-budgetí fiscal impacts, as well as an analysis of the feasibility of implementing reform in the existing institutional environment. Evidence about the risks of private provision shows that in many cases, the benefits of better performance are outweighed by costs in these other areas.

Debt Sustainability Framework for Low Income Countries: Policy and Resource Implications

27th September 2004 Abstract

Fiscal Insurance against Exogenous Shocks in the CFA-franc Zone

13th September 2004 Abstract

This paper proposes the implementation of a fiscal insurance scheme for the two currency unions of the CFA-franc zone, the West African Economic and Monetary Union (WAEMU) and the Central African Economic and Monetary Community (CEMAC). A fiscal insurance mechanism would help to cushion for transitory shocks and at the same time reinforce the monetary union’s long-term viability. The paper proposes a basic framework for a fiscal insurance contract of 70 percent of coverage level for shortfalls in cyclical revenues owing to terms-of-trade shocks as a benchmark and then, analyzes different coverage levels and re-payment options in response to incentive problems –i.e. moral hazard and free riding. The paper presents numerical simulations of the initial resources required to implement a group insurance scheme and demonstrate that they would be lower than the required under a self-insurance arrangement. In addition, for particular country cases, each country can be better off under group insurance if the initial fund resources are redistributed in accordance with size and volatility. Finally, the paper analyzes what would be the initial buffer fund needs if the scheme had been implemented in 2003, and also, what could be the role for international organizations together with regional contributions in financing this scheme.

Beyond the Chiang Mai Initiative: Prospects for Regional Financial and Monetary Integration in East Asia

12th September 2004 Abstract

The Macroeconomic Impact of Remittances in Ghana

3rd September 2004 Abstract

This paper presents Balance of Payments (BOP) estimates of private unrequited transfers (remittances) for Ghana. It shows that the level of private unrequited transfers increased significantly from US$201.9 million in 1990 to US$1,017.2∗ million in 2003. Total transfers have increased from just over US$410 million to US$1,408.4 million over the same period reflecting mainly the increase in private unrequited transfers. The study also found that private transfers are much bigger and more stable than Official Development Assistance (ODA) and Foreign Direct Investment (FDI) over the period 1990 - 2003. Also remittances have been increasing more than proportionately compared to GDP and exports earnings. A new reporting format introduced in 2004 has led to a significant improvement in the balance of Payments estimation of remittance flows into the Ghanaian economy

Real Exchange Rate and Employment in Argentina, Brazil, Chile and Mexico

24th August 2004 Abstract

The World Development Report 2005: An Unbalanced Message on Investment Liberalization

13th August 2004 Abstract

Access to Land, Growth and Poverty Reduction in Malawi

13th August 2004 Abstract

After four decades of agricultural-led development strategies in the postindependent Malawi, economic growth has been erratic and a large proportion of the population live below the poverty line and studies suggests that the poverty situation has worsened. Agricultural policies favoured large-scale (estate) production at the expense of smallholder farmers who account for more than 80 percent of households. Smallholder farmers face several constraints including landlessness and small land holdings and declining agricultural productivity. This study argues that past agricultural strategies have been less successful because they ignored the land question among smallholder farmers. We show that access to land via agricultural production is one of the important factors that can translate growth to poverty reduction. Hence, for agricultural based strategies to be pro-poor in Malawi, land redistribution or resettlement programme for the landless or near landless should be central and a pre-condition for the effectiveness of pro-poor growth strategies in agriculture.

Enhancing the Voice of Developing Countries in the World Bank

13th July 2004 Abstract

Enron and Internationally Agreed Principles for Corporate Governance and the Financial Sector

10th June 2004 Abstract

Recent corporate scandals have led to a wide-ranging re-examination of standards for corporate governance with repercussions that extend to financial regulation and the key standards for financial systems which are a major component of current initiatives to strengthen the international financial architecture and include corporate governance as one of their subjects. This paper contains an account of the breakdown of corporate governance in the most baroque of recent scandals, that involving the collapse of Enron, where there were not only conflicts with standards for good corporate governance but also unusually extensive use of sophisticated techniques and transactions to manipulate the firmís financial reports. Good corporate governance presupposes satisfactory performance not only on the part of auditors but also of other ìwatchdogsî or ìgatekeepersî from the private sector such as credit rating agencies, lenders, investors and financial analysts. Their role in turn must be complemented by effective regulation, which in the case of a firm with operations as complex as Enron involves several different bodies. The paper documents the extensive failures of these different parties in the Enron case.

