Acemoglu, Daron, Simon Johnson, and James A. Robinson, 2001, “The Colonial Origins of Comparative Development: An Empirical Analysis,” American Economic Review, XCI, pp. 1369–1401.
Bulíř, Aleš and Hamann, Javier, 2001, How Volatile and Unpredictable Are Aid Flows, and What Are the Policy Implications? IMF Working Paper 01/167, (Washington: International Monetary Fund).
Bulíř, Aleš and Hamann, Javier, 2005, “Volatility of Development Aid: From the Frying Pan into the Fire?,” IMF Working Paper, Preliminary draft (Washington: International Monetary Fund).
Gupta, Sanjeev, Benedict Clements, Alexander Pivovarsky, and Erwin H. Tiongson, 2004, “Foreign Aid and Revenue Response: Does the Composition of Aid Matter?” in S. Gupta, B. Clements, and G. Inchauste, eds., Helping Countries Develop: The Role of Fiscal Policy (Washington: International Monetary Fund).
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)| false Gupta, Sanjeev, Benedict Clements, Alexander Pivovarsky, and Erwin H. Tiongson, 2004, “ Foreign Aid and Revenue Response: Does the Composition of Aid Matter?” in S. Gupta, B. Clements, and G. Inchauste, eds., Helping Countries Develop: The Role of Fiscal Policy( Washington: International Monetary Fund).
Heller, Peter S., 2005a, “Understanding Fiscal Space,” IMF Policy Discussion Paper No. 05/4, (Washington: International Monetary Fund).
Heller, Peter S., 2005b, “Pity the Poor Finance Minister: Facing the Challenge of a Substantial Scaling-Up of Aid Flows,” Informal Draft Paper, June.
International Monetary Fund, 2004c, “Macroeconomic and Structural Policies in Fund-Supported Programs—Review of the Experience”.
International Monetary Fund, 2005d, “Operational Framework for Debt Sustainability Assessments in Low-Income Countries—Further Considerations”.
International Monetary Fund, Independent Evaluation Office, 2004 Report on the Evaluation of Poverty Reduction Strategy Papers (PRSPs) and the Poverty Reduction and Growth Facility (PRGF).
Prati, Ales and Tressel, Thierry, 2005, “What Monetary Policy for Aid-Receiving Countries?” paper prepared for DESAA Development Forum on ‘Integrating Economic and Social Policies to Achieve the United Nations Development Agenda,’ March 14–15, 2005.
Reinikka, Ales and Jakob Svensson, 2004, “Local Capture: Evidence from a Central Government Transfer Program in Uganda,” Quarterly Journal of Economics, Vol. 119 (May), pp.679–705.
Rodrik, Dani, Arvind Subramanian and Francesco Trebbi, 2004, “Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development,” Journal of Economic Growth, 9(2), June, pp. 131–165.
Rogoff, Kenneth, et al., 2004, Evolution and Performance of Exchange Rate Regimes, IMF Occasional Paper No. 229, (Washington: International Monetary Fund).
World Bank and International Monetary Fund, 2005, Global Monitoring Report 2005—Millennium Development Goals: From Consensus to Momentum (Washington, D.C.: World Bank).
See, for instance, the Acting Chair’s Summing-Up on Evaluation Report of Poverty Reduction Strategy Papers (PRSPs) and the Poverty Reduction Growth Facility (PRGF) by the Independent Evaluation Office,(Executive Board Meeting 04/71).
The Acting Chair’s Summing Up on The Design of Fund-Supported Programs, (Executive Board Meeting 04/114).
The implications of the recent proposal by the G8 to provide further multilateral debt relief to the countries that have been part of the enhanced HIPC Initiative are not considered in this paper.
The improvement in economic outcome in low-income countries, and particularly in sub-Saharan Africa, is discussed extensively in the World Bank and IMF (2005).
A relatively broad net was cast to identify this group: per capita income growth greater than 1 percent and inflation less than 10 percent. In practice, per capita income growth has on average been much higher at more than 2½ percent. See the discussion in Box 1 of Monetary and Fiscal Policy Design Issues in Low-Income Countries.
While the focus of the review is on the mature stabilizers, many of the issues considered here are also highly germane to other low-income countries. For example, both mature stabilizers and other countries with PRGF-supported programs face the challenge of increasing their capacity to absorb foreign aid and improving the efficiency of public spending. Beyond this, the macroeconomic policy challenges that face the broader group of countries with PRGF-support have been addressed in other recent studies, including World Bank and IMF (2005), IMF (2004a), and IMF, Independent Evaluations Office (2004).
