DISCUSSION PA... t...... DRD125

ABSTRACTS OF

Public Disclosure Authorized DEVELOPHENT RESEARCH DEPARTMENT PUBLICATIONS:

APRIL 1984 - APRIL 1985

.It" 1•• 1i ,. Public Disclosure Authorized

Development Research Deoartm~nt Economics and Researc~ Staff \Jorld Bank

The World Bank does not accept responsibility for the views expressed herein

Public Disclosure Authorized which are those of the author(s) and should not t>e attributed to the World Bank or to its affiliated organizationa. The f1;~ding~i' interpretations, and conclusions ar~ the results of res~arch supporte~ by the Bank; they do not necessarily represent official policy of the Bank. The designations employed, thl" presentation of material, and any maps used in this docwcent are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or i~s affiliates concerning the legal status of any country, territory, city, area, or of its authoritie6, or concerning the delimitations of lts boundaries. or nat1olla1 affil1at1.oll. ------Public Disclosure Authorized , ' - . .. .",...... "t • .

Development Research Department Publications, April 1984 - April 1985 Contents

This document is a compilation of abstracts pages of books and papers written by Development Research Department staff and consultants from April, 1984 to Books 1-4 April, 1985. The books and papers included are publicly available. By revie~ing the abstracts, readers can decide Journal Art ides 5-20 if they wish to obtain and read the summarized work. Other Publications 21-31 Copies of books, journal articles, Bank Staff Working Papers, alld other publications can be obtained Bank Staff Working Paper 32-41 through libraries, the usual commercial channels, or the Bank's hook store. Bank staff members can obtain copies ORO Discussion Papers 42-61 of ORD Discussion Papers from the Internal Documents Unit. People from outside the Bank should contact the Bank's Research Documents Center for Discussion Papers •

." ' Gregory K. ingram Director Development Research Department World Bank 1818 H Street N.W. Washington, D.C. 20433 . . . .

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• ,11 ,. ,.,. I' Books tla 1 ass a, B. Morocco: Industrial Incentives and Export World Bank Promotion. A World Bank Country Study Washington, D.C. pp. xxxi, 219

The volume analys~s the development of Horocco's manufacturing sector. It reviews the system of industrial incentives (particularly exchange rate, tariffs, quotas and export promotion measures), taxation and the financial sector. The report focusses on improving the effectiveness of import-substitution policies, export incentiVes and the mobilization and allocation of financial resources. Estimates of the economic and financial impact of the recommended changes in Morocco's system of incentives are provided in the report.

Crowe, r., Brasil: Analise does Sistemos Financeiros ISHEC and Woria Bank Gelb, A. and Rio de Janeiro, 1985, pp. 216. Knight, P.

Brazilian financial policies have had a: major impact on the evolution of the macroeconomy. This book analyses their evolution, and that of the financial system, from the reforms of the mid-1960's until the end of 1~83.The contribution of financial policies towards the increasing instability of t0e ma~roeconomy is also addressed.

Uammert, A. and Modell i •. g Investments in the World Copper Sector University of Texas Press, S. Palaniappan Austin, Texas, 1985, pp. 136.

The study presents a framework for analyzing future investment patterns in the copper mining, processing and semifabricating ind~strif!s on a worldwide context. The mixed integer programming models developed in the:book are used to carry out systematic investment analysis taking explicitly into Bccoun~ interdependencies among processing stages, determining the most efficient investment~ prqduction and shipment patterns in o~der to satisfy market requirements •

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Mitra, P., The Theory of Taxation for Developing Countries World Bank (D. Newbery and forthcomin~, 1986 N. Stern, eds.) ... ' The World Bank is increasingly called upon to offer policy advice to developing countries. These range from recommendations to implement substantial tax, tariff and public enterprise price reforms on the one hand to more or less continuous policy dialogue at the sectoral and project level, where the social profitability of specific projects may be quite sensitive to sectoral tax, tariff, or pricing reforms.

The rapid development of the theory of public finance in l:he last decade has had a dramatic effect on the way such policy interventions are analyzed.

The main theme of the book is to adapt recently developed theory for use in developing countries, which f~ce different constraints than those envisaged in the original theories. This has been done with considerable success, and demonstrated In a series of case studies within the book.

It develops operational techniques which can be used to identify desirable tax reforms, using time series and cross-section conswmer bcdget data, input-output tables, and information on tax receipts. The contents in~lude a textbook exposition of the new theory, relating it to theclosely allied subject ~f social cot-benefit analysis; illustrations of the normal application of the th~ory to economywide tax reform; a definition of the range of the theory's applicab(lity and identification of the assumptions tha are most important in shaping policy advice; application of the theory to p~tpra. It'ax reform; and a discussion of taxes affec;ting factor markets and issues of development policy.

The book also contains an extensive and rich research agenda of issues whose solutions would assist tax analysis. It was nev~r intended to solve these during the project, though s.ome progress haa been made on some of them. " . "7~ , ", . . ~ '. ,"

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Pyatt, G. and Social Accounting Matrices: Washington, D.C. J. 1. Round A Basis for Planning The World Bank, 1985 (editors)

,It,. ,.,Ii IIThis volume is based on a selection of papers presented at a conference sponsored by the World Bank. An extensive introduction reviews the present stage of development of social accounting. The methodology af social accounting is discussed In Part 1, which begins with Ben King's paper: What is a SAM?, and includes two papers by the editors (one on regional accounting), and a paper by Alan Roe on flow of funds analysis. The country studies in Part II give a retrospective view of an early SAM, for Sri Lanka, and new matrices for Swaziland and Bostwana which involve some innovations. Part III then addresses multipliers and SAM based models. The first paper in this section, by Sir-Richard Stone, discusses the disaggregation of the household sector in the national accounts. This is illustrated, together with a full multiplier, by resulLs for the U.K. A paper by the editors is then followed by an extensive review of early fixed price and CGE models by Erik Thorbecke. The final paper, by Clive Bell and Shanta Devarajan, builds on their SAM-based study of the Muda RLver region in Malaysia in attempting a synthesis of semi-in-output and Little-Mirlees methods of cost benefit analysis.

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Balassa, B. Industrial Prot~ction in the Developed The World Economy Countries (with Carol Balassa) June 1984, pp. 179-196 World Bank Reprint No. 315

This paper reVlews recent changes in protection measures in the United States, the European Common Market, and Japan as regards their total trade as well as their trade with developing countries. The paper provides information on changes in tariffs and employs numerical indicators to gauge the scope and the restrictive effect of non-tariff barriers.

Ba t ass i1, B. Adjustment Policies in Developing World Development Countries: A Reassessment September 1984, pp. 955-972 ORD Discussion Paper No. 78 World Bank Reprint No. 312 ." ' This paper analyses policy responses to external shocks by developing countries in the 1974-76 and 1979-81 periods. It is shown that outward-oriented economies relied largely on output-increasing policies of export promotion and import substi~ution to offset the balance-of-payments effects of external shocks in both periods and accepted a temporary decline in the rate of economic growtW in order to limit their external indebtedness. In turn, in~ard-oriented economies fafled to apply output-increasing policies of adjustment. They financed the bala~ce-cf-payments effects of external shocks by for~ign borr~~ing in the 1974-76 period, and'had FO take deflationary measures in 1979-81 as their increased indebtedness limited the po~sibi1ities for further borrowing. The policies applied led to subsstantially higher rates of economic growth in outward-oriented than in inward-oriented economies, 'with the differences in growth rates offsetting the differences in the size of exte~nal ~hocks several times.

Ba ta s sa, B. Pr1r.es, Incentives, and Economic Growth Weltwirtschaftliches Ar~hiv, 1984(4), pp. 611-30 World Bank Reprint No. 339

This paper examines the economic effects of ' government directives and instructions in developed, developing, and soci~list countries. The paper reviews policy - imposed disto~tions in the product and factor markets of these countries and use~ available empiric~l evidence to establish the adverse effects of these distortions on resource allocation and economic growth. ...' . . . . .

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Hdld~~il, H. Trade and Trade Relations Between OECD Economic Studies Developed and Developing Countries: Autum.'1, 1984, pp. 7-25 The Decade Ahead World Bank Reprint No. 321

The paper reviews the trade policies applied by developed and by developing countries in the postwar period and examines the ~ffects of these policies0n trade between the two groups of countries. Emphasis i~ given to trade in manufactured goods, w"ich has been the most dynamic element of world trade. The possible interest of developed and developing countries in the liberalisation of their mutual trade is cl:amined, with a view to establishing a policy package for multilaLeral trade liberalisation. Pinally, matters relating to the conduct of a North-South rOulld at trade negotiations are analysed.

Ba 1ass a, H. Medium-Term Economic Policies for Portugal Economia .It ,. ,..• " October 1984

This paper examines the economic policies applied in Portugal in recent years and makes recommendations for policy changes th~t ma~ improve the performance of the Portuguese economy as the country becomes a mer)iber of the European Cortunon Market. It analyses issues relating to the public sector,·trad,~ policies, the amount and availability ot credit to the private sector, indus1rial policy, and policy t0wards agriculture.

Baiassa, B. External Shocks and Adjustment Policies in Managing International Development Twelve Less Developed Countries: 1974-76 and November/December 1984, pp. 6-22 1979-81 DRD Discu~sion Paper No. 80

This paper provides an analysis of exlern~~ shocks experienced by less developed countries and the adjustment policies followed~y U.ese countries in the years 1974-76 and 1979-81. The paper follows an earlier stud} by 'the author on the policy responses of , , I Less developed countries to external shocks in ~h~~974-78 period.

It is "shown that outward-oriented economies accepted a sluwdown in their economic growth after the quadrupling of oil pr(ces ~n 1973 in order to avoid a large external indebtedness, but accelerated econpmic grQwth in subsequent years as the policies applied encouraged exports and efficient• import substitution; they repeated this . . ,...... ~ '"

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experience after 1979. In turn, inwar~-oriented economies lost export market shares and, notwithstanding substantial foreign borrowing, were not able to maintain past rates of economic growth in the 1973-79 period. Growth rates in inward-oriented economies declined further after 1979 as they could not continue borrowing at earlier rates.

!;alassa, H. Adjusting to External Shocks: The Newly Weltwirtschaftliches Archiv Industrializing Developing Economies in 1985 (1) 1974-76 and 1979-81 DRD Discussion Paper No. 89.

