Homi Kharas

An East Asian renaissance : ideas for economic growth

The region has been transformed by these developments, changing from a set of countries that rapidly integrated with the world to one that is also aggressively exploiting the sources of dynamism that lie within Asia. But countries in East Asia now face the domestic side-effects of rapid growth driven by international integration: congestion, conflict, and corruption. The challenge now is to complement global and regional integration with domestic integration. This requires ensuring vibrant cities that are not only linked to the outside world but also well-integrated domestically, strengthening social cohesion and reducing inequality, and providing clean governments which efficiently reinvest the economic returns that accompany fast growth.

What Is the Middle Income Trap, Why do Countries Fall into It, and How Can It Be Avoided?

The risks of falling into the Middle Income Trap have increasingly become a focus of discussions on the long-term economic and social development prospects of developing countries. These risks, and how to minimize them, are being debated at the highest levels of policy making in some of the fastest growing emerging economies, even while these countries remain a source of envy to the rest of the world. The term Middle Income Trap is by now also being widely used in economic literature as well as business-oriented media. We draw satisfaction from the fact that some of our previous writings (Gill and Kharas, 2008; Kohli et al. 2009) (co-authored with other colleagues) seem to have helped popularize this term. At the same time, we realize that some have interpreted and used the term quite differently from what we had in mind when we first introduced the term Middle Income Trap in our writings and presentations. This article offers our perspective as to what the Middle Income Trap is, why so many countries fall into it, and the key challenges involved in avoiding the trap. With policy makers as its primary audience, the article is deliberately short in length and straightforward in language.

The Long-Run Creditworthiness of Developing Countries: Theory and Practice

This paper analyzes the determinants of developing country long-run creditworthiness, focusing on the process of capital accumulation relative to external debt. Creditworthiness depends on the actual capital stock compared with a critical level, representing the gross wealth just sufficient to ensure that interest payments to foreigners never exhaust national output given expected gross inflows and existing outstanding debt. Hence, the probability of rescheduling is linked to debt service-capital, net inflows-capital, investment rates, and income levels. The empirical results, based on a probit analysis of historical rescheduling incidents, are quite robust and supportive of the theoretical framework.

Exchange Rate Rules, Black Market Premia and Fiscal Deficits: The Bolivian Hyperinflation

With dual exchange rates, where a managed official exchange rate co-exists with a floating black market rate, a given budget deficit may be consistent with many different inflation rates rather than two, which is the normal result in closed economy systems. Further, all these inflation equilibria are saddle-point stable. A policy of adjusting the official exchange rate towards the black market rate may cause the economy to converge to a high-inflation, saddle-point stable equilibrium where money inflation elasticity exceeds unity. The analytics are motivated and illustrated by the Bolivian hyperinflation of 1984–1985.

Trends and Issues in Development Aid

This note provides background data and analysis on what has been happening to aid flows and the resulting change in aid architecture. It is based on data taken from the OECD/DAC and on a review of the literature.

Measuring the Cost of Aid Volatility

Flows of official development assistance (ODA) to recipient countries have been highly volatile and this reduces their value. At the macro level, empirical evidence suggests that volatile ODA can negatively impact growth through several channels. At the micro level, volatility can affect fiscal planning and the level and composition of investment. This working paper develops a simple financial metric that policy makers can use to estimate (and reduce) the cost of aid volatility. Unlike other estimates, our measure does not depend on parameter estimates from cross-country regressions, nor on country-specific model simulations. We treat aid flows as the uncertain return on an unobserved asset of global goodwill held by developing countries. We then calculate the certainty equivalent value of the volatile aid flows as well as an associated dead weight loss, using a capital asset pricing model. Our measure of the deadweight loss per dollar provided in aid permits a comparison of costs across donors and over time. We find that the costs of volatility rose steadily until 2002, and have since fallen. Aid volatility is similar for low and middle income countries; weak states and strong states; aid dependent and low-aid countries; and across regions. Aid volatility differs substantially, however, by donor. We infer that donor policies contribute to volatility and that they should make reducing volatility a strong priority.