The Bretton Woods Institutions: Governance without Legitimacy?

13th May 2004 Abstract

Who pays for the World Bank?

12th May 2004 Abstract

The allocation of IBRD net income is the lens through which the burdensharing issue in the World Bank Group is viewed. The paper concludes that (1) the distribution of voting power does not reflect the contribution to IBRD equity made by its borrowing members as the share of retained earnings has risen while the share of paid-in capital has declined over the years; (2) the major shareholders have used their control rights to allocate portions of IBRD net income to serve their interests in ways that have been at the expense of the borrowing members and (3) a continuation of a stagnating loan portfolio in nominal terms and a declining one in inflation-adjusted terms is likely to constrain the Bank’s net income from lending operations and to render it increasingly dependent for its continuing profitability on its role as a financial trader and arbitrageur. In order to regain its competitiveness as an international development lending intermediary, it is important to review the pricing of loans and the conditions attached to them as well the restraints that have applied on the purposes for which the Bank lends.

Trip Wires and Speed Bumps: Managing Financial Risks and Reducing the Potential for Financial Crises in Developing Economies

3rd May 2004 Abstract

This paper investigates the shortcomings of the “early warning systems” (EWS) that are currently being promoted with such vigor in the multilateral and academic community. It then advocates an integrated “trip wire-speed bump” regime to reduce financial risk and, as a consequence, to reduce the frequency and depth of financial crises in developing countries.

Specifically, this paper achieves four objectives.

First, it demonstrates that efforts to develop EWS for banking, currency and generalized financial crises in developing countries have largely failed. It argues that EWS have failed because they are based on faulty theoretical assumptions, not least that the mere provision of information can reduce financial turbulence in developing countries.

Second, the paper advances an approach to managing financial risks through trip wires and speed bumps. Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed. Among the most significant of these vulnerabilities are the risk of large-scale currency depreciations, the risk that domestic and foreign investors and lenders may suddenly withdraw capital, the risk that locational and/or maturity mismatches will induce debt distress, the risk that non-transparent financial transactions will induce financial fragility, and the risk that a country will suffer the contagion effects of financial crises that originate elsewhere in the world or within particular sectors of their own economies. It argues that trip wires must be linked to policy responses that alter the context in which investors operate. In this connection, policymakers should link specific speed bumps that change behaviors to each type of trip wire.

Third, the paper argues that the proposal for a trip wire-speed bump regime is not intended as a means to prevent all financial instability and crises in developing countries. Indeed, such a goal is fanciful. But insofar as developing countries remain highly vulnerable to financial instability, it is critical that policymakers vigorously pursue avenues for reducing the financial risks to which their economies are exposed and for curtailing the destabilizing effects of unpredictable changes in international private capital flows.

Fourth, the paper responds to likely concerns about the response of investors, the IMF and powerful governments to the trip wire-speed bump approach. The paper also considers the issue of technical/institutional capacity to pursue this approach to policy. The paper concludes by arguing that the obstacles confronting the trip wire-speed bump approach are not insurmountable.

Remittances: The New Development Mantra

10th April 2004 Abstract

Remittances have emerged as an important source of external development finance for developing countries in recent years. This paper examines the causes and implications of remittance flows. It first highlights the severe limitations in remittance data, in sharp contrast to other sources of external finance. It then examines the key trends in remittance flows, and their importance relative to other sources of external finance. The paper subsequently analyses the many complex economic and political effects of remittances. It highlights the fact that remittances are the most stable source of external finance and play a critical social insurance role in many countries afflicted by economic and political crises. While remittances are generally pro-poor, their effects are greatest on transient poverty. However, the long-term effects on structural poverty are less clear, principally because the consequences of remittances on longterm economic development are not well understood. The paper then concludes with some policy options. It suggests a role for an international organization to intermediate these flows to lower transaction costs and increase transparency, which would both enhance these flows and maximize their benefits.