The p-aper provides evidence on the differential effects of alternative policy responses to external shocks in newly-industrializing economies during the three-year periods following the quadrupling of oil prices in 1973-74 and two-and-a-half fold increase in oil prices in 1979-80. It is concluded that, after a temporary slowdown, the application of 0ulward-orienled policies permitted regaining relatively high rates of economic growth while limiting external indebtedness. In turn, inward orie~tation was often accompanied by extensive foreign borrowing and, in the absence of the efficient use of borrowed fund~, external debt and debt service ratios increased, eventually necessitating the rescheduling of the debt and the application of deflationary policies. j

!;e ll, C. and lntertemporally Consistent Shadow Prices In a~ Journal of Public Economics De va raj an, S. Open Economy: Estimates for Cyprus (submitted)

In the practical estimation of shadov prices, the assumption that the economy IS • "011 a steady-state growth path is often invoked, usually implicitly. Most developing countries are far from this trajectory. We dE~ri\'e 'shadow prices where the dynamic evolution of the economy is endogenously deter~nined, important influences being initial conditions and the constraints on foreign borr~wing~ Hence, the resultin~ (dated) shad0w prices of tradeables, nontradeables, labour an~ the accounting rate of inte~est (ARI) are mutually consistent. Estimates for the RepubliF of Cyprus show that deviations from steady-state growth can be significant, leading to large fluctuations in the ARI and thereby making.. the timing of investment project~ crurial . . I " • ' . . . ' . . . .. ,. . , .

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.ii,_ ~t,'-, Bel~)~i!Martin, .w ,Assessing the Performance of Infant In'lustries Journal of Development Ross­ La qf9n" B. Economics, Vol. 16, 1984 & WJ$tphal, L. pp. 101-128 Working Paper No. 666

This paper reports findings from a literature survey to learn about the performance of infant industries in less developed countries. Remarkably little direct evidence was uncovered about the costs and benefits of developing these industries. But the'findings·indicate that infant firms have experienced relatively slow productivity growth. Thus many infants started quite some time ago apparently have so far failed to achieve international competitiveness. The findings suggest tentative conclusions about the causes of the failure. Insufficient productivity growth to achieve and maintain competitiveness seems to reflect the absence of sustained efforts to acquire and use the capabil ities necessary for: continuous technological change. Far more than stenuning from experience alone, these capabilities appear to increase to needed levels only through consciously allocating resources to acquire them.

Condon, C. Productivity Growth, External Shocks and Capital Journal of Policy Modell ing, Corbo, V. and lnflows in Chile During 1977-81: A General Vol. 7, (forthcoming) de Mela, J. Equil ibrium Analysis DRD Discussion Paper No. 91

The growth path of Chilean economy duri~g 1977-81 is analyzed using a computable general equilibrium model. During that periQd a ~omprehensive package of reforms liberalized international trade and removed ~estrictive labor legislation. As a result Itt '~f"i\le' reforms, there were large changes in telat~ve prices, and in the structure of production and demand and the economy enjoyec( unp{ecedented growLh with declining inflation. But large macroeconomic imbalance\. bee'ame evident toward the end of the period and in 1982 Chile experienced an abrupt an~ severe recession.

Taki'ng the real exchange rate as an e'xoger,ous pol icy variable, and using the observed lev~ls of employment growth and foreign cipital inflows, this paper compares model-generated growth paths with those of th~! ecor,omy. First, the benchmark simulation path issued to estimate the magnitude and pat2ern pf growth and prOductivity change during the 1977-81 period. Next, counterfact~al s~mulations are used to assess how Chile's economic performance would have diffe~ed i1: (a) external events had been different; and (b) toreign capital inflows ha~ been different. The analysis suggests that the macroeconomic imbalances that led to' the crisis in 1982 were exacerbated by the · . '. ,.f ....'

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.tt,. ",.11 large capital inflows and real exchange rate appreciation that resulted from the use of the exchange rate as a stabilization device.

Corbo, V. Reforms and Macroeconomic Adjustment World Development in Chile during 1974-84 August 1985, Vol.13, No.8

Thi~ paper provides a background on the main macroeconomic developments of the reform period. After a review of macroeconomic disequilibrium before the reforms, the paper interpreted the macroadjustments. The interpretation covers t;.JO distinct periOds: 1973-76, when policy was based on a closed-economy view, and 1977-82, wllen macropolir.y was increasingly guided by an open-economy model. The paper argues that the setback that Chile suffered during 1982-83 and the large external debt that was accumulated were the result of two major errors. The first was the use of the exchange rate to stabilize prices without due regard for the incentives for large capital inflows that arose from this policy at a time when international capital markets were very liquid. The second major error was in the second half of 1981. After a large drop in capital inflows, the authorities relied on an alltomaLic adjustment mechanism, by which the w~netary squeeze from the reduction 1n capital inflows would improve in the real exchange rate. Because wages were indexed to prior inflation, as indeed .was the case. The paper concludes with lhe aSSeSSlJl2rrt that most of the micro reforms wer'e 10 th"~ right direction and ~lad the expected resilit -- snd that the errors were ~ostll In the design of macroeconomic policies.

Cuddington, J. Budget Deficits and the Current Account in th~ Economic Journal Vinals, J. Presence of Classical Unemployment Vol 96, March 1986

This paper uses an intertemporal disequi li brium model of a monetary (i.e. cash­ in-advance) economy to explain the effects of fiscal policy on the current accou"t in the presence of flexible exchange rates and short-~un real wage rigidity that gives rise to classical unemployment. The differing effects o[ alternative methods of financing government expenditures--by rai~ing taxes, bOI:rowing via the issue of government securities, or printing money--are considered:within a microtheoretic optimizing framework. Our results are strikingly differ~~nt f;rom those of standard sticky wage-price 'M ~ational expectations models as well as those of ~he new inter~<:mporal Walrasian­ equilibrium models. For example, we show tha:t reclucing government spending will, in the presence of Classical unemployment, worsen the current account. This worsening is larger the more 'permanent' the policy shift is perceived to be. These results ,are contrary to the usual presumption based on the above-mentioned alternative models. . _.9 . ~ ...... , .. .. .' . - :. .., ~.

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de Melo, J., Microeconomic Adjustments in Uruguay During 1973-81: ~orld Development, Vol. 13, No.8 Pascale, R. &. The Interplay of Reai and Financial Shocks August 1985 Symposium Issue: 'l'ybout, J. Liberalization with Stabilibiz­ ation in the Southern Cone of Latin Amer:'ca

This paper uses th& financial statements of industrial firms to de~elop an integrated firm's eye view of the changes in the Uruguayan economy during 1973-81. In the first of three subperiods, 1973-75, real financial costs were very negativ~ and tended to offset low returns on operating assets. During 1976-78, the dismantling of • It 'illlerest rate control s increased real financial costs, but other factors increased the returns on operating assets more rapidly. During 1979-81, financial co~ts jumped enough to more than absorb increases in grosg earnings, which were probably dUL to Argentine demand. The rates of earnings and capital format.on were highest among exporters in the set.:ond subperiod, when a rr.ajor export promotion program was in place. this pattern was reversed in the third subperiod, as the promotion programs were dismantled and real currency appreciation seemed to squee~e gross earnings of exportables relatively more. This unequal squeezing was probably due to redundant tariff and other protection for import-comp~ting producers.

Drud, A. CONOPT: A GRG Code for Large Sparse Dynamic Mathematical Programming, Nonlinear Optimization Problems Vo 1. 3 1, 1985 pp. 153-191

The paper presents CONOPT, an optimizati

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Drud, A. Alternative Model Formulations in Nonlinear Operations Research, Vol. 33, Programming - Some DisastroLls Results No.1, Jan./Feb. 1985, pp.218-222

This paper describes some experiments ~ith two alternative formulations of a nonlinear programming model. One apparently suitable formulation proves to be numerically disasLrous for several algorithms. The paper discusses the reasons ~or this behavior and argues that solution systems need to be strengthened so that they can cope with alternative model formulations. As argued in the paper, it w~uld be desirable to Itt" il1lpiro"'e the numerical algorithms ;:hemselves, or to develop computerized modeling syste:ns that c~n reformulate models into the form most suitable for a particular existing algorithm.

Fernandez, R. The Expectations Management Approach to World Development, Vol. 13 Stabilization: Argentina, 1916-82 No.8, August 1985 Symposim ISf\ue: Liberalization with Stabilization 1n the Southern Cone of ~atin America

The main goals of the economic authorities in Argentina during 1~16-82 were to open the economy to foreign trade and to reduce inflation. The stabilization plan relied first on the control of money anu wages, lat9.r on,a preannounced schedule of a declining future exchange rate -- actions that were supposed to be accompanied by a fiscal policy to reduce the public sector deficit.

The stabiLization plan was ab6ndone~ in the first quarter of 1981 for two reasons: an important fi ~ncial crisis during the second qu~~ter of 1980, and a deterioration of fiscal discipline that coul~ no longer assure coherence between the deficit and the preannouncement schedule. 1~e paper also argues that the political situation i~ Argentina undermined the credibility of the reforms and particularly the stabilization attempts. With the abandonmeQt of'the stabilization schedule, new commerc.ial a.1d exchAnge rate measures were ,~radu'ally introduced, reversing the pol icy of opening the economy to foreign trade. The ~financial reform was reversed in 1982 with the virtual nationalizarion of deposits. .

The exper1ence of Argentina suggests that capital inflows responding to in~erest rate arbitrage playa fundamental role in the short run dynamics of real exchange , ~." ' ' " , , ~ . ":' ' . " .

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rates. They can promote the adjustment, o~ they can precipitate a run on the foreign e.':change market. The lesson is that a stabilization plan based on the preassnouncement of future exchange rates is highly risky for an economy like Argentina's. Finger, J. M. The Political... Economy of Trade Policy Cato Journal, Vol. 3, No.3 pr. 743-750

Virtually every studied ir.stance of the application of a "trade policy" which is an import restriction shows that the policy substracts more from than it adds to the national economic interest of th~ country ~hich implements the policy. Yet there is increasing provis~on in tne industrialized countries of such policies. A significant reason why policy Jecision processes are operating perversely is that, for trade policy matters, the decision process has come to be professionalized. The cadre of professionals, (inside and outside of governments) operate the process (and the operation of the process defines what the process is) according to a set of technically complex but conceptually incomplete rules. The public's trust of expertise plus the professionals' conception of education as the passing of mastery of these rul~s to the next generation combine to make the process not only self-sustaining, but self-reinforcing. Given the nature of the decision process, the only sensible pol icy advice is, "Don't do it!"

