Alun H. Thomas

Lessons from the Crisis in Argentina

In 2001- 02, Argentina experienced one of the worst economic crises in its history. A default on government debt, which occurred against the backdrop of a prolonged recession, sent the Argentine currency and economy into a tailspin. Although the economy has since recovered from the worst, the crisis has imposed hardships on the people of Argentina, and the road back to sustained growth and stability is long. The crisis was all the more troubling in light of the fact that Argentina was widely considered a model reformer and was engaged in a succession of IMF-supported programs through much of the 1990s. This Occasional Paper examines the origins of the crisis and its evolution up to early 2002 and draws general policy lessons, both for countries’ efforts to prevent crises and for the IMF’s surveillance and use of its financial resources.

Is the Exchange Rate a Shock Absorber? The Case of Sweden.

This paper uses a structural vector autoregression representation of the Mundell-Flemming model to analyze the determinants of movements in Sweden’s real exchange rate. It finds that, while (supply and demand) shocks account for over 60 percent of the forecast error variance, comparable to several Economic and Monetary Union (EMU) countries, demand shocks account for a higher fraction of these real shocks in Sweden than in those core countries. If real demand shocks result from controllable macroeconomic policies, the cost of relinquishing the exchange rate is no higher, and may be lower, for Sweden than for most core EMU countries.

Expected Devaluation and Economic Fundamentals

Recent incidents of exchange rate collapse have provoked interest in how much these events are determined by economic fundamentals. This paper considers whether interest rate differentials are appropriate measures of the risk of devaluation and whether this measure of devaluation risk reflects the movements of variables that capture internal and external balance. The paper finds that interest rate differentials reflect devaluation risk but that movements in fundamental variables in France and Italy have only a weak effect on devaluation risk. The most significant influence on devaluation risk is the position of the currency in its band in that the lower the exchange value of a currency is within the band, the greater is the perceived risk of devaluation.

Africa's Got Work to Do: Employment Prospects in the New Century

Estimates of the current and future structure of employment in sub-Saharan Africa (2005–20) are obtained based on household survey estimates for 28 countries and an elasticity-typemodel that relates employment to economic growth and demographic outcomes. Agriculturestill employs the majority of the labor force although workers are shifting slowly out of thesector. Sub-Saharan Africa’s projected rapid labor force growth, combined with a lowbaseline level of private sector wage employment, means that even if sub-Saharan Africarealizes another decade of strong growth, the share of labor force employed in private firmsis not expected to rise substantially. Governments need to undertake measures to attractprivate enterprises that provide wage employment, but they also need to focus on improvingproductivity in the traditional and informal sectors as these will continue to absorb themajority of the labor force.

Saving, Investment, and the Regional Current Account: An Analysis of Canadian, British, and German Regions

The relationship between regional saving and investment is examined to measure the extent of capital mobility. The relationship between total regional saving and investment is significantly negative in Canada and the United Kingdom, in contrast to the significant positive relationship found across countries. The difference is attributed to government subsidies to poor regions. The relationship between personal saving and private investment is insignificant in the U.K. and Germany and is negative in Canada which suggests that capital is mobile for individuals. The relationship between retained earnings and private investment is significantly positive in the U.K. and Canada suggesting capital immobility for firms but a test for the presence of regional corporate liquidity constraints yields no effects.

Benchmarking Structural Transformation Across the World

This paper documents stylized facts on the process of structural transformation around the world and empirically analyzes its determinants using data on real value added by sector of economic activity (agriculture, manufacturing and services) for a panel of 168 countries over the period 1970-2010. The analysis points to large differences in sector shares both across and within regions as well as for countries at similar levels of economic development. Using both linear and quantile regression methods, it finds that a large proportion of the cross-country variation in sector shares can be accounted for by country characteristics, such as real GDP per capita, demographic structure, and population size. It also finds that policy and insitutional variables, such as product market reforms, openness to trade, human and physical capital, and finance improve the baseline model’s ability to account for the variation in sectoral shares across countries.

Current Account Balance Estimates for Emerging Market Economies

This paper uses a modified version of the methodology used by the IMFs Consultative Group on Exchange Rate Issues (CGER) to calculate equilibrium current account balances (or ?norms?) for a sample of 33 emerging market economies. We find that the fundamental determinants of the equilibrium current account balances are similar to those identified by the CGER using a sample that also comprises advanced economies. However, the fiscal balance has a considerably stronger impact on current account norms for emerging markets. This paper also offers estimates for the equilibrium current account balances of eleven smaller emerging market economies that are not currently included in the country sample used by the CGER.

Review of the 2002 Conditionality Guidelines

1. The Fund reviews its conditionality at regular intervals . These reviews may encompass issues related to the design of Fund-supported programs or to the formal aspects of conditionality. Both sets of issues are fundamental to the effectiveness of the Fund’s financial support, which requires that program design reflect the best possible analysis in its formulation of both objectives and policy content, and that the formulation and application of conditionality be supportive of good program design and of program implementation.

Relative Prices and Economic Adjustment in the United States and the European Union: A Real Story about EMU

Structural vector autoregressions are used to analyze the relationship between real output and relative prices within the European Union and the United States. Relative price variability appears to be more important for adjustment within the European Union than in the United States, reflecting the lower integration of goods and factor markets. In the absence of higher market integration, the lower relative price variability implied by the introduction of a single currency in the European Union could well cause significant economic disruption.

Resource Dependence and Fiscal Effort in Sub-Saharan Africa

High natural resource prices in recent years have resulted in sizeable increases in fiscal revenue for many resource-exporting countries in sub-Saharan Africa. However, this revenue source is volatile, and arguably these countries should also rely on other forms of taxation to help fund public expenditure. This paper asks whether the availability of higher resource revenue in these countries has led to lower taxation effort of other revenue categories. The question is analyzed both in terms of the relationship between non-resource tax revenue and resource revenue, and between non-resource tax revenue and statutory tax rates. The paper finds evidence suggesting that nonresource revenue is negatively influenced by a higher resource revenue-to-GDP ratio. The lower take up of nonresource taxes in resource-rich countries is correlated with higher levels of corruption in these countries, suggesting weaker institutions affect nonresource revenue through incentives for tax evasion and/or large tax exemptions as argued in the literature.