Reinventing Industrial Strategy

10th April 2004 Abstract

As liberalization and globalization gather pace, some developing countries cope well but the majority do not. Diverging industrial competitiveness is one of the causes of the growing disparities in income: the potential that globalization offers for industrial growth is being tapped by a relatively small number of countries, while liberalization is driving the wedge between them and laggards deeper. This paper examines two approaches to this problem: neoliberal and structuralist. The neoliberal approach is that the best strategy for all countries and in all situations is to liberalize. Integration into the international economy, with resource allocation driven by free markets, will let them realise their ënaturalí comparative advantage, optimize dynamic advantage and yield the maximum attainable growth. No government intervention can improve upon this but will only reduce welfare. The structuralist approach puts less faith in free markets and more in the ability of governments to mount interventions effectively. It questions the theoretical and empirical basis for the argument that untrammelled market forces account for the industrial success of the East Asian Tigers (or the presently rich countries). Accepting the mistakes of past strategies and the need for greater openness, it argues that greater reliance on markets also needs a more proactive role for the government.

External Debt Sustainability: Guidelines for Low and Middle Income Countries

26th March 2004 Abstract

Capital Management Techniques in Developing Countries

10th March 2004 Abstract

This paper uses the term, capital management techniques, to refer to two complementary (and often overlapping) types of financial policies: policies that govern international private capital flows and those that enforce prudential management of domestic financial institutions. The paper shows that regimes of capital management take diverse forms and are multi-faceted. The paper also shows that capital management techniques can be static or dynamic. Static management techniques are those that authorities do not modify in response to changes in circumstances. Capital management techniques can also be dynamic, meaning that they can be activated or adjusted as circumstances warrant. Three types of circumstances trigger implementation of management techniques or lead authorities to strengthen or adjust existing regulations: changes in the economic environment, the identification of vulnerabilities, and the attempt to close loopholes in existing measures.

External Debt Sustainability: Guidelines for Low and Middle-Income Countries

10th March 2004 Abstract

The high debt burden continues to hamper the growth prospects of many developing countries and is increasing their vulnerability. Bilateral official aid has declined sharply and financing by multilateral organizations is low. Developing countries have experienced net negative resource transfers, reducing their ability to invest. Finally, growth in these countries has lagged worldwide growth, particularly in Latin America and Africa.
Poorer countries depend heavily on support of official institutions. Aid to poorer countries has diminished and in many cases their debt burden appears to be unsustainable. Countries with access to market borrowing on the other hand, have been affected by high volatility in international capital markets, while having fewer policy options than in the past to absorb shocks.

“Up From Sin: A Portfolio Approach to Salvation”

9th March 2004 Abstract

This study develops a proposal that has the potential to greatly improve the ability of developing countries to reduce their exposure to other countries' interest rate and exchange rate volatility and to lower their cost of raising capital abroad by borrowing in their own local currency. The key to achieving these goals is the creation of portfolio of emerging market local currency government debt securities that employs the risk management technique of diversification to generate a return-to-risk that competes favorably with other major capital market security indices. This study shows, based on data from the mid-90s through the end of 2000, that a portfolio of local currency debt can generate rates of return relative to risk that compete with that of major securities indices in international capital markets. It is noteworthy that this period includes several shocks to international capital markets including the crises in East Asian, Russia, the failure of Long Term Capital Management and Brazil. The study also provides an analysis of the implications of deploying such a policy for attracting capital to developing countries, the impact on the stability of their financial systems, their costs of borrowing and the implications for future developing of local capital markets.