Galvez, J and_ Microeconomic Adjustments in Chile during 1977-81: World Development, Vol. 12, No.8 Tybuut, J : •• It "'llh~' Importance of Being a Grupo '. August 1985, Symposium Issue: Liberalization with Stabilizalion in the Southern Cone of Latin America

This paper uses financial statem~~ts cf industrial firms to provide an integrated' firm level view of the changes 'in t.t.le Chilean economy during 1977-81. 80Lh real side 1ind financial shocks had major (,ffec':s on tile performance of !'ume Lypes of firms. Exportable goods producers did re}ativ~ly poorly in "real" activities, for reasons probably tied to Chile's real prolong~d exchange rate appreciation. Import­ compeLing firms that began the period with high protection did even worse, apparent:. reflecting tbe larger change in their out\.>ut p'rices as protection was dismantled. The reforms thus shifted demand away from ind~stri~s l~ast in line with the country's comparative advantage, but they also hurtexpo}tables -- the very sector authorities intended to pr8moLc. - - u . . , . ~. II , . I

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On the financial side, the highly posillve real cost of peso borrowing reduced industrial profits considerably. A handful of powerful conglomerates (~os) generaLed , large (but presumably unrealized) capital gains by investing in the securities of related ... enterprises. Such activities allowed them to offset relatively poor returns on real operations; and their ownership of the country's major banks allowed them to conso!idate control of a large volume of assets with debt finance. Thse two results explain why the groupos were suddenly in considerable financial difficulty when the ChLlean boom endE HI 1982.

CrO()Lilert, C. and liouseho Id ~:xper]d i tur(' ~urveys: Some LSMS Working Paper No. 22 Cheung, K.F. Methodological Issue; March 1985

This Workip.g Paper (which comprises two parts) is concerned with ~everal methodulogical aspects of collecting information on household expenditures. Three issues are discussed in the first part (1) the impact of the length of survey participation on mean and variance of reported income and expenditures; (2) the detetminants of survey participation, in particular the decision by household members to fill out expenditure diaries and (3) the additional reporting which r~sults from household members keeping individual diaries, as opposed to one member keeping one household diary book. The second part compares the reliability of two' alternative methods to obtain data on expenditures on durables and other infrequ~ntly purchased goods and services.

Hanson, J. and External Shocks, Financial Reforms and World Development, Vol. 13, No.8 de MeLo, J. Stabilization Attempts August 1985 Symposium Issue: Liberalization with Stabilization in the Southern Cone of Latin America

This paper interprets and evaluates Uruguay's reforms emphasizing the outcome of financial reforms and attempts to bring dow~ inflation. It is shown that domestic interest rate deregulation and the removal of proj1ibition towards holding dollar­ denominated assets led to a rise in the ratie uf financial assets in CDP and to a shlft towards dollar-denominated assets. Causes o~ the'persi~tent and large spread between peso and dollar interest rates adjusted for the preannounced rate of devaluation (tablita) are examined. . . , .' '. ~ .'

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The discussion of the stabilization program during 1979-82 and its aftermath in 1983 shows that setting the tablita at less than the difference between internal and external inflation led to severe imbalances. Because of remaining redundant ~rotection ,if II 'i1~d'price stickiness, the real exchange rate appreciated sharply for a prolonged period and the trade balance widened until the stabilization episode ended with capital flight when dOubts set in about the sustainability of the tablits.

Lele, U. Women and Structural Transformation Economic Development and Cult-Iral Change 1985 (forthcoming)

This paper focuses on an examination of the extent to which, and the circumstances under which, gender affects economic behavior, thereby influencing women's participation in the process of structural transformation. A review of development literature relevant to women's role in agricultural production and economic development under different social and prOduction systems brings to bear analysis from several major approaches to these issues: the study of agricultural growth and technological change, distributive and demographic factors as they interact with women's economic role, sociological and anthropological literature, abd analyses of the impact of government intervention on women in agriculture. A brief' summary of trends in agricultural production and overall employment is then'developed, particularly with a view to examining its implications for women induding' substitution of male and female labor, and women's different stages of development and under diverse social situations. In the treatment of these issues, the paper poin(? oui pol icies that are detrimental to productive efficiency and social welfare, ~hat affect the legal framework, the institutional cGpacity and educational pro~rami of the developing countries. Reform of such policies w~~ld contribute to increase~ societal awareness of the losses implicit in women's unequal 2ccess to resources and th~ir c~nsequences for w6men's participation in economic activity as structural trans[orma~ion ~ccurs.

Le 1e, U. Growth of Foreign Assistance and its Effect~ on To be published in a book edited African Agriculture by John W. Mellor, Christopher de.l Gada and Malcolm BJackie, 1985

This paper is an attempt to assess the effectiveness of foreign assistance to the agricultural sector of the Sub-Saharan countries. It first reviews the justification .~ for aid in Africa from the point of view of donor and African recipients. An overview of the donor involvement and donor impact in Sub-Sahara and the African agricultural - 14 - Journals

performance are then discussed. The evolution of donor assistance to African agriculture is traced with attention to the patterns and the type of aid given. The paper explores the effects of the allocative patterns of physical resources provided by donors to the recipient governments to develop their capacity to address the problems in their agricultural sectors. It discusses the impact on African agriculture of the more difficult to define "knowledge transfers" which donors consciously or inadvertently carry out in the process of physical resource transfers. The paper finally examines the types of policy issues which affect donor-recipient interactions. The paper also illustrates why donor and recipient governments need to focus on these interactions with a view to improve the effectiveness of future aid to African agriculture.

Levy, V. Cropping Pattern, Mechanization, Child Labor, nnd Economic Development and .... Fertility Behavior in A Farming Economy Cultural Change July 1985

This paper examines cross-section evidence on differential fertil:ty in rural Egypt, focusing on the relationship between structural and policy changes in agriculture, on the one hand, and fertility and children's schooling on the other. The results obtained indicate that variation in Laborcont~ibution from children has appreciable effect on farmers' attitudes towardsfertility:and actual family size. It supports the hypothesis that cotton labor intensity is one qf the basic conditions motivating Egyptian farmers to bear relatively large numbers of chfldren.

Levy, V. "The Savings Gap and the Productivity of Foreign Aid The Journal of Developing to a Developing Economy: Egypt >. Areas 19, October 1984,

This paper develop and estimate a simple general equilibrium decision model of the Egyptian economy. The estimates of the model's parameters are used to simulate the economy for dlfferent levels of future fore~gn resource inflows and to calculate the productivity and internal rate of return tathese inflows. The results indicate that high level of foreign aid are needed for t~e Egyptian economy to continue to grow at the pace experienced in the 19705.

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Levy, V. The Distributional Impact of Economic Growth Middle Eastern Studies and Decline in a Developing Country, Egypt, (forthcoming October 1985)

This paper examines the changing patterns of income inequality and poverty in Egypt in the period 1958-74. The analysis centers on the fundamental question: who received what share of the proceeds of economic growth? In answering this question the paper adopts an absolute income approach and compares the results with measures of r~lativ~ income inequality and Lorenz curves.

Lewi s, J. 0 Anatomy of a Balance-of-Payments Crisis: Economic Modelling 1 and Urata, S. Application of a Computable General July 1984, pp. 281-303 Equilibrium Model to Turkey, 1978-80.

, " ,. r· I. I' This paper analyzes quantitatively the causes of the foreign exchange crisis in Turkey in the Late 19705 through application of a multi sector computable general equilibrium (CCE) model. The model incorporates some mechanisms that simulate the actual workings of the foreign exchange market during the turbulent foreign exchan~c disequilibrium period 1978-L980. It features. the simultaneous operation of both quantitative controls and premium ralioni"l1g s(~hemes. Factors contrilJutillg to the foreign exchange crisis are analyzed through counterf~ctual simulations which examine the implications [or the Turkish economy of ~~e of ? flexible exchange rate, no oil price shock in the 1978-80 period, and maintaintng i constant price-level deflated effective exchange rate. Our results indicate that ~":,,hil,,~ exchange rate policy pl<,.yed an imporlallt role in bringing abuut the fort:!ign exchallg\~ cn,sis, the influence of other factors W!iS sub:;tantial. ~; ,

Mit.ra, P. and The Quantitative Analysis of Optimum Public Policy Economic Perspectives, 1985 c. Heady

This paper presents an overview of th~ authors' work on developing a quantitative framework for the analysis o~ opttmal public policy. :haL work has proceededoboth by extending the theory an;; by ;lsing numerical analysis to elucidate its implications. The paper focusses on the fesul~s thal such an approach makes possible in the areas of laxation and pricing, pub! iC";J in\..eslmt::Tll and lrade pul icy. The aUlhors' ongoing work.is concerned with the impact of (ublic policy under different assumptions aboul the functioning of factor markets. . - 16 - Journals

Nogub, J. Agricultural Policies and Developing Countries The World Economy in the GATT: A Proposal for Breaking the Impasse June 1985

Continuous demands put forward by developing countries for greaLer access to the markets of agricultural products of industrial countries appear to have overlooked the fact that industrial countries' view of trade policy is essentially mercantilistic. Mercantilism views exports as a gain and imports as a cost to the national economy. In fact, the trade liberalization rounds under the aegis of the GATT has been viewed as a mercantiljstic exchange of concessions.

After reviewing i~dustrial countries' structure of protection of their agricultural sectors and the economic effects, the paper argues that developing countries' exporters of agricultural products have much to gain by changing their historical behavior of requesting and obtaining exceptional treatment in the GATT, and deciding to take a more active participation in future trade negotiations. These negotiations provide a more balanced trade policy decision mechanism - one in which exporters' interests are given a higher weight than is the case when these decisions are highly influenced by domestic objectives. Developing countries can also gain if they offer import concessions in costly import-substitution industries.

