The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Abstract

The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Luiz de Mello

In September 2000, the member states of the United Nations underscored the importance of sustainable development by reaffirming the Millennium Development Goals (MDGs)—a set of time-bound targets for improving human development. The MDGs are multidimensional and focus on eradicating extreme poverty and hunger; achieving universal primary education; promoting gender equality and women’s empowerment; reducing child mortality; improving maternal health; combating HIV/AIDS, malaria, and other diseases; ensuring environmental sustainability; and developing a global partnership for development. There has been a growing body of IMF research on public policies that could contribute to achievement of the MDGs.

Although the MDGs have been accepted widely as a framework for assessing development progress, as many as 48 indicators have been selected to monitor progress toward achievement of the goals. IMF research has focused on understanding the links between public spending and these social indicators, where health and educational indicators are treated as outcomes and public spending ratios are treated as inputs in a social production function.1 An alternative methodology has been proposed more recently, recognizing that no single output indicator perfectly captures the multidimensional nature of unobserved variables such as a population’s health or education status.2

Improving the education status of the population is a key MDG and IMF research confirms that public spending on education has a positive effect on education indicators. Higher public spending on education tends to be associated with higher school enrollment rates, lower illiteracy rates, and a higher probability that a student will continue on to the fifth grade.3 These findings are robust to the inclusion in the regressions of variables that control for other determinants of educational attainment, such as socio-demographic factors (e.g., fertility rates, secondary enrollment rates for girls, and adult illiteracy rates), development proxies (e.g., urbanization rates and GDP per capita), government size (share of total public spending in GDP), and sector-specific indicators (e.g., pupil-teacher ratios, the ratio of outlays on health care to outlays on education, measuring the composition of social spending, and the ratio of public spending on education per pupil in primary and tertiary education).

The intrasectoral composition of social expenditures (between primary and tertiary education, and curative and preventive care, for instance) affects the correlation between spending and outcomes, especially in poorer countries. In these countries, in particular, investing in basic education can have a positive impact on the population’s health status through reduced illiteracy and better access to public social services. Also, a large share of budgetary resources in the social sectors is often used for wages, thus displacing budgetary resources that could be allocated to higher productivity, nonwage inputs, such as medicines and textbooks.4

Other key MDGs concern the health status of the population. Per capita income is the most important determinant of health indicators. Most cross-country research shows that public outlays on health care are positively correlated with life expectancy at birth and negatively correlated with malnutrition rates. The latent variable model estimated by Baldacci, Guin-Siu, and de Mello (2002) confirms the correlations estimated using the conventional social production function approach. Recent research has also focused on the correlation between public spending and the health status of the poor. Using disaggregated data on health indicators, Gupta, Verhoeven, and Tiongson (2001) show that public health spending has a positive, stronger correlation with the health status of the poor, who rely more heavily on public provision of services.5 Public expenditure on water and sanitation, as well as environment protection, also correlates positively with health indicators. Recent research has also estimated the effects of debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative on public health spending.6

Can the Poor Influence Policy?

Participatory Poverty Assessments in the Developing World

Caroline M. Robb

Explaining how and why poor people should be included in the national policy dialogue is the subject of this new book. A research method called participatory poverty assessment (PPA) includes poor people in poverty analyses, with the objective of having the results influence policy. PPAs contribute to a better understanding of poverty, identification of policy priorities of the poor—and, hence, budget allocations—and monitoring and evaluation of policy implementation and impact. Results from PPAs have consistently shown that poverty is multidimensional. Problems such as vulnerability, physical and social isolation, insecurity, lack of self-respect, lack of access to information, distrust of state institutions, corruption, and powerlessness can be as important to the poor as low incomes.

The book shows how poor people’s priorities often differ from those assumed by policymakers. It then describes how traditional household surveys and PPAs, as well as data gathered by other research methods, can promote a better understanding of the poverty and distributional impacts of macro policies and reforms.

Policy Discussion Paper

Policy Discussion Paper PDP 02/10 Reviving the Case for GDP-Indexed Bonds

Eduardo R. Borensztein and Paolo Mauro

Indicators of access by the population, especially the poor, to social services also correlate strongly with social outcomes. In many countries, the government will have a central role in ensuring access to services by either providing them itself or financing private-sector provision. However, a majority of the benefits from public spending on education and health care do not accrue to the poor.7 A large share of resources is allocated to tertiary education in most countries, which tends to have lower social rates of return than primary education.8 Similarly, in the health-care sector, spending on basic preventive health care, such as immunization and prevention of diseases, has a relatively stronger impact on the poor, yet most public health-care outlays were absorbed by curative care (e.g., hospitals and medical equipment) rather than basic and preventive health care.