East Asia integrates : a trade policy agenda for shared growth

Rapid and sustained growth in international trade has long been a hallmark of successful growth and development strategies in East Asia. Some success stories are well known: those of the newly industrializing economies (NIEs) such as the Republic of Korea, as well as middle-income economies such as Malaysia and the transition economy of China. More recent entrants to world markets that have seen rapid export growth include low-income economies such as Cambodia and Vietnam. Trade has been an important factor in growth in the region, enabling progress in poverty reduction. Although the 1997-98 financial crisis interrupted this progress, recovery since then has brought poverty rates in every emerging economy in the region to record lows, and in economies like that of Vietnam, trade growth has brought with it a rapid reduction in poverty. Intraregional trade in East Asia has grown faster than trade with any other market, and while the largest economies account for the bulk of this trade, the regional trade of most smaller economies has also grown. Trade integration has been marketled, stemming from a combination of unilateral reforms, fulfillment of multilateral commitments, and a pattern of relocation of production processes (see Kawai and Urata 2002). Intraregional trade has been driven not only by growing demand but increasingly by improved competitiveness in regional markets, as reflected in increased market shares (Figure 1). China has been particularly dynamic, but almost all countries increased their competitiveness in regional markets during 1995-2001.9 This increase was accomplished without loss of competitiveness in other markets; East Asia continued to expand its market shares in the European Union (EU) and North American Free Trade Agreement (NAFTA) markets in the same period.

The California Consensus: Can Private Aid End Global Poverty?

Global philanthropy is remaking the relationship between the worlds rich and poor. Private aid – aid provided by foundations, corporations, non-governmental organisations, and individuals – has doubled over the past decade and may soon overtake ‘official’ foreign aid. Something of a consensus has developed around the emergence of private aid – that is it is less prone to corruption and more likely to benefit the poor. While private aid has the potential to be a more effective form of aid, it remains vulnerable to many of the same problems affecting official development assistance. Private aid that is both accountable and well monitored, however, can potentially catalyse more competitive markets for foreign aid, and dismantle the monopoly held by traditional bilateral and multilateral donors.

Mercosur: Integration and Industrial Policy

OMPRISING the majority of Latin Americas population, land and economic output, the Southern Cone Common Market (Mercosur) represents the deepest attempt to date at economic integration in that region. Initiated by the Treaty of Asuncion in 1991, Mercosur aims to eliminate all internal tariff and non- tariff barriers on the flow of goods and factors of production, implement a common external tariff, and harmonise numerous macroeconomic and sectoral policies among Argentina, Brazil, Paraguay and Uruguay. If it is successful, Mercosur members will gain from greater production rationalisation, more efficient resource allocation and expanded consumption opportunities. More broadly, Mercosur is evolving into a core unit with which other countries and regional trading blocs can negotiate trade arrangements. Already agreements have been signed admitting Chile and Bolivia as associate members, and negotiations are taking place with the Pacto Andino countries and the European Union. Thus, Mercosur is engaged in simultaneous efforts to widen its membership and to deepen integration among its members. The immensity and difficulty of this task is demonstrated by the fact that despite more than two dozen attempts at regional integration in the world over the past four decades, only the European Union has successfully forged the path from free trade area, to customs union, to common market, and now towards imminent monetary union. 1 The EUs experience has shown that the predicted welfare gains

Do Philanthropic Citizens Behave Like Governments? Internet-Based Platforms and the Diffusion of International Private Aid

Until recently, most aid from rich to poor countries was transmitted through official bilateral and multilateral channels. But the rapid growth in private development aid from foundations, charities, and philanthropic individuals raises a host of questions regarding the allocation of aid and its selectivity across recipient countries. This paper analyzes determinants of the supply of private aid from two large internet-based non-profit organizations that bundle contributions from individuals and transfer them as grants or loans to developing countries: GlobalGiving and Kiva. It compares the allocation of funds from these organizations to official development assistance. It finds that the selectivity of private aid is less oriented toward country-specific factors, and more toward frontline projects and individuals in developing nations. Survival analysis examining the funding rate of projects on these two Web sites confirms the lower relevance of country-specific characteristics and risks, suggesting that philanthropic individuals behave unlike official aid donors. This indicates that private aid and official aid are complementary: official aid supports countries, private aid supports people. With different preferences, formal coordination between these different donors may not be needed. Instead, each needs to understand when and how it can partner with the other to meet differing objectives.