Nugucs, J. Distortions, Factor Proportions and Efficiency: Weltwirtschaftliches Archiv Loss: Argentina in the Latin-American Scenario June 1985 ." This paper reports orders of magn~tude of the employment and income gaIns that could be expected from removal of policy-i~duced distortions in the ~rgentina manufacturing sector. The data used in th~ analysis is from the earl~ 70s when Argentina was following import-substitution policies~

..The findings show that for B givgn le:/el of !Tl8.nufacturing output, removal of factor market distortions would increase i+'18nuf~cturing employment by at least 16k. The estimates also show that a more uniform s;ste~ of trade incentives could increase marginal foreign exchange earnings by 81;.

The paper concludes with a brief comparison of Argentine estimates with similar ones that have been reported in the literature for Brazil, Chile, Colombia and Uruguay. 2E'

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in all cases, the employment and efficiency losses of policy-induced distortions haVe ," ' been important.

Petrei, H. and Microeconomic Adjustments in Argentina During World Development, Vol. 13, No.8 Tyboul, J. 1976-81: The Importance of Changing Levels of August 1985, Symposium Issue: Financial Subsidies Liberalization with SLabili~ation in the Southern Cone ot Latin .. America This paper lIses the financial statements of Argentine industrial firms La study Lhe micro level impact of recent liberalization and reform attempts. The main lesson is that eXLremely large subsidies were provided to the industrial sector by way of negative effective financial costs. These negative costs appeared first in the late 1970s because of real currency appreciation and unconstrained access to foreign credit, then again in 1981 because of an exchange insurance program. We also find that the Arl!~ntille government's announced intention to promote exporting activities did not translate into relatively favorable product market conditions for exporting firms. To the contrary, the real currency appreciation squeezed exporters' profits while redundant tariff protection insulated import competing firms from world competition, at least until 1980. j'yalL, C. Commodity Balances and National Accounts: Review of income and A SAM Perspective Wealth Series 31, No.2 1985

,tt I .• ,-,.. J' This paper is concerned with Lhe r~;aLmenL of cOf!unodity and activity balances in a national accounts context. It makes us~ ~f a general method for reducing the size of a social accounting matrix (SAM) by apportion:lng t.;he elements of one or more accounts to the rest. The national accounts are lookecrat I'n terms of their usefulness for policy analysis, not least analysis of the impactiof price changes. The SNA convention of separately distinguishing activities and c&mmod.i.ties is endorsed. However, in contrast to the SNA~ it is argued that for analytic'purpbses commodity transactions should be recorded at market prices, with a separate acc6unt for each of the markets for a given commodity in which a distinct price prevaits. "The SNA SAM is shown to be a reduced form of the SAM resulting from the recommendedtrea~ment of commodity transactions, while a further round of reductions, (apportionments),:yields SAMs which are familiar from inpuL­ oULput analysis, in which activities and c.ommodities are not separately distinguished. It is argued that no special effort would be nquired to produce SAMs in which commodity balances are recorded at market prices as recoimended here, and that all reduced form \ . ' •

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verSions of such SAMs t including the SNA, are inferior as a basis for the analysis of price effects on the structure of production.

Syrquin, M. Sources of Change in Factor Intensity of Trade Journal of Development Economics (forthcoming) DRD Discussion Paper No. 95 .,.tt ,. .' ". /1

The factor proportions hypothesis of trade theory has been the subject of a large number of empiri~al tests but few of them have analyzed the changes in the factor content of trade in a country over time or across countries.

This study analyzes the changes in factor intensity of trade in Mexico, Japan, Korea, Taiwan and Israel during the 1960s. It traces back the changes in capital-labor ratio~ in the production of exports and import substitutes to variations in the sectoral composition of trade, changes in factor-output ratiqs (labor and capital), and changes in input-output coefficients.

UraLa, S. Price-Cost Margins and Imports in a Economics LEtters 15 Oligopolistic Market 1984, pp. 139-44

Unlike previous studies, this paper finds that in an oligopoly model the price­ cost margin can be positively related to the i.mport share (perverse relationship)' The perverse relationship is more likely to take ~lace if the degree of implicit collusion between the domestic and foreign firms is gre~ter than that among domestic and foreign firms, and if domestic concentration expressed,by the Herfindahl index is low.

Westphal, L., Choices of Technology in Industry International Journal of and Rhee, Y. Development Banking #2 July 1984, pp. 5-12

This article discusses questions of appropriate technology in a particular case. The case ~~udy shows that ill-advised government price policies can lead to inappropriate choic.es that have a substantial impact on employment generation and hence on economic welfar~. The generality of this finding is therl discussed, with the conclusion that pro~€r price policles are a sufficient condition for apprcpriate choices - 19 - Journals

only if there is an adequate infrastructure of market and non-market institutions to provide the technical information and assistance needed for those choices.

West phal, L., Exports of Technology by Newly Industrialized World Development, Special Issue Kh e e, Y, Kim, L, Countries: Republic of Korea May/June 1984, pp. 505-533 and Amsden, A.

Korea's spectacular export growth -- from $50 million worth of goods in 1962 to $25 billion in 1982 -- is a well-known, well-documented success story. Less well known is the recent surge in Korea's exports of capital goods and related services. The~e exports include those directly related to overseas projects to establish and operate productive systems. They also include non-project-related exports of capital goods, such as most kinds of transportation equipment or machinery sold to trading firms for resale. The project-related exports comprise overseas construction, exporls of capilal goods procured in connection with specific project~, and various flows of technological •• ihformation and technical and managerial services. The value of such exports from Korea was small until 1977, when the annual value ne'arly surpassed the c'JrT,ulative value for the preceding 15 years. For the five years from 1977 to 1981, contracts for these exports amounted to more than $40 billion. During th!,~ same period non-projecr-rejaled capital goods exports were worth roughly $8 billion. ;This paper examines K(.rLa's't:Xyorts of capital goods and related services, their rOl'e in .'Korea's developme;;t strategy, ai~d eli.: way they conform to Korea's dynamic comparali~e advantage.

Westphal, L. and Symposium on ~echnological Change and Journal of Developmenl Economics S. Teitel Industrial Development: editors' introductio" Vol 16, Sept.IOct. 1984, pp. 1-11

There is growing recognition that technolo~~cal change m~j h~v< a central role 1n successful industrialization. Several linei uf ~esearch have contributed lO this emerging perception which, in turn, is likely to ex~rt a strong influeoce on the design of future research. The articles in the symposium s;urvey and illustrate some of the research. underlying. the new perception. Four of Lh2 articles are primarily concerned with technological change: two seek to characterize the nature. of observed changes, and lWO examine some of the consequences for the relationship wilh industrialization. The remaining three articles are concerned with measuring producLivity and analyzing lhe sources of productivity differentials: two investigate r~oductivily at the firm level, and one examInes productivily rlt the sectoral level across c:olJnlries. The introdunioll " ,

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- 20 - Journals •

Wo od, Jr., D. The Collection of Price Data for the LSMS Working Paper No. 21 Measurement of Living Standards March, 1985

This paper considers ways of collecting price data in a Living Standards Survey. Its objective is to comment On the efficacy of collecting price data through household surveys and to consider alternative methods for obtaining such information. 'rhe paper provides a general overview of problems encountered in the construction of price indices over lime and among different regions al a point in time and offer9 practical solutions to them.

,if II ""1111 ...... It. " ' c,: ~ ~ ~ ~: J ~ Pt • ..,. , .. • " • • ",11 • .

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Balassa, B. The Policy Experience of Comparative Development Developing Countries, 1973-1978 ?erspectives World Bank Staff Working Paper No. 453 Boulder, CO, Westview Press pp. 96-128

The paper examines the external shocks suffered by the less developed countries as a result of the quadrupling of oil p~lces of 1973-78, and the world recession of 1976- 78, as well as the policies applied in response to these shocks. The conclusion is reached that outward-oriented economies were better able to surmount the external shocks they experienced than inward-oriented economies.

5a I ass a, B. Adjustment Policies and Development Economic Structure and Strategies in Sub-Saharan Africa Performance ORO Discussion Paper No. 61 New York, Academic Press 1984, pp. 317-40

The paper examines adju&tments to extern'al shocks of the 1973-78 period in Sub­ Saharan Africa. The results show that succe~sfuladjustment policies through export promotion and import substitution permitted ~utwa~d-oriented countries to accelerate their economic growth while interventionist ~

Ba I ass a, B. The Terms of Trade Controversy and the Pioneers in Development Evaluation of Soft Financing: Comments Washington, D.C., World Bank ... . pp. 304-11

This note presents evidence on trends in the terms of trade. It: is shown that, contrary to assertions made by Hans Sieger in ;he present volume, there has been no deterioration in the terms of trade of the dey~lor!n~ countries. ' .. . .. 0 ' I , . . , . ...., "... . ~

- ?2 - Other Publications

Brooke, A., ... fiigh Level Modeling Systems and Nonllo'GI.'r Numerical Optimization 1984 A. Drud, and Programmings in Numerical Optimization 1984, edited by P.T. Boggs, R.M. Byrd A. Meeraus and R.B. Schnabel, SIAM DRO Discussion Paper No. 113 Publications, Philadephia, 1985 I

The advent of high level modeling systems will make non-linear programming (NLP) more productive. This judgment is illustrated by a comparison of one such system, the General Alge~raic Modeling System (CAMS) with the traditional approach. The linkage between GAMS and four NLP codes are discusses to demonstrate to code developers how more 'machine friendly' codes will also become more 'user friendly'.

