Working Papers
2004
May 1, 2004
Debt Accumulation in the CIS-7 Countries: Bad Luck, Bad Policies, or Bad Advice?
Description: Following the breakup of the Soviet Union in 1992, several low-income countries in the Commonwealth of Independent States (CIS) accumulated substantial external debt in a short time span, about half of which is owed to multilateral financial institutions. Three factors contributed to the current debt burden. First, the initial years of transition brought large systemic economic disruptions, loss of transfers from the center and collapse of trade relations among Council for Mutual Economic Assistance (CMEA) countries, and negative terms of trade shocks. Second, fiscal and other reforms, and consequently, growth revival, took longer than expected. Third, overoptimism by multilaterals contributed to the high debt levels. If external financial assistance, which was needed because of high social costs of the transition, had come in the form of grants in the first two or three years of the transition, the debt burden would have been lower and sustainable.
May 1, 2004
A Cointegration Model for Search Equilibrium Wage Formation
Description: In flow models of the labor market, wages are determined by negotiations between workers and employers on the surplus value of a realized match. From this perspective, this paper presents an econometric analysis of the influence of labor market flows on wage formation as an alternative to the traditional specification of wage equations in which unemployment represents Phillipscurve or wage-curve effects. The paper estimates a dynamic wage equation for the Netherlands using a cointegration approach. It finds that labor flows, and notably flows from outside the labor market, are important determinants of both short-run and long-run wage setting.
May 1, 2004
Does Regulatory Governance Matter for Financial System Stability? An Empirical Analysis
Description: This paper provides empirical evidence that the quality of regulatory governance-governance practices adopted by financial system regulators and supervisors-matters for financial system soundness. The paper constructs indices of financial system soundness and regulatory governance, based on country data collected from the Financial Sector Assessment Program (FSAP). Regression results indicate that regulatory governance has a significant influence on financial system soundness, along with variables reflecting macroeconomic conditions, the structure of the banking system, and the quality of political institutions and public sector governance. The results also indicate that good public sector governance amplifies the impact of regulatory governance on financial system soundness.
May 1, 2004
Revisions Policy for Official Statistics: A Matter of Governance
Description: This paper proposes a set of good practices for the revision of macroeconomic data. The authors argue that revisions are a routine part of disseminating quality data. Revisions are made not just to correct errors but also to incorporate better source data, update base periods, and make other improvements. It is argued, using country examples and views from policymakers and other users, that national statistical agencies should have explicit revisions policies.
May 1, 2004
Japan’s Distressed-Debt Market
Description: Sizable risk capital from outside may be necessary to accelerate Japan's corporate restructuring to replace the stock of impaired bank loans. To attract risk capital, impaired loans must find market-clearing prices. However, the asymmetry in the bid-ask prices faced by banks and distressed-debt investors continues to stall efforts to create a liquid distressed-debt market. This paper asserts that the wedge between the prices faced by different participants is primarily a result of different valuation methods employed by banks and distressed-debt investors. On the one hand, banks do not recognize "maturity default" that results in banks rolling over impaired-loan accounts, effectively turning them into perpetual debt, which is expected to capture any upside potential for value. On the other hand, distressed-debt investors presently view their investments as equity stakes that require improved cash flows, unlike the buy-and-sell distressed-collateral market that existed in the mid-1990s. We suggest that bids from distressed-debt investors may not be as low as they are deemed by local banks and the asymmetry in prices may be reduced if banks value their claims as corporate equity.
May 1, 2004
Angola’s Fragile Stabilization
Description: This paper discusses the nature of Angola's disinflation strategy in recent years, with special emphasis on the most recent efforts by the Angolan authorities to stabilize the economy. Looking to the past, the paper stresses the costs of the disinflation strategy, as measured by the central bank sizable foreign exchange intervention and the increase in Angola's external liabilities that unfolded in the process. The paper also notes that non-oil fiscal deficits have remained very large. Looking to the future, the paper stresses the pressing need to reduce demand pressures stemming from sizable government spending on wages and salaries, goods and services, subsidies, and other current transfers to the economy. The prescribed fiscal consolidation effort is viewed as critical to curtail the non-oil fiscal deficit, reduce inflation expectations on a lasting basis, and avoid further foreign borrowing on commercial terms, including loans collateralized by future oil revenues.
May 1, 2004
The WTO and the Poorest Countries: The Stark Reality
Description: Small and poor countries pose a challenge for the World Trade Organization (WTO). These countries have acquired a significant say in WTO decision-making. However, they have limited ability to engage in the reciprocity game that is at the heart of the WTO, and have limited interests in the broader liberalization agenda because of their preferential access to industrial country markets. Accommodating the interests of the small and poor countries is desirable in itself, but would also facilitate expeditious progress in the Doha Round. The stark reality facing the system is that the desirable ways of addressing their concerns- providing them additional financial assistance and nonpreferential market access-is proving infeasible. As a result, the system is gravitating toward the less desirable option of relieving these countries of obligations, including those that might be welfare-enhancing for them.
May 1, 2004
Political Instability and Growth: The Central African Republic
Description: This paper provides empirical evidence that the propensity for political instability in the Central African Republic (C.A.R.) has been increased by low tax revenues and deteriorations in the terms of trade. The direct effect of political instability on economic growth is not statistically significant, once account is taken of domestic investment, and economic growth in neighboring countries. The policy implications are: (i) mobilization of domestic revenues to pay public employees' salaries and provide basic social services would lower the probability of coups; (ii) economic diversification would reduce the propensity for adverse terms of trade shocks to fuel coups; and (iii) neighboring countries' efforts to resolve conflicts and achieve sustained growth would be beneficial for the C.A.R.'s economic performance.
May 1, 2004
Can China Grow Faster? A Diagnosis of the Fragmentation of Its Domestic Capital Market
Description: This paper examines possible segmentation of the internal capital market in China. We employ two standard tools from the international finance literature to analyze financial integration across Chinese provinces. Both tests confirm a similar (and somewhat surprising) picture: capital mobility within China is low! Furthermore, the degree of internal financial integration appears to have decreased, rather than increased, in the 1990s relative to the preceding period. Finally, we document that the government tends to reallocate capital from more productive regions to less productive ones. In this sense, a smaller role of the government in the financial sector might increase the rate of economic growth.
May 1, 2004
The IMF and the force of History: Ten Events and Ten Ideas that Have Shaped the Institution
Description: The International Monetary Fund was designed during World War II by men whose worldview had been shaped by the Great War and the Great Depression. Their views on how the postwar international monetary system should function were also shaped by their economics training and their nationalities. After the IMF began functioning as an institution, its evolution was similarly driven by a combination of political events (Suez, African independence, the collapse of global communism), economic events (the rising economic power of Europe, the Middle East, and Asia), and trends and cycles in economic theory (the monetary approach to the balance of payments, new classical economics, the rise and fall of the Washington Consensus). As they happened, these forces had effects that were perceived as adaptations to current events and new ideas within a fixed institutional structure and mandate. The cumulative effect of history on the institution has been rather more profound and requires a longer and larger perspective.