Thorsten Janus

Aid and the Soft Budget Constraint

The author applies the theory of the soft budget constraint to explain some stylized facts regarding the outcomes and practice of international aid, including ineffectiveness, white elephants, and volatility. The soft budget constraint can also make aid counterproductive. Nonetheless, actual aid institutions may be constrained optimal responses to soft budgets and commonly suggested reforms such as improved donor coordination in aid, focus on fewer countries and projects, and less volatility of aid may lower the effectiveness of aid. The soft budget is also consistent with conservative project selection and the recent focus on “ownership.”

International gross capital flows: A new measure and application to a global panel

Macroeconomic studies of international capital flows have focused on (i) net capital flows across countries, (ii) gross capital flows or (iii) more rarely gross inflows (outflows) computed as the sum of foreign (domestic) acquisitions of domestic (foreign) assets in balance of payments data. In this paper, we argue that more information than embodied in existing measures is readily available. Thus, we decompose a country’s net capital inflow into four instead of the standard two inflow/outflow components. We, then, support the practical importance of four-way decompositions by showing that they explain six financial crises and predict sudden stops better than standard measures of gross capital flows. Finally, we note that what the literature’s terms gross capital “inflows” (“outflows”) really measure net acquisitions of international assets by foreign (domestic) residents and that the actual cross-border flows implied by balance of payments data are larger.

Trust and Culture

Large populations can gain from economies of scale but lose internal trust due to diluted information. This creates an optimal group size. However, trusting strangers who claim to be members invites outsiders to disguise as insiders and abuse extended trust. Thus, if cultural diversity can raise the imitation cost it can promote cooperation. Even so, however, scale economies are lost when the population subdivides and the cultural boundaries may have to be enforced to prevent assimilation. The model is consistent with norms against inter-cultural marriage and episodic boundary-reinforcing conflict where formal institutions for contract enforcement are weak.

Economic Shocks, Civil War and Ethnicity

Using a novel cross-country panel dataset, we show that commodity terms of trade declines cause civil war in countries with intermediate ethnic diversity. The civil war effects for highly diverse or homogenous societies are negative and insignificant. Since the size of the largest ethnic group explains 96% of the variation in the ethnic diversity measure, we conjecture that a key problem may be ethnic dominance: countries where the ethnic plurality is large, but not so large it cannot be challenged, may be most vulnerable to economic shocks. The findings may help to bridge the partly distinct literatures linking ethnicity and economic factors to conflict.

Controlling for Import Price Effects in Civil War Regressions

Abstract Several studies estimate the effects of commodity export prices on economic outcomes, such as conflict and democratic transitions. In this note, we argue that it is important to control for the effects of import prices due to two reasons. First, economic theory predicts that both import and export prices affect the economy’s performance, which can, in turn, affect its conflict propensity. Second, the facts that import prices might affect the conflict risk and that import and export prices can be correlated imply that the failure to control for import price effects can bias the export price coefficients. We illustrate these points using the dataset and one of the regression specifications in a recent civil war study.

Banking Crises, External Crises and Gross Capital Flows

In this paper, we study the relationship between banking crises, external financial crises and gross international capital flows. First, we confirm that banking and external crises are correlated. Then, as we explore the role of gross capital flows, we find that declines of external liabilities in the balance of payments – a proxy for foreign capital repatriation we call gross foreign investment reversals (GIR) – predict banking as well as external crises. Finally, we estimate the effects of GIR-associated banking crises on the risk of currency and sudden stop crises in an instrumental-variables specification. In developing countries, GIR-associated banking crises increase the onset risk for currency and sudden stop crises by 39-50 and 28-30 percentage points per year respectively. For OECD countries, we show an increase in the currency crisis risk by 33-45 percentage points.

Democracy, capital flows, and odious debt

This paper relates democracy, public and private international capital flows, and odious debt. Democracy commits a ruler to pass borrowed funds on to the private sector which builds the countrys international collateral, and the consequent rise in the credit ceiling is a Pareto-improvement within a range because the ruler can appropriate a smaller share of the rising loan. However, the ruler may still impose odious debt in the sense that the private sector prefers the country to borrow less. Under certain conditions, a fall in the world interest rate or a rise in productivity growth increases the optimal levels of democracy, borrowing, investment, and welfare. I offer suggestive evidence from a global panel.

Interventions and Conflict Incentives

Recent literature suggests that well-intentioned third-party intervention in military conflict can lead to moral hazard by acting as a subsidy to rebellion. In this paper, the following are suggested: failure to intervene can also lead to conflict, which will be called the ‘insufficient deterrence’ problem; and a classification scheme for potential conflicts in the world, which can be used to derive the optimal intervention policy on a case-by-case basis. The optimal policy may be to intervene at random because certainty in some cases will encourage parties who benefit from intervention or parties who lose to attack. The model also suggests that post-conflict aid and a siding-with-the-winner approach may promote the incidence of conflict, even if such policies lower the loss from unavoidable conflicts.