Condon, T. Coping with a Foreign Exchange Crisis: Mathematical Programming Study Robinson, T.S. A General Equilibrium Model of Alternative (ed) Alan S. Manne and Urata, S. Adjustment Mechani~ms (forthcoming)

The proDlems posed by a shortfall in for~ign exchange have received great attention recently, much of it focused on the often painful measures developing countries impose to cope with the shortfall. This pap~r sh~)ws a computable general equilibrium (CGE) model that is essentially Walrasian ca~ be ~odified to reflect some of the more common adjustment mechanisms to which developing tountries often resort. The adjustment measures often do not rely on price adjustmen~ and so represent important departures from the Walrasian spirit of the model. In pnrtic4lar, the paper considers the welfare effects of exchange rate, import premiurr 'Id 'quantity rationing adjustment mechanisms. Itt ,{htf.,~ptrlel also incorporates "rt::nt seeking activities lenerated by rationing mechanisms. The numerical results, using dat~ for Turkey, show that welfare losses are smallest when the exchange rate is free LO clE;ar the foreign exchange market and largest for quantity rationing. The costs associated'with rent seeking are the most important source of welfare 10SS, far outweighing allocRtional inefficiencies arising from the use of quantity rationing. ; • :.,..." t . '. • , ,. _ ,...... t I . • \'. ,. ." . .. , , , ...... , I' •

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,1f'1 '·,011 .' Corbo, V. and Measuring Technical Efficiency: A Compariscn of in Dogrammaci, A de Melo, J. Alternative Methodologies with Census Dar~ and N. Adams, (eds.) Alternative Methodologies with Census Data Managerial Issues in Productivity Analysis, Kluwer-Nijhoff, Boston

This paper reviews and contrasts the results from different approaches to the measurement of technical efficiency. The measurement of efficiency is based on the estimation of production function frontiers. The alternatives considered include full frontiers and stochastic frontiers under different assumptions about the error structure. The comparison is carried out on the 1967 Chilean manufacturing census. The few previous attempts that have compared alternative approaches were based on extremely narrow data sets such as the Swedish milk industry and the U.S. steam powel' generating plants. The results for 43 4-digit ISIC sectors indicate that the measurement of sectoral efficiency is sensitive to the selection between statistical and stochastic frontiers but not to the choice of error structure. In general there is a high correla:ion across measursu for establishment-level efficiency estimates within a sector. Finally in contrast to other studies, a~out half of the sectors considered could not support the estimation of a stochastic f~-onti"er because the skewness of the distribution of the overall residual was of the wrong sign. This result suggests at least two explanations: the error structures'considered in the literature are not appropriate or the purged data might still iQclude observations with measurement errors.

Devarajan, S. Oil Revenues and the Cameroonian The Political Economy of Lhe and Benjamin, N. Economy Cameroon edited by I. W. Zdrtman and M. Schatzburg, Praeger Press, October 1984

This paper examines the impacL of 'the t'i 1 secLor on the economy of Cameroon. IL identifies features that make Cameroon's 0[1 bo~m distinct from those of other oil exporters. First, the size and scope of L~e oil sector indicates that oil represents a temporary but significant windfall in Cameioon'$ economic development. Second, in stark ... , contrast to othe~ oil exporters at the sam~ lev61 of development, Cameroon is saving in foreign banks the lion's share of its income from oil sales. Consequently, the "Dutch disease" -- the syndrome of rapid structural shifts that has afflicted other exporters has not hit Cr.~eroon. Third, sho~ld th2 rate of expenditure out of oil revenues increase, the ensuing changes in the economy may be somewhat different from th0~e oredicted by the classical models of international trade. Using a computable general ...... _1. ~. . ". . .?' , '. '\..: ...... '~.-'

- 24 - Other Publications

equilbrium model of the Cameroonian economy, we show that while the tradable sectors as a whole are likely to contract, and the nontradables expand, some tradable sectors may actually experience an increase in demand and hence output. Specifically, some import­ substituting manufacturing sectors, because they are no~ perfect substitutes for imported goods, may grow in order to meet the investment demand generated by increased spending of oil income. The sectors producing agricultural exports, however, are most likely to suffer from this action since the almost inevitable domestic inflation will harm their international competitiveness.

Grootaer(, C. Measuring Levels of Living: Research News, Vol. 5:2 and de Tray, O.~ 'The Contribution of World Bank Research Summer, 1984

This paper reviews several efforts by Bank researchers to imprpve the measurement and understanding of living standards. Research projects 8.re grouped In categories, roughly defined by whether they principally concern a) the comparison of living standards among nations, b) the measurement of changes in living standards over time within a single country, or c) more general issues of measuring and analyzing living standards ••Issues that are addressed include the correct way of using expenditures and income as measures on levels of living, the components of living standards, and appropriate ways of aggregating data on levels of ;living. Both operational and conceptual lessons of the research are discussed •. Ongoing research to generate better data on living standards, as a starting point for improved analysis, is then described, followed by a short agenda for the future.

Ingram, G. Comment on: H. S. Rosen, 'Housing Behavior Social Experimentation, edited and the Experimental Housing Allowance Program' by J. Hausman and D. Wi~~. University of Chicago Press, 1985

During the 1970's, the U.S. experimented wiLh a housing-allowance program which made direct payments to household to promote the consumption of housing. The data from these experiments indicate that households 4re less likely to participate in such a program than had been hypothesized, that su~h a program would increase housing consumption only slightly, and that such a ~rogram would produc~ very minor effects on • If IIhQUliing prices or rents. " , '~ " ',", J " ., '. , " - ." , . , ... , .... ~., . .. ,"4' (). ~. • . '. • .. " : '" ~. t...... O. ,." .. 1 _~ r" . .

- 25 - Oth~r Publications

Mazumdar, o. Rural-Urban Migration 1n Developing Countries Proceedings of a Conference on Population Growth, Urbanisation and Urban Policies in the Asia­ Pacific Region, Honolulu, April 1985, Sponsored by the East-West Center, Hawaii and the Australian National University

Migration is a re~ponse of individuals to b~tter opportunities. Considerabl~ evidence ~xist:i in the literature -- and some of these ar~ revi~wed in the paper -- to suggest that private gains from migration are, ~s expected, s~bstantial. Yet the overall consequence of rural-urban migration has been far from equilibrating in the social sense. In spite of the very large degree of mobility which labor in LOC's has shown over the years, large differences in income (and labor earnings) continue to persist between regions connected by migration flows. Nor has spatial mobility been able to squeeze significantly income disparities between the poorer sections of the rural population and the high wage urban sector. Two lines of enquiry can be detect~d in the literature to explain this divergence between the income-equalizing effect of migration at the individual level, and the relative failure of ~igration flows to reduce differences in .wlabor incomes at the aggregate or social level~ T~~ first is concerned with a ~roup of hypotheses tending to suggest th&t migrants reipond. to signals other than aClual wage differences, leading to excessive rural-urban ~igrition (the over urbanization thesis). These factors inClude migrants' sensitivity teo' nO!1·economic factors (city ,lights, etc.); to gambling instincts highlighting a desire t~ break into the high wage sector of the urban econo~y; or a des~erate act on the part:ofl~bor after being pushed out of traditional rural activities due to populatio~ gro~th. Excessive migration in this sense increases inequal ity of earnings in the urban 'labo:~ market through increased un- and under~employme~t. without significantly reducing o~erall rural-urban wage gaps. The cost of building urban infrll.structure to accommociat~ the "e ... cess" volume of migrants is an added social cost. '

S~condly, the literature has focussed, ltention on some crucial aspeclS of the process of migration itself which detract from .ts e'1uilibrating role in a macroeconomic sense. Examples are the important influence of,lIfamlly and friends" in the area of destination encouraging the cumulative nature of migration flows; the information and psychic costs of distance; and the cost ot fina~cing migration in ~he p~esence of a highly imperfect capital market in rural areas. · .". _. .' : ", ~..'... . . "," .' . . '. . ...' '. : ... - 26 - Other Publications

The paper reVlews the evidence on these concerns, proceeding in logical sequence from the aggregative or macro studies (Sections I and II) to more micro research in urban and rural economics (Sections III and lV, respectively).

1Jo' Mitra, P. Perspectives on the Global Economy Oxford University Press, 1985 ( D. La 1 ( e d • )

This paper develops a modelling framework to examine adjustment to external shocks - terms of ~rade movements, recession in the industri~l countries and increases in interest rates - in five groups of developing countries. The framework is used to review the main features of their adjustment up to 1981. This provides a convenient backdrop against which individual country adjustment may be viewed.

Mitra, P., The Theory of Taxation for Developing Countries World Bank, 1985 D. Newbery and N. Stern (eds)

This paper analyses the determinants of optimal tax and investment policies in a I "dtval~ping country and investigates how those polirCies should respond to a sustained r: se in t~e price of imported intermediate inputs such .s oil. The effect on the terms of trade between industry and agriculture are also reported. The paper breaks new ground by combining in one model the tax and investment~policies considered in the literature on shadow pricing and incentives in the presence'of ~ax restrictions with the nation of Labour markeL imperfection central to contric4Lion, on Lhe dual economy. This general model is then subsjected to external st~cks.

A simple general equilibrium model is constructed 3nd its parameters are chosen so that it can approximately replicate the obs~rved economic dat~ for a particular developing country. Optimal policies are first~ der~ved analytically, providing rdes for organizing production, setting taxes and offset,-ing ·labour market distortions. They are then computed under alternative assumptions abo~t government objectives, its ability to tax transactions within the agricultural scctor;of a' developing econolllY and the environment in which government pol icies must operate. Whilt:! many important insights can be obtained from simple static models, an analy"is of investment policy also requires the computation of optimal intertemporal policies. This paper presents optimal one-period policies as well as optimal steady-state policies. " ...... '. "t,. ",.,1 - 27 - Other Publications

The numerical analysis d~monstrates that the optimal tax structure depends crucially On the extent to which agriculture can be taxed and on the assumptions made about the distribution of land ownership among rural and urban residents. It turns out that, ... nenever tax restrict ions are present, increase/' prices of imported energy reduce the size of government subsidies. There is also a su;gestion tha increases in the energy price should lead to a reduction in the optimal rate Jf investment.

Mitra, P. and A Computational Approach to Optimum Public Policies Mathematical Programmi~g, 1986 C. Heady

This paper describes and illustrates the use of an algorithm tho computes optimal taxes and public production in an economy where the government' tax powers are restricted. The special features of the optimal restricted tax problem required the solution of problems that have not arisen in previous applications of Scarf's algorithm. Indeed, these problems could only be dealt with properly by developing lwo versions of lhe algorithm that can be used together.

This paper outlines the economic model and explains ils special features. The two versions of the algorith are then described and their convergence properties established. The combined use of the lWO versions of the algorithol is illustrated in a problem tha involves'the choice between public and private control of production and shows that domestic tax restrictions can make inefficient public production desirable.