Recent IMF research has shown that poor governance, particularly corruption, might hamper countries’ ability to reach the MDGs through a number of channels.9 First, corruption leads to a reallocation of resources to unproductive uses, absorbing resources that might be used for poverty-reducing activities.10 Second, corruption has been shown to affect the composition of public spending by reducing outlays on operations and maintenance and diminishing the overall quality of public investment spending.11 Third, corruption also has an impact on the efficacy and provision of social services, with repercussions for progress in social indicators.12 Finally, indices of democracy have also been shown to be correlated with government spending on health care and education.13

Following a different branch of the literature, IMF research has focused on the correlation between government policies and poverty, given that poverty reduction is another key MDG. Research in this area has been motivated by the finding in the literature that economic growth alone is not enough to reduce the incidence of poverty, thus creating some justification for the implementation of policies benefiting the poor. This IMF research has highlighted the role of macroeconomic policies, such as low inflation and sound fiscal policies, as important poverty-reducing instruments.14 Others have highlighted the role of policies to mitigate the impact of financial crises on the poor.15

The implication of this body of research is that increased public spending on poverty-reducing activities, such as education and health care, can lead to better social outcomes. The econometric evidence of a correlation between public spending and social indicators reported in IMF research is being used by researchers outside the IMF to estimate the resources, particularly in terms of debt relief and foreign financial assistance, needed to help countries meet the MDGs.16

In any case, the agenda for future IMF research is focused predominantly on further empirical work on the association between public spending and the social indicators selected for monitoring progress toward achieving the MDGs. Data constraints remain an obstacle to more refined hypothesis testing but, as more reliable, higher-quality data become available for a wide enough sample of countries, particularly the less-developed ones, further empirical research is expected to shed more light on the correlation between policy measures and the achievement of the MDGs.

1

Sanjeev Gupta, Marijn Verhoeven, and Erwin Tiongson, “Does Higher Government Spending Buy Better Results in Education and Health Care?” IMF Working Paper 99/21, 1999 (also published in the European Journal of Political Economy, Vol. 18 (November 2002), pp. 717–37).

2

Emanuele Baldacci, Maria Teresa Guin-Siu, and Luiz de Mello, “More on the Effectiveness of Public Spending on Health Care and Education: A Covariance Structure Model,” IMF Working Paper 02/90, 2002.

3

Karnit Flug, Antonio Spilimbergo, and Erik Wachtenheim, “Investment in Education: Do Economic Volatility and Credit Constraints Matter?” Journal of Development Economics, Vol. 55 (April 1998), pp. 465–81.

4

Paul Glewwe, “Schools and Skills in Developing Countries: Education Policies and Socioeconomic Outcomes,” Journal of Economic Literature, Vol. 40 (June 2002), pp. 436–82; and Hong-Sang Jung and Erik Thorbecke, “The Impact of Public Education Expenditure on Human Capital, Growth, and Poverty in Tanzania and Zambia,” IMF Working Paper 01/106, 2001.

5

Sanjeev Gupta, Marijn Verhoeven, and Erwin Tiongson, “Public Spending on Health Care and the Poor,” IMF Working Paper 01/127, 2001 (also forthcoming in Health Economics).

6

Sanjeev Gupta and others, “Debt Relief and Public Health Spending in Heavily Indebted Countries,” Bulletin of the World Health Organization, Vol. 80 (February 2002), pp. 151–57; and Hemamala Hettige, Muthukumara Mani, and David Wheeler, “Industrial Pollution in Economic Development: The Environmental Kuznets Curve Revisited,” Journal of Development Economics, Vol. 62 (August 2000), pp. 445–76.

7

Ke-young Chu, Hamid Davoodi, and Sanjeev Gupta, “Income Distribution and Tax and Government Social Spending Policies in Developing Countries,” IMF Working Paper 00/62, 2000.

8

George Psacharopoulos, “Returns to Investment in Education: A Global Update,” World Development, Vol. 22 (September 1994), pp. 1325–43.

