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International Monetary Fund. Research Dept.

This paper analyzes the link between economic growth and structural reforms. The paper highlights that as the recovery from the financial crisis firms up, many country authorities will turn their focus from short-term stabilization policies to more structural policies to spur long-term potential growth. The paper discusses that the global financial crisis has affected growth in countries of all income levels and has led to substantial output losses that in many cases could be permanent. The paper also presents a discussion on monetary policy and asset prices.

Ms. Susan Creane, Rishi Goyal, Mr. Ahmed Mushfiq Mobarak, and Miss Randa Sab

As countries in the Middle East and North Africa (MENA) consider ways to promote rapid and lasting economic growth, further financial sector reform should be high on their agenda.1 The theory is that policies aimed at enhancing financial sector performance will result in lower information, transaction, and monitoring costs, thus improving allocative efficiency and raising output (see Levine, 1997; and Khan and Senhadji, 2000). Supporting evidence is typically based on a broad cross section of countries, where financial development is measured by a small set of statistical indicators.2 However, comparatively little work has been done on (1) how to measure the specifics of financial sector development, taking into account the variety of markets and institutions that the financial sector is composed of; and (2) creating measures of financial development in the MENA region that go beyond simple aggregate indicators.

International Monetary Fund

This Selected Issues paper analyzes the empirical relationship between corporate leverage—and other indicators of financial health—and investment in Israel, using dynamic panel data techniques. The results suggest that weak balance sheets may well have contributed to the investment decline of recent years. The impact of financial variables on investment is more pronounced for firms under financial pressure. However, there is little evidence that weak balance sheets’ impact on corporate investment increases during real downturns or following an equity market bust.

International Monetary Fund. External Relations Dept.

John Odling-Smee has been Director of the IMF’s European II Department since its inception in 1992. The Department was created expressly to work with the Baltic states and the other countries of the former Soviet Union, which became members of the IMF following the breakup of the Soviet Union. Educated at Cambridge University, Odling-Smee held academic posts in the 1960s and 1970s. Subsequently, he served as Economic Advisor to the Prime Minister of Ghana, held various posts in the U.K. Treasury, and also worked briefly as a Senior Economist in the IMF’s European Department in 1981. He rejoined the IMF staff in 1990 as a Senior Advisor in the European Department and was appointed its Deputy Director in 1991, before assuming the directorship of the newly created European II Department.

Ms. Catherine A Pattillo

This paper analyzes the impact of uncertainty on the investment behavior of Ghanaian manufacturing firms using a panel data set for the years 1994—95. Recent literature has focused on how uncertainty affects investment when capital expenditures are largely sunk or irreversible. The empirical analysis presented here explores the extent to which the investment-uncertainty relationship is affected by the degree of reversibility of a firm’s capital expenditures, an issue that has not received much attention in the few existing firm-level studies of investment under uncertainty. Empirical methods for investigating the investment-uncertainty relationship are developed and applied to the example of Ghanaian manufacturing sector firms. The objectives are to test some of the theory’s predictions as well as to explore questions on which theory is not conclusive. In addition, the paper tests whether a firm-level uncertainty variable that measures the entrepreneur’s perceptions of risk is significant in the model estimation.

Mr. Robert H. Floyd

The generation of operating surpluses by nonfinancial public enterprises is one technique by which domestic resources can be mobilized for use by the public sector (the enterprises themselves or some governmental unit). Assuming that the enterprises are operated in a manner consistent with X-efficiency and allocative efficiency, the pricing policies and practices that would be consistent with the generation of operating surpluses (or losses) are almost certainly regarded by many as a substitute in some sense for taxation (or subsidization) measures in the mobilization of domestic resources. 1 For example, Musgrave and Musgrave noted that, in the case of government monopolies, “if the government does not follow this [marginal cost pricing] rule but charges a higher price, this may be considered equivalent to imposing an excise tax on the product.” 2

Mr. Dean A. DeRosa and Mr. Morris Goldstein

The proposition that imports provide a competitive constraint or discipline on the price-raising ability of domestic producers has long been part of the case for a liberal trade policy. Even if output in the domestic industry is concentrated among few producers and even if there is little countervailing power from either consumers or organized labor, actual and potential competition from imports are said to be sufficient to discourage monopolistic price behavior. For if domestic producers consistently maintain a price above the landed price of imports (for similar goods),1 they face the same prospective loss of output, profits, and employment as would ensue if there were effective internal price competition. As such, the expectation is that, other things being equal, the rate of change of domestic producers’ prices will be smaller, the greater the increase in import competition.2