Hi lra, P. Adjuslment lo Exlernal Shocks in Selected Studies in Banking and Finance, Semi-Induslrial Countries, 1974-1981 North Holiand, 1985

This paper uses an analytical framework previously developed by the author lo ,classify fourteen semi-industrial counlries i0to five groups depending on the way in ." which they adjusted to external shocks in the,1970s and early 1980s. The eXlernal shocks considered are: (i) changes in the terms of tiade; (ii) slowdonwn in the industrial mark~t economies; and (iii) changes in real iblercsl rales on eXlernal borrowing. The five groups are: (J) export expansion and pu))lic resource mobil ization;' (3) import substitution and negative public resource mob~lization; (4) financing without domestic adjustment; and (5) favorable extenal shocks. - 28 - Other Publications

The framework is also used to provide an analytical hislory of adjusLmenl in each country up to 1981. This shows that internal shocks in the form of public sector profligacy were as imporcant as external shocks in a number of countries. The adjustment experience of the semi-industrial countries also underscores the irr,~ortance of pursuing ... 'mutually consistent internal and external policies in response to sl,,~ks.

Pya(l, G. An Axiomatic Approach to the Gini Economic Inequality: Coefficient and the Measurement of Survey Methods anp Welfare Measurements, Advances in Econometrics, \'01. IV edited by R. L. Barmann and G. F. Rhodes, JAI Press Greenwich, CT, 1985

This paper provides a set of axioms under which the Gini coefficient emerges as a limiting form of the admissible set of inequality measures. Such measures are assumed lo be derived via a measure of mean equivalent income in a utilitarian framework. The main novelties are to allow for differences in the needs of individual households, and for the welfare of anyone household to depend on the incomes, relative to needs, of others. Conditions are obtained such that if agg.regate income is independent of its distribution, then social welfare is maximisqd when income is distributed in proportion to needs.

£lyall, C. Comment on: Clark, C., 'Development Economic? Pioneers in Development The Early Years' eeited by G. M. Meier and Dudley Seers, Oxford, The UniversiLY Press, 1984

,It II This paper comments on the contribution to 'The Pioneers' volume by Colin Clark, and focuses particularly on three areas of wor~, (i) the relative importance of agriculture, industry and services,·(ii) the i~ler~ational comparison of real income and real product; and (iii) agricultural productiiity ~nd population growth. - 29 - Other Publications

vah der Gaag, J., lIealth Care 1n the Netherlands The Future of National Health J.L R.ut te r, and Health Care Systems W. vande Ven

.iI'l ,.,. II In this paper we study the development of the Dutch health care sector against the background of the development of the Dutch economy for the period 1953-1983. During this period real per capita GNP grew at. a yearly rate of 2.6 percent, with an average inflation rate of private cons'lmption of 5.1 percent. During the same period the health care sector grew from three percent of GNP to nine percent. The two five-year periods with the fastest economic growth, 1963-68 with 10.2 percent and 1968-73 with 12.3 percent annually, ~ere alos the periods with the highest annual growth rates in the cost of health care, 15.1 and 19.0 percent, respectively.

After more than 30 years of uninterrupted real per capita growth in GNP, the economy stagnated in 1980 and showed negative growth in the subsequent years. During this period health care cost inflation, which had been running at about twice the CPI­ rate came down to the average in~lation rate of private consumption, while the volume of medical consumption stabilized at one percent per year.

We analyze whether various major govern~ent measures ailned at reducing health costs are likely to have had any significan~ imp9ct on the growth ot the health care sector, but conclude that the economic rece&sion rather than direct government interventio"n in the health care sector shout'd be credited tor reducing the growth of health care costs. The implication i!' that,: as soon as the economy will turn for the better, health care cost as a percentage of GNP will start increasing again.

Westphal, L. and The Interdependence of Investment jecisions In Syrquin, et. ale (eds.) Cremer, J. Revisited Economic Structure and Performance: Essays in Honor of Hollis B. Chenery, New York Academic Press (1984) pp. 543-572.

In his well-known article on "The Inle,rdependence of Investment Decisions,1I Chenery investigated the consequences of economies of scale in production activities that are related through the use of intermediate inputs. He demonstrated that investments ." ' which are not profitable if undertaken individually may nonetheless be profitable if - 30 - Other Publications

undertaken simulLaneously. His analysis suggests t~o questions about such "critically interdependent investments." Is there a criterion ~hich ~ould identify them independently of kno~ing the full set of optimal decisions? How costly is it if Lhey are not undertaken? These are the questions addressed in this paper. A criterion is developed that identifies critically interdependent investments and an expression is derived that indicates the cost of failing to undertake then. It is shown that the cost can be quitt large in relative terms.

Westphal, L., Reflections on Korea's Acquisition of Technological In N. Rosenberg, Kim, L. and Capability and C. Frischtate,(eds.) Dahlman, C. International Technology Transfer, New York, Praeger (1985)

This paper explores teChnological development in relation to industrial strategy .~ In Korea. What technologies does Korea possess? Where did they come from? Ho~ ~ere they obtained? What ~as the role of trade? The paper begins by establishing a conceptual foundation for discussing the Korean experience. Next, it describes the salient aspects of Korea's development in general terms. Then, becaus~ of the importance of exports in Korea's strategy, the paper analyzes the interactions between technological development and export activity.

Westphal, L. Microanalytical Aspects of Complementary In S.K. Kwak, et.al. (eds.) and Rhee, Y. Intra-indu~try Specialization Essays in Memory of Sang Chul Suh Seoul, Korean Economic News (1984), pp. 203-225

This paper investigates comparativ~ advantage at the level of specialization in separable processes and components that ent~r into the production of finished products. The analysis centers on the process stages invpi-ved in metalworking activities. It is primarily concerned with the nature and co~sequ~nces of factor subbtitution, economies of scope, and increasing returns to scale. P6rtic~lar attention is paid to economies of scope which derive from possibilities tor ~hari~g indivisible production facilities among distincl process stages. The approach employe{ uses technical data at the man-machine level and enables quantitative assessments of overall production costs for different choices of technology and under different 0rganizations of prOduction among prOducers -­ thal is, under different patterns of speciGliz4~ion by process and of joint prOduction among stages. It is shown that complement~ry intraindustry trade, which involves the , if 'I ,.•• I' - 31 - Other Publications

integration of production across countries, affords potentially substantial gains in the forms of reduced production costs. For the activities analyzed, estimated gains range from 10 to 80 percent in the scenarios investigated here.

Westphal, L., Sources of Technological Capability in South Korea In M. Fransman, and K. King (eds.) Hhee, Y. and Technological Capability In the Pu rs ell, G. Third World, London, MacMillan (1984)

, II ,. I". I' This paper discusses how the Koreans have established an independent base of technological know-how in many sectors. It is found that Korea's industrialization has overwhelmingly and in fundamental respects been directed and controlled by nationals. Technology has been acquired from abroad primarily through means other than direct foreign investment and licensing. Moreoever, sales of manufactured exports have typically be.en at arrll's length. For most industries, Korea has had little difficulty gaining acce_ss to foreign technology in world markets that appear to he characterized by competitive conditions. Korea's success in ipdustrialization derives from its extremely rapid development of technological capabililities,: a process in which the assimilation of foreign technology has played an important ro'le. ;There are two principal implications for countries less far along the path of ind~striulization. First, a high level of technoLogicaL sophistication is not required~to attain substantial industrial competence, and it is possible to become a significant i!ildust~rial power simply on the basis of proficiency in production. Second, there i~ tre~~ndous efficacy in relying on export activity as a means of acquiring technologi~al c~pability; exporting thus appears to offer a direct means of improving productiv:ty. ; - 32 - Bank Staff Working Papers

Mohan, R. The Poor of Bogota: Who They Are, What They Do, Number 635 and Where They Live March 1984

The composition and characteristics of the poor in Bogota, Colombia are examtned In order to identify the correlates of poverty. The poor are defined as those who fall in the bottom 30 percent of household income per capita, a figure that indicates the number of malnourished as well. The findings reveal that, although larger households are more likely to be poor, the smaller households who are poor are likely to be poorer still. As expected peQple with lower levels of education are more likely to be more but a significant proportion of the better educated are also found to be poor. The poor have higher rates of unemployment at all levels of eduction. In addition, the poor who do have higher education appear to have low participation rates, a fact that supports the discouraged worker hypothesis, as well as high unemployment. Thus, it seems that workers from poor poor households difficulty getting jobs regardless of qualifications. Spatially, the poor tend to be concentrated in the South of the city but are also found in all other parts of the city. Numerous sta~ist~~al tables and technical notes on the calculation of income are appended • ... 1 Lal, Deepak The Real Effects of Stabilization and Struct~ral Number 636 Adjustment Policies: An Extension of the March 1984, pp. 68 Australian Model

This paper asks if there is anything useful that economists can say about minimizing the real costs of stabilization a~d the structural adjustment entailed by reforming va~ious inefficient microscopic policies in the economy. Of particul~~ concern are the effects of these policies on real waf'e an'j real profi t rates in the ._conomy. The paper first outlines a version of the orthod~x tr~de theoretic treatment of the small, open economy which is sufficiently rich to th~\nk through the various issues rai sed in debates over stabilization policies. This si>;lple 'framework is then applied to a model case to show how it can be used to answer que~~iond on how to minimize the welfare costs of traditional stabilization and adjustment p~'ckagts. The third part of the paper briefly discusses the usual reasons why count;ies get into a crisis and whether this can be prevented. The final part of the paper explains' how the approach outlined in the first two parts might be applied in practice in country economic analysis by the Bank. '. . . ..

I - 33 - Bank Staff Working Papers

Mazumdar, D. The Issue of Small Versus Large in the Indian Number 645 Textile In~ustry: An Analytical and Historical April 1984 Survey

This paper attempts a comprehensive review of the development of the handloorn, powerloom, and factory sectors of the Indian textile industry. Estimates of production in the three sectors are made. The evolution of economic policy toward increasing protection of the small scale sector is outlined, and the relevance of policies toward manmade fibers for the small versus large issue is studied. Study of the relative profitability of weaving cloth in the three sectors within the framework of cost-benefit analysis shows that, while at prevailing market wage rates the powerloom sector appears to be profitable over a wide range of interest rates, at reasonable social prices of labor the profitability of this sector is much reduced. In addition, the study attempts to evaluate some aspects of the impact of the Indian textile policy on employment, consumption of cloth exports, and the technological change in the large-scale factories.