Trade, Growth, Poverty Reduction and Human Development: Some Linkages and Policy Implications

8th March 2004 Abstract

Mission Creep, Mission Push and Discretion in Sociological Perspective: The Case of IMF Conditionality

8th March 2004 Abstract

A Fiscal Insurance Proposal for the Eastern Caribbean Currency Union

8th March 2004 Abstract

This paper proposes the implementation of a fiscal insurance mechanism for the member countries of the Organization of Eastern Caribbean States (OECS). Fiscal insurance would be important to cushion against transitory shocks and would also reinforce the union’s long-term viability. These countries are already linked together through a common currency, administered by the Eastern Caribbean Central Bank (ECCB) under a currency board arrangement. Preliminary evidence suggests that volatility in fiscal accounts would be reduced if countries join a fiscal insurance arrangement through the possibility of cross-compensations under a risk-sharing scheme. Moreover, since the regional fluctuations of output and government revenues are not significantly correlated, a fiscal insurance mechanism can take advantage of these asymmetries and lead to welfare gains for all members. The paper presents numerical simulations for partial and full insurance schemes and quantifies the required size of the initial buffer. It also simulates what would be the welfare gains in terms of lower volatility and lower initial buffer as compared to self-insurance.

How Well Do Measurements of an Enabling Domestic Environment for Development Stand Up?

3rd March 2004 Abstract

Official donors and private investors, focused increasingly on the role of institutions and policy quality in development, seek to monitor them more closely. This paper examines the World Bank’s Country Policy and Institutional Assessments, the World Economic Forum’s Global Competitiveness Indices, and a set of governance indicators also developed at the World Bank. The paper calls for appreciating the weaknesses of such indicators, especially their low ability to discriminate among countries or over time. More robust elements in such indicators, however, may usefully complement structured narrative analyses of countries and stimulate public discourse on institutional and policy development.

Alternative Loan Guarantee Mechanisms and Project Finance for Infrastructure in Developing Countries

13th February 2004 Abstract

Commodities Under Neoliberalism: The Case of Cocoa

10th January 2004 Abstract

The paper examines the case of cocoa as an illustration of the problems faced by primary commodity producers. The impact of market liberalization in cocoa producing countries as well as consuming industrial countries on the cocoa price and cocoa farmers is examined. The paper shows that the market liberalization cannot be held responsible for such improvements in productive efficiency as occurred over time, which was one of the two stated goals of these measure. Nor is there convincing evidence that the producerís share in the export price increased, which was the other goal. A serious consequence of the preoccupation with market liberalization, however, was that it diverted attention from the main concerns of cocoa producers, viz., the market volatility, low prices, and the declining producersí share in the value chain. The paper then goes on to explore the kinds of action that might be considered to address these issues. It makes a case for filling the institutional vacuum that has been created as a result of the abolition of state marketing authorities in several cocoa producing countries. The paper attempts to show that the conditions are favourable for cocoa producers to coordinate their production policies in order to maintain satisfactory cocoa prices, which is needed to arrest the erosion of incomes of cocoa producers.

Modernizing Small Holder Agriculture to Ensure Food Security and Gender Empowerment: Issues and Policy

1st January 2004 Abstract

Burden Sharing at the IMF

24th December 2003 Abstract

The paper reviews aspects of the financial governance of the IMF, focusing on the equity implications of the manner of distributing the cost of running the Fund’s regular (nonconcessionary) lending operations as well as the modalities of funding its concessionary lending and debt relief operations. It is concluded that while the Fund charges borrowers roughly what it pays its creditor members for the resources used in its regular lending operations, its overhead costs (administrative budget plus addition to Reserves) are shared between the two groups of members in a less equitable manner. With the overhead costs rising inexorably to meet an increasing number and variety of responsibilities being placed upon the institution, largely at the instance of the Fund’s principal creditors, by virtue of their dominant majority of voting power, the under-representation of the Fund’s debtors undermines the legitimacy of its decision-making. In regard to the concessionary lending and debt relief operations, some of the funding modalities have involved a substantial contribution by Fund debtors, sometimes under pressure. While this outcome has been accepted as part of an intra-developing country burden-sharing exercise, it has also meant a significant burden-shifting away from the developed countries in the cost of meeting their responsibilities to the poorest members of the international community.