Andrés Solimano

Economic instability and aggregate investment

Recent literature suggests that because investment expenditures are irreversible and can be delayed, they may be highly sensitive to uncertainty. We briefly summarize the theory, stressing its empirical implications. We then use cross-sectional and time-series data for a set of developing and industrialized countries to explore the relevance of the theory for aggregate investment. We find that the volatility of the marginal profitability of capital-a summary measure of uncertainty-affects investment as the theory suggests, but the size of the effect is moderate and is greatest for developing countries. We also find that this volatility has little correlation with indicia of political instability used in recent studies of growth, as well as several indicia of economic instability. Only inflation is highly correlated with this volatility and is also a robust explanator of investment.

Debt crisis, adjustment policies and capital formation in developing countries: Where do we stand?

Abstract This paper documents the decline in investment rates observed in developing countries after 1982, and explores analytically and empirically the factors contributing to explain it. The paper focuses on the impact of macroeconomic adjustment and reform measures on private investment, particularly in Latin America and East Asia, and underscores the importance of macroeconomic uncertainty, policy credibility, and potential coordination failures in shaping the response of investment to the changes in economic incentives brought about by structural reforms. The analysis concludes with some policy recommendations to improve the design of sustainable, growth-oriented adjustment programs.

Striving for Growth after Adjustment: the role of capital formation

This book presents the results of about three years of work finished in early 1992 in the area of private investment and macroeconomic adjustment. Its purpose is to explore the macroeconomic determinants of investment and the causes and cures for the gap between maroeconomic adjustment and stabilization and the resumption of economic growth in developing countries, a gap that even today - 10 years after the debt crisis and the subsequent adjustment of the eighties - remains wide. This volume highlights the central role of capital formation (public and private) in the restoration of sustainable growth.

Growth, equity, and the environment in Chile: Issues and evidence

Abstract Chile has grown at an annual rate of 7% over the past decade. Income distribution, however, deteriorated for the poor and middle class before the economy reached full capacity, when real wages began to rise and unemployment to fall. Growth has been export-led, putting pressure on stocks of native forests and fishery and mining resources. Environmental quality worsened before 1990. Reversing these trends would require extra investments on the order of 1% of GDP over many years.

Development Cycles, Political Regimes and International Migration: Argentina in the Twentieth Century

At the turn, of the twentieth century, a large number of Europeans -mainly Italians and Spaniards- left their homelands and headed to the distant southern shores of Argentina responding to the good economic opportunities, fertile land and a better future that were to be found in this country, at the time one of the most vibrant world economies. Around 7 million people migrated from Europe to Argentina between 1870 and 1930, although near 3 million returned back at different point in time during those years. Also foreign capital responded to the opportunities opened in Argentina and British financial institutions funded an important part of the construction of national infrastructure needed to support growth. In contrast, since the 1950s, European migration to Argentina virtually stopped and the country become in the next 30 years or so a net exporter of professionals, scientists, intellectuals that were flying economic decline, poor opportunities and authoritarian regimes. Moreover, during this period, financial capital steadily left Argentina looking for safer places. Nowadays, and in the reversed direction of a century ago, Argentineans are leaving in large numbers to Spain, Italy and other destinations. This time, emigration is associated with the collapse of the countrys currency experiment of the 1990s -the convertibility board and its ensuing short lived prosperity- that left a legacy of massive output decline, high unemployment, financial crisis and lost hopes. This paper investigates the main patterns of internationalmigration to and from Argentina in the twentieth century. The study examines the effects of relative income differentials, persistence effects, economic cycles and political regimes on net migration estimating econometrically a net migration model for Argentina using time series data for the twentieth century.

The postsocialist transitions in comparative perspective: Policy issues and recent experience

Abstract This paper examines the postsocialist transition in Eastern Europe, the reforms in China and the “postdirigiste” transitions in Latin America. The paper analyzes: the initial conditions that gave rise to processes of reform in the different countries; the main strategies for economic reform—shock treatment, gradualism and mixed strategies—discussing their conditioning factors and rationale; the actual record of these policies in terms of key indicators of economic performance such as inflation, GDP growth, external sector sustainability, progress in privatization and the social costs of adjustment. In addition, the paper discusses interdependencies between economic and political reforms during the course of systemic transformation.

Colombia: Essays on Conflict, Peace, and Development

A purpose of this book is to present recent World Bank analytical work on the causes of violence and conflict in Colombia, highlighting pilot lending programs oriented to promote peace and development. The Banks international experiences in post-conflict situations in different countries and their relevance for Colombia are also examined in this volume. The identification of socio-economic determinants of conflict, violence, and reforms for peace came about as a key element of the Banks assistance strategy for Colombia, defined in conjunction with government authorities and representatives of civil society. This report is organized as follows: After the introductory chapter, Chapter 2 provides a conceptual framework for understanding a broad spectrum of political, economic, and social violence issues; identifies the role played by both the countrys history and the unequal access to economic and political power in the outbreak and resilience of political violence; and examines as costs of violence the adverse impact on Colombias physical, natural, human, and social capital. Chapter 3 analyzes the costs of achieving peace and its fiscal implications; and indicates that exclusion and inequality rather than poverty as the main determinants of violence and armed conflict. Chapter 4 reviews the Banks experience in assisting countries that are experiencing, or have already overcome, domestic armed conflict. The authors illustrate the relevance of these cases for Colombia.

Globalization and national development at the end ot the 20th century - tensions and challenges

Globalization offers developing countries the opportunities to create wealth through export-led growth, to expand international trade in goods and services, and to gain access to new ideas, technologies, and institutional designs. But globalization also entails problems and tensions that must be appropriately managed. For one thing, global business cycles can contribute greatly to macroeconomic volatility at the national level. The scope and severity of crises in Mexico (1994-95), Asia (1997), Russia (1998), and Brazil (1999) suggests the severity of the financial vulnerability developing countries face nowadays. With financial markets so highly integrated, problems are transmitted rapidly from one country to another. The rapid transmission of financial shocks changes levels of confidence and affects exchange rates, interest rates, asset prices, and, ultimately, output and employment - with consequent social effects. Policymakers should also be concerned about how globalization exacerbates job instability and income disparities both within and across countries. Macroeconomic and financial crises, by increasing poverty and social tensions, can be political destabilizing. As the 20th century ends, the resources of Bretton Woods institutions are strained because of the large and complex rescue packages needed to deal with large-scale volatility. Development policy agendas in the era of globalization need to articulate traditional concerns with growth, stability, and social equity with new themes such as transparency and good governance at several levels: national, regional, and global.

A simple macro model for a small open economy facing a binding external constraint (Chile)

Abstract In this paper a Keynesian macroeconomic model for a small open economy is used, which describes the functioning of the real part of the economy in the short run when facing a dominant external restriction. The main conclusions of this paper are: (1) In the Chilean case, a devaluation has a contractionary impact in the short run, i.e., a 10% real devaluation produces a 3.4% drop on the level of output. The non-fulfilment of the Marshall-Lerner condition accounts for only 30% of the output contraction, while the remaining 70% corresponds to the decline in consumption that is induced by the reduction in real wages. (2) When the economy has an external deficit, the adequate combination of exchange and fiscal policies to restore the Balance of Payments equilibrium which minimizes the decline of output depends on the magnitude of the devaluation. Thus, an ‘over-shooting’ in the exchange rate, together with a contractionary fiscal policy, would produce an unnecessarily deflationary impact in the short run. (3) The Chilean empirical evidence shows that when there is a dominant external constraint, the magnitude of the short run trade-off between real wages and employment is not very acute. The short-run elasticity of employment with respect to the real wage is 0.34.