Pyatt, G., Improving the macroeconomic data base: Number 646 J. Round, and" ,I <'\, "~ ~ for Mal a y S i a , 1 9 7 0 May 1984, p. 296 J. Denes

The SAM for Malaysia addresses a number of conceptual issues and their practical solution which do not seem to have been tn'!ated elsewhere. This SAM is a large one, with a level of ~etail more nearly that at whic~ national accounts are typically compiles, ralher than the more aggregated formats whi'ch are often adopted as a basi s tor macro models or a~alysis. Malaysia's excellent set of national account& make possible an initial exploration of the strengths and we#knesses of using market prices as the basis for evaluation of commodity balances, leadirig to some formal, algebraic treatment of the reasons for preferring this approach to oth~r cOllventions. An extensive household survey, covering incomes, expendi.tures, and~mployment issues, complements the national a c c 0 u n t sin d e fin i n g the p r inc i p led a t a sou r,; e s • The ma j 0 r novel tie s 0 f t his SAM include: 0) it has been necessary to define"a two-region SAM at the conceptual level; (ii) given the conceptual framework, the apptoach is essentially to estimate a SAM for East Malaysia and then to form the SAM for all Malaysia by combining this with a matched matrix for the West Malaysia states. These novelties should be of interest to others concerned with SAM estimation methods. "II ,I ,·,11 I'

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Mohan, R. An AnatomY'of the Distribution of Urban Income: Number 650 A Tale of ~wo Cities in Colombia July 1984

This approach for analysis of distributional and other change in incomes in fast growing cities in the developing world is based on data from Bogota and Cali. Among the distinguishing features is the utilization of primary data from different household surveys of comparable quality spread over six years. The paper uses different samples, inequality indices, income concepts, and ranking procedures in its analysis. Particular attention is paid to the existence of spatial inequality among different parts of the two cities by using an index of spatial income segregation. This is found to be very high when the cities are disaggregated spatially into radial sectors rather than into concentric rings. The inequality in labor earnings is also calculated and decomposed. The paper finds that the industry of activity and the size of the firm of the worker contribute little to overall inequality in earnings. Instead, education, occupation, and residence location of the worker contributed most to inequality in earnings. The results suggest that increases in spatial inequality in ,household as well as labor earnings could have deleterious effects on income distrib~tion~in the future. ~ special computer program EQUALISE which can compute income ~istrjbution indices is included.

Hanley, M. The Supply Responses for Rubber in Sri Lanka: Number 6!j7 a Preliminary Analysis September, 1984, p. 82

Study of supply response for peren~ial ~rops has frequently been limited by lack of data. This study is based on new extens(ve t~me series for rubber in Sri Lanka covering total output, producer prices, new~planlings, replantings, wage rates, area under cultivatIon, as well as many other varlabl~s. In addition, a survey of 49 rubber estates provides data on yields, type and ag~ of clone, stand densities, and many other .If 'variables. This paper reports some prelimini1.ry aBalysis of the Sri Lankan data designed to test the adequacy of Dowling's analysis o~ supply response for rubber in Thailand, based on a sophisticated reduced form supply ,function developed by Wickens and Greenfield for Brazilian coffee. The model used in thi~ study focuses on the uprooting-replanting decision, which is central to understanding ~ubber supply response in Sri Lank~, as well as disaggregates the reduced form into sever~l di§tribution and age-yield profile data from the estate surveys. This modest extension of the Wickens-Greenfield formulation performs significantly better in the Sri Lankan context, than a straightforward appl icati on ~f the model. - 35 - Bank Staff Working Papers

Ingram C. Housing Demand in the Developing Metropolis: Number 663 Estimates from Bogota and Cali, Colombia August 1984

... This paper presents estimates of housing demand equation parameters separately for owners and renters in Bogota and Cali, Colombia in 1978, and for Bogota renters only in 1972. The demand estimation procedure use~ a workplace based stratification to introduce price variation in the equations. The demand equations estimated using this procedure give income elasticities of the demand for housing that are less than one. Other household characteristics involved in the demand equations have low demand elasticities. The age of household head has a positive elasticiLY over mosL of iLs range while family size usually has a positive elasticity for renters and a negative elasticiLy for owners~' Female headed households seem to consume more than male headed households, but this result is rarely statistically significant. Distallce from home to work is entered into the equations as an adjustment to income, but it is undoubtedly also represent:r.g price variaton within the workplace strata that are used as the main representation of price variation. The distance elasticity i~ small and a1mo: t always negative. Comparison with US data sets indicate that the range of the Co1or::ba:~ estimates generally overlaps the range of the US estimates. Comparisons are dlso reported between estimates from aggregated and from disaggregaLed data.

[)u loy, J. 1 ssues oj' Efr ic iency and Interdependence itl Number 665 O'Mara. C. Water Resource Investments - Lessons from lhe September 1983 Indus Hasin of Pakistan

This paper reporLs the results froD some experiments utilizing models 01 Lhe irrigated agriculture of the Indus Basin of )}akistal~' The models are unique in that they integrate agricultural production with a surface water distribution system and a , .. II ~'i"oll'ndwaLer aquifer system for a large river basin. Each \)[ the modei!; incorporaLes a special case of two-level hierarchical decision-making with the policy maker (Lhe government) and policy recf'i.vers (farmers) In the analysis of agricultural production response. The models are mostly configured in a long run comparaLive sLatistical mode and include endogenous private inJcstmenl il twb2 wells and tractors. These lools were design~d for evaluation of investment "rojects and programs and assessment of irrigation sysLem management, but have been iid;;!,u. .j f,,'r other purposes as well. . ,~ ......

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Dahlmall, C. and Local Development and Exports of Technology: Number 667 Sercovich, F. The Comparative Advantage of Argentina, Brazil, August 1984 India, the Republic of Korea, and Mexico

Itt " ",II" Technology exports reflect important shifts in the global pattern of comparative advantage. They reflect increasing industrial maturity and te~hnological experience accumulated in industrialization. Except for construction and capital goods, the volume of technology exports is comparatively small, but it has reached appreciable levels in recent years. More significantly, all types of technology exports have been growing rapidly, which seems likely to continue, particularly once favorable international market conditions 'are restored. Technology exports can bc accounted for in terms of the influences..of resource endowment, government policy, and firm strategy. The combined impact of these influences can be expressed in the following terms: overall resource endoW'TTlent, including human capital, determines potential comparative cost advantage; fi rm strategy and country policy affect the realization of potential advantages and the relative profitability of exercising them through different means; strategy and policy aspects influence changes in comparative a~vant;age through their effects on human and institutional capital accumulation. While-ther~ are benefits to greater participation 1n trade, acquiring experience in newly estab~isheJ areas t~kes time and effort.

Vi rrnilll i, A. Evaluation of Financial Policy: Credit Number 672 Allocation 1n Bangladesh October 1984, p. 103

Th£ Bangladesh Government has used,~ variety of policies to influence the allocation of credit to specific borrower groups Jike poor farmers, uses such as housing, and sectors such as agriculture. These poli~ies bave also been used to reduce allocation for certain uses such as inventor) .. ·.lding, .Le., speculative purposes. The policies used have included interest controls c~edit ~uarantees, systematic analysis of all the policies used by the Bangladesh Government.·! The'effect of each of the policies used, alone or in combination, is analyzed with a.view to evaluating their impact, suggesting policy changes in Bangladesh, as ~ell as dr~wiQi lessons for financial policy makers in other countries. .

... , . ., . '

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Balassa, tl. Adjustment Policies in Developing Countries, Number 675 1979-83. "An Update (with F. Desmond McCarthy) November 1984, pp. 1-113

This paper updates the analysi c of the policies ~pplied by developing countries In response to the external shocks of the '079-82 period, extending the investigation to 1983. The external shocks in question incl~~ed the two-and-a-half fold increase in oil prices in 1979-80, the slowdown of the world ecol~omy after 1978, the rise of interest rates starting in late 1978, a~: well as the softening of commodity prices in 1981 and 1982.

lloth pol icy variables liS "' .. 1 liS ; ,'rf()rmanc{~ indic~t.:;:-<; have b(~en used in the analysis. Policy variables have be~n utilized to provide an indJ~ation of the policy effort matle by tleveloping countries confrolltetl by external shocks; at the same time, the , choice has been limited by the av~!lability of quantitative measures and, in their ... absence, by the possibility of a judgmental evaluation basetl un available information on the policies applied. Performance indicators have been derived in the framework of a methodology that permits separating external shocks and policy responses to these shocks; they have been taken to reflect the effects of;the policies applied oA performance in dealing with external shocks. Thus, it should be emphasized that the rep0rl ~c!udes from its purview general development polic~es.

lthe results suggest some correspondencE' between policy variables and performance indicators. In particular, much of the intercountry differences in domestic adjustment to external shocks may be explained by exchange rate and energy price policy and Lo a lesser extent by monetary and interest rate policy.

van der Gaag, J. Private Household Consumption in China, A ~tudyof Number 701, People's Livelihood December ]g84

Until recently data on the economy of China have been scarce. In this paper we take a first look at private household cObsumption in China, using data for 1981 and 1982 published in the Statistical Yearbooks of"Chinl. We first show current consumption patterns, make some simple extrapolations for the period 1983-2000 based on various growth scenarios, and then estimate the Extended Linear Expenditure System (ELES) for China. Income, own-price and cross-price elasticities are also presented. The analy'i(~s are preceded by historical data for the period 1949-1979. - 38 - Bank Staff Working Papers •

Ua h 1 ma n, C., Managing Technological Development: Lessons Number 717 Ross-Larson, £l. from the Newly Industrializing Countries January 1985 and Westphal, L.

This survey, written in language untrammeled by technical words and concepts, looks at the technological development of the newly industrializing countries to draw some important lessons for firms and governments in other developing countries.