9

George Abed and Sanjeev Gupta, eds., Governance, Corruption, and Economic Performance (Washington: IMF, 2002); and Sanjeev Gupta, Hamid Davoodi, and Erwin Tiongson, “Corruption and the Provision of Health Care and Education Services,” in Arvind K. Jain, ed., The Political Economy of Corruption (London: Routledge, 2001).

10

Sanjeev Gupta, Luiz de Mello, and Raju Sharan, “Corruption and Military Spending,” IMF Working Paper 00/23, 2000 (also published in the European Journal of Political Economy, Vol. 17 (November 2001), pp. 749–77).

11

Paolo Mauro, “Corruption and the Composition of Government Spending,” Journal of Public Economics, Vol. 69 (June 1998), pp. 263-79; and Vito Tanzi and Hamid Davoodi, “Corruption, Public Investment, and Growth,” in The Welfare State, Public Investment and Growth, ed. by H. Shibata and T. Ihori (Tokyo: Springer, 1998).

12

Sanjeev Gupta, Hamid Davoodi, and Erwin Tiongson, “Corruption and the Provision of Health Care and Educational Services,” IMF Working Paper 00/116, 2000 (also published in The Political Economy of Corruption, ed. by A. Jain (London: Routledge, 2001)).

13

Reza Baqir, “Social Sector Spending in a Panel of Countries,” IMF Working Paper 02/35, 2002; and Louis Kuijs, “The Impact of Ethnic Heterogeneity on the Quantity and Quality of Public Spending,” IMF Working Paper 00/49, 2000.

14

Dhaneshwar Ghura, Carlos Leite, and Charalambos Tsangarides, “Is Growth Enough? Macroeconomic Policy and Poverty Reduction,” IMF Working Paper 02/118, 2002; and Paul Cashin, Paolo Mauro, Catherine Pattillo, and Ratna Sahay, “Macroeconomic Policies and Poverty Reduction: Stylized Facts and Overview of Research,” IMF Working Paper 01/135, 2001.

15

Emanuele Baldacci, Luiz de Mello, and Gabriela Inchauste, “Financial Crises, Poverty, and Income Distribution,” IMF Working Paper 02/04, 2002.

16

Sanjeev Gupta and Marijn Verhoeven, “The Efficiency of Government Expenditure: Experiences from Africa,” IMF Working Paper 97/153, 1997 (also published in Journal of Policy Modeling, Vol. 23 (May 2001), pp. 433–67).

Third Annual IMF Research Conference

Capital Flows and Global Governance

The third in a series of annual research conferences was held at IMF headquarters in Washington, DC, on November 7–8, 2002. A summary of the proceedings will appear in the next issue of the IMF Research Bulletin. A more detailed program and links to these papers can be found at www.imf.org/research.

IS-LM-BP in the Pampas

Andrés Velasco (Harvard University), Luis Céspedes (IMF), and Roberto Chang (Rutgers University)

Bond Restructuring and Moral Hazard: Are Collective Action Clauses Costly?

Torbjörn Becker (IMF), Anthony Richards (Reserve Bank of Australia), and Yunyong Thaicharoen (Bank of Thailand)

Banking, External Flows, and Crises

Raghu Rajan and Douglas Diamond (University of Chicago)

Bubbles and Capital Flows

Jaume Ventura (CREI-UPF and MIT)

Keynes, Cocoa, and Copper: In Search of Commodity Currencies

Paul Cashin (IMF), Luis Céspedes (IMF), and Ratna Sahay (IMF)

Financial Integration and Macroeconomic Volatility

M. Ayhan Kose (IMF), Eswar Prasad (IMF), and Marco Terrones (IMF)

Towards a Statutory Approach to Sovereign Debt Restructuring: Lessons from Corporate Bankruptcy Practices Around the World

Patrick Bolton (Princeton University)

Securities Transaction Taxes and Financial Markets

Karl Habermeier (IMF) and Andrei Kirilenko (IMF)

Global Financial Integration

Philip Lane (Trinity College, Dublin) and Gian Maria Milesi-Ferretti (IMF)

The Mundell-Fleming Lecture

Explaining Sudden Stop, Growth Collapse, and BOP Crisis: The Case of Distortionary Output Taxes

Guillermo Calvo (Inter-American Development Bank and University of Maryland)

Panel Discussion

Promoting Better National Institutions: The Role of the IMF

Guillermo Ortiz (Bank of Mexico)

Jeffrey Frankel (Harvard University)

Nancy Birdsall (Center for Global Development)

Jeffrey Sachs (Columbia University)