Jacques Morisset

Does financial liberalization really improve private investment in developing countries

Assuming that liquidity constraints exist in most developing countries, the majority of analysts believe that increasing real interest rates will raise the volume of lending and hence private investment. The author, focusing on the demand for capital goods, argues that the positive effect on the domestic credit market may be offset by the negative effect of a portfolio shift from capital goods and public bonds into monetary assets. The author also demonstrates that a policy of financial liberalization could increase the public sectors demand for domestic credit, thus limiting the funds available to the private sector. This crowdingout does not result from a change in the governments behavior but from a shift in the portfolio of private agents. Higher demand for bank deposits reduces the private sectors willingness to hold government bonds, so the public sector must finance a given budget deficit with more domestic credit. Simulations for Argentina for 1961 - 1982 suggest that the low response of private investors to changes in interest rate policy in those 20 years was attributable not to the low values of interest elasticities but to the interaction of the mechanisms allowed for in the model, which tends to neutralize the impact of such policies. The author concludes that the effect of changes in interest rate policy on the demand for capital goods is weak in Argentina and might affect the quality of private investment more than its quantity.

Unfair trade? Empirical evidence in world commodity markets over te past 25 years

Since the 1970s, commodity prices have fallen in international markets at the same time that consumer pries have risen. The price of coffee declined 18 percent on world markets between 1975 and 1993, for example, but the consumer price for it increased 240 percent in the United States. Explanations for such diverging patterns remain largely unexplored in current economic literature. The author examines the spreads between international and domestic commodity prices, explains why they have increased, and analyzes their implications for commodity-exporting countries. He finds that the spreads have increased dramatically because of the asymmetric response of domestic consumer prices to movements in world prices. In all major consumer markets, decreases in world commodity prices have systematically been transmitted to domestic consumer prices much less than have increases. This may have cost commodity-exporting countries more than

Uncertainty and global warming: an option - pricing approach to policy

100 billion a year because it has limited the expansion of demand for commodities in these markets. The asymmetric response, which has been attributed to trade restrictions and rising processing costs, appears to be caused largely by the behavior of international trading companies. Many of these companies are large enough to dominate most commodity markets. Surprisingly, although mainstream economists have suggested imperfect competition in international trade at both the producer and the consumer levels, they have not yet pointed it out at the intermediary level. Free trade requires that all players sing the same tune : competition. The author recommends a special effort to understand the determinants of consumer prices and the role of intermediaries at both wholesale and retail levels -starting with the collection of information about the activities of international trading companies. This effort would require the involvement of the World Bank and the World Trade Organization, because they have the resources to undertake such an operation worldwide. Only a better understanding of how these companies operate will remove the suspicion of unfair trade in international commodity markets.

Foreign Direct Investment in Africa: Policies Also Matter

Uncertainty is inherent in the analysis of global warming issues. Not only is there considerable scientific uncertainty about the magnitude of global warming, but even if that problem were resolved, there is uncertainty about what monetary value to assign to the costs and benefits of various policies to reduce global warming. And yet the influence of uncertainty in policymakers decisions is ignored in most studies of the issue. The authors try to explicitly incorporate the effect of uncertainty in the choice of global warming abatement policies. The approach they develop draws on the emerging literature on investment under uncertainty - in particular, that on the option-valuation approach. Their numerical applications focus on the Clines (1992) analysis of global warming, but it may be applied to a range of global warming analyses. First, they assess whether it is optimal to implement Clines strategy of limiting global warming today, or whether it should be postponed, and for how long. Then, they identify the optimal policy to be implemented today for different levels of uncertainty about the costs and benefits of policies to reduce global warming.