In contrast to broad economic institutions, narrow institutions relate to those entities that are effective for implementation of policies to promote economic and financial stability—the likes of central banks, domestic revenue authorities, and regulatory agencies.
Growth accelerations are those episodes where a country registers an increase in per capita GDP growth of, at least, 2 percentage points, sustains growth of at least 3½ percent for seven years, and achieves a higher post acceleration income level than the preacceleration peak.
Four SG cases (Botswana, India, Mauritius, and Sri Lanka) were dropped from the sample because they had strong initial institutions. The other SG cases were: Chile, Peoples Republic of China, Dominican Republic, Egypt Arab Republic, Indonesia, Korea, Lesotho, Malaysia, Singapore, Taiwan Province of China, Thailand, Tunisia, and Vietnam.
The importance of export growth and trade liberalization for sustaining growth points to the close link between the two. In particular, trade liberalization forces producers to be competitive, requiring them to adopt modern technologies and minimize costs. The productivity improvements that this generates in turn spurs growth.
Recourse to domestic borrowing is subject to the same constraints, plus the potential for crowding-out the private sector is more pronounced.
This intertemporal choice is at the core of debt sustainability analysis.
For Ethiopia, the World Bank estimates that the goals of universal primary enrollment (by 2015), and modest increases in secondary enrollment (to 23 percent at the junior secondary level, and 14 percent at the senior level) would require an increase in expenditures to the tune of 9 percent of current GDP. In Ghana, the government would have to spend about 4½ percent of GDP annually over 2004-08 to address maintenance and new infrastructure investment needs in the road sector alone.
There may also be scope to ease fiscal constraints on infrastructure investment and increase efficiency through the use of public-private partnerships.
Taxation is less volatile than aid (Bulíř and Hamann, 2001 and 2005). It is also one of the key junctures where the government and the public interact, and the better the manner in which the taxes are collected and the more willing citizens are likely to pay their taxes, the stronger indication that it provides of strength of institutions in the country.
The discussion in this subsection (III.A) focuses on the 15 mature stabilizers covered by Monetary and Fiscal Policy Design Issues in Low-Income Countries.
The high tax ratios in the latter likely reflects the possible underestimation of GDP in Guyana and the legacy of socialism in Mongolia. Tax Ratio and Per Capita Income
See Box 4 in Monetary and Fiscal Policy Design Issues in Low-Income Countries.
Privatization is one option to reduce high debt burdens and make room for additional productive expenditures.
The NPV of public debt is defined here as the sum of the NPV of public and publicly guaranteed external debt plus the nominal value of domestic public debt.
These thresholds are used in the Debt Sustainability Assessment templates for Low-Income Countries (see IMF, 2005d) and apply to external debt.
Grants, too, have potential private sector crowding out effects, but this is not unique to grants and also applies to loans (see discussion below).
These distinctions are discussed extensively in The Macroeconomics of Managing Aid Inflows: Experiences of Low-Income Countries and Policy Implications.
In the short run, to the extent the marginal propensity to import is less than 1, some increase in international reserves could be observed. In addition, given aid volatility, the country authorities may want to spend and absorb over several years.
See The Macroeconomics of Managing Aid Inflows: Experiences of Low-Income Countries and Policy Implications.
Prati and Tressel (2005) note that the practice of sterilizing aid inflows is quite common—over the 19601998 period, sterilization (proxied by a decline in net domestic assets of the central bank) was evident in more than a third of the close to 2000 episodes of annual increases in foreign aid of more than 2 percent of GDP.
See Monetary and Fiscal Policy Design Issues in Low-Income Countries for a fuller discussion of the merits of such a target range; countries with fixed exchange rate regimes would likely need to consider a lower inflation range.
That review—IMF (2004c)—considered a much broader set of PRGF countries and over an earlier period.
Evidence to this effect is presented in Monetary and Fiscal Policy Design Issues in Low-Income Countries.
Most of the mature stabilizers are effectively doing this already—with reserve cover averaging some 8 months of imports. Increasing the reserve coverage further would, of course, entail costs which would need to be taken into consideration.
There is limited evidence of private sector crowding-out being a problem in the mature stabilizers in recent years—see Monetary and Fiscal Policy Design Issues in Low-Income Countries.