The maln lessons are clear. rirst, inventing products and processes is not at the center of the technological development needed for successful industrialization. It is at the fringe. What is at the center is acquiri~g the capabilities needed for efficient production and investment. Second, some countries have overemphasized the drive for technological self-sufficiency and paid a high price in poor productivity. ,if Ii ~at makes the best economic sense is to combine foreign and local technological elements -- and to do this in a way that progressively develops local capabili~ies in areas where they can be more efficient. Third, the acquisition of technological capability does not come merely from experience, though experience is important. It comes from conscious efforts -- to monitor what is being done, ~p tr~ new things, to keep track of developments throughout the world, to accumulat~ added skills, and to increase the ability to" respond to new pressures and 0PP9rtun,ities. rourth, the economic environment, through its influence on the technological ~fforts of firms, is very important in determining the prOductivity of a country's:resources. The environment is shaped by the incentives and penalties that ';ifect the W8/ firms use and adapt technology. It is also shaped by the activities of specialized tedmolo1gical agents that can provide information, means and understanding to fir~ns. "' Ahmed, S., Development of a SAM basis for planning an~ Number 726 B.Bhat tacharya, mcueling in Egypt April 1985 W. Crais, and IL Pleskovic

M the 'nid-point of the 19805, Egypt 1 fJ characterized by intervent ion and regulationoin all facets of economic activtty ~ith the govern~ent controlling some prlces and directl.y determining S0me quantities. These policy-induced economic variables have led to distortions that affect the efficient allocation of resources and create misperceptions about the actual opportunity cost of goods and services. One result is a ~ • '. ~ I !...... ~ or" •.' -. ~:J . .":,. • . "- .... -

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misallocation of resources and resultant heavy costs to the economy. During the period • If ' of the seventies, external resources were abundant, and the economy was able to sustain, high rate of economic growth despite the misallocation, whose costs were not perceived a: a heavy burden. In the eighties, however, the world environment has been less favorable, and the inflows of external resources have been and are likely to b~ more limited. Henc( concern over the cost of the misallocation of increasingly scarce resourc~s is gro~ing.

To analyze the rel.ation between regulation, distortions and macroeconomic performa·n·ce, measures of the levels of distortion are needed, a requirement that implies some evaluation of opportunity costs. This paper presents an economy-wide framework, c~lled ~ISR2'a~hat provides a general equilibrium evaluation of these costs and hence of dlstori:1ons. -

The MISR2 framework is designed to analyze the short- to medium-'term macroeconomic consequences of policies aimed at minimizing the costs ef th~ ~i~allocatior and distortions. The framework was used to analyze two sets of policy intLr~entions: (i) adjustlnents of regulated pri=es and quantities within the same policy regime, thac is, with the regulated variables remaining controlled; and (ii) adj~~ ments in the polic) regime itself, an approach that implies freeing controlled p,ices and quantities and letting market forces determine them. In MISR:2 the focus is on four areas of economic intervention: (i) pricing of output in the p~blic sector, (ii) employment and wage policy in the public sector, (iii) the t~ade ~nd exchange rate regime; and (iv) rationing and subsidization as relates to househol~s. 1n this paper, MISR2 is used mainly to anal ~/ze the effects of adjustments in public sector prices and in the rcginles governi.ng Itt " rl'. tradeI' and exchange rates.

MlSR2 disaggregates production into n~~e activities. Each producLion activity can be further separated into two, b~se~ on whether production takes place in the public or private sector. The ~,~tinction is ~eedeG on the one hand to capture the different pricing rules governing the oUtpl~t of th~ two' sectors, and on the other hand to trace the relation-between the pricing of public st~ctoroutput and the mobilization of savings. Households are separated into two catel0~ies: urban and rural. This distinction reflects the different nature of the ] ,")(.{:- rr:al'kel of the two groupings. The MISR2 framework also captures the gO'lf:'rr, "it i.; dependent agent that coi lee: 5 taxes, spends, saves and invests. The gv,er' :1:. ( ~')''lL!:'rvenes in various mark, '.S Ly supporting certain prices and subsidiz.L,?I'( ,·t.lin cummodities. Fin[;11y,:~" rest of Lhe - 40 - Bank Staff Working Papers

~orld is separated into three groups in order to capture the three pools of foreign I It II "1. ~'xchange through which transactions with abroad take place.

In order to obtain a quantitative evaluation of distortions, for each market MISR2 di~tinguishes between the actual price and the opportunity cost oftbe commodity concerned. The opportunity cost is determined for each commodity based on tbe functioning of the market and the nature of intervention. A measure of distortion 1n lhl market is obtained by calculating the difference between the values of transaction at tht actual price and the opportunity cost respectively.

A predominant result of increases in prices in the public sector is a contraction of the economy. Raising prices is the same as imposing a tax on private sector income. When no other policy intervention takes place, the price increases generate an excess supply of resouces in the public sector that lowers total absorption in the economy. In other words, raising public sector prices alone results in a trade­ off belween growth and efficiency. While distortions will be less, that result will Occur 3l the expense of a slowdown in economic growth. Tbe lrade-off, however, can be improved by combining price increases with demand management policies.

Another important result is that a program of reform which liberalizes the economy with respect to the determination of prices in the markets for public sector output, to wage and employment decisioni in the public Sector and to determination of the exchange rate, will lead Egypt to a high~growth path while at the same time, improving the macroeconomic balance considerably. A major reason is the improved efficiency of the public sector. In an environment riddled with major policy induced constraints, the actual productivity of key resources, fcreign exchange, labor and capital, are much below their true levels. Consequently, when the distortions are removed, the realized productivity gains are substantial. The;factors of production are now mobile and respond to market signals which now better refle.:,t true economic values. Resources move from low productivity activities to high producti~ity activities enabling both higher output and lower costs. The macroeconomic balance a1so improves. Liberalization of the exchange rale combined with improved efficiency in the public sector augments the growth of exports, which in turn play a key role in sustaining high economic growth. With improved ." . earnings from exports, the current accoun~ deficit also narrows. The fiscal deficit falls as tax revenues increase because of the Higher economic growth, and the FiscHl contribution of the public sector picks up because of the price liberalization. tm2M n '3' 77 7'r

- 41 - B"nk Staff Working Papers

A further interesting result is thaL Lhere i:.; no neC(;:ssary conLradiction between price flexibility and a dampening of inflaLionary pressures. Price flexibility, by raising public savings, will contrjh~te both to improved efficiency of resource use and reduced budget deficits because of ~reater public savings. Nominal aggregate demand will fall, whereas real aggregate. supply will rise, causing a decline in inflationary pressures.

As expected, in a flexible environmenL distortions are virtually eliminated. Economic agents operate along Lh~ir true supply/demand curves and resource allocations are governed by price signals which reflect true economic values. Consequently, the sources of rents no longer exist. 1n a flexible environment the dualism between public ... and private sectors does not exist since buth face the same set of prices and operate under identical policy framework.

a/ MISR is the Arabic name for Egypt. MlSR2 is a more disaggregated and technically advanced follow-up to MISR!, which is a very simple aggregative model using the Transaction... Value (TV) approach •

• " ,I ,., •• ' .. ' - 42 - ORO Discussion Papers

Corado, C. £. An Ex-Ante Model for Estimating the Impact on Number 67 de Melo, J. Trade Flows of a Country's Accession to a November 1983 Customs Union

This paper presents a structural ex-ante model to study the trade creation and trade diversion effects associated with a country's accession to a Customs Union. The model extends previous studies by introducing explicitly product differentiation and exports in the determination of trade creation and trade diversion. Unlike the traditional Vinerian analysis where the role of exports is neglected, the model handles the effects of elimination of the common external tariff facing home exports. The model is then applied to Portugal's accession to the EC and estimates of trade substitution ~lasticities are presented for 26 sectors. Finally these elasticities are used along ..... ~''\r~'th other parameter estimates to classify sectors according to whether they would give rise to trade creation or trade diversion.

Corbo, V. Liberalizetion with Stabilization Number 69 in the Southern Cone December 1983

~his paper presents a macroeconomic model to explain the dynamics of Chilean inflation during 1976-82. The model extends the Australian and Scandinavian open economy models by making a finer distinction bet~een ~radables and nontradables and by introducing more elaborate expectations formation. Results of the model supplied the quarterly Chi lean data over the period r~ject '.I,e homegeneity of the system indicating that a devaluation does indeed affect thq relative price between tradables and nontradables in the Chilean context. Th~ res~lts cast doubt on the stabilization policies pursued during the period 1979-~2, which implicitly relied upon a model in whir.h full homegeneity obtains.

Mi tra, P. Adjustment in Oil Importing Countries Number 70 May 1983

This paper develops a modelling framework which is used to examine adjustment to external shocks in thirteen semi-industrial countries. The approach offers a unifed treatment of trade adjustment as well as rp'source mobilization in public and private sectors, changes in the growth of investme0t arnd external shocks, and reliance on alternative modes of adjustment are explor~d t~rough statistical analysis. An open economy macroeconometric model, which is e~timated for each country over the period 1963-

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- 43 - DRD DifFussion Papers

~.~

78 and used to measure shocks and adjustment, is formulated. ~his allows intercountry comparison and provides benchmarks against which individual country performance may be assessed. The countries are classified on the basis of modes of adjustment in response to external shocks, and the results of cross-country regressions of growth performance against these modes are reported. Experiments with the model for each country are conducted to ascertain the macroeconomic impact of variations. de Melo, J., Market St~ucture and Performance: The Role of Number 71 and Urata, S. International Factors in a Trade Liberalization January 1984

This paper uses the Chilean manufacturing censuses of 1967 and 1979 to exam1ne the effects of the Chilean reforms in the mid-seventies on market structure ,and performance. The results show a very large increase in concentration and a slight reduction in profitability after the reforms. These results are then interpreted in the light of hypotheses about the role of potential entrants on market structure and on the pricing behavior of incumbents suggested by the theory of industrial organization. Next, a cross-sectoral simultaneous equations model of the structure-performance relationship is estimated to investigate the contribution of import and export shares in accounting for cross-sectoral variations in concentration and profitability. The statistical analysis confirms that trade liberalization gave rise to a rol~ for foreign trade variables in the determination of profitability with a change in the structural oW relationship between exports and profitabtlity~ .~ -\ Robinson, S., Yugoslav Economic Performance 1n the 19805; Number 72 Tyson, L. and Alternative Scenario January 1984 [)l:w'atripont, M.

This paper uses a multisector, com~utable general equilibrium model to analyze ~ Yugoslav e.onomic performance during the 19~1-90 period. The model is used to generate both counterfactual historical simulations for the 1981-84 period and alternative forward-run scenarios for the 1984-90 period. The counterfact~al simulations assess the relative contribution of domestic policy er{ors ~nd assess the relative contribution of domestic policy errors and adverse changes ~n exiernal trade and credit market conditions on deteriorating economic performance betwe~n 1~~1-84. These simulations illustrate the impact of the growing foreign exch.\nge 5im'1)ati~l1s illustrate the impact of the growing foreign exchange crisis on domestic gru·..;th ;lIld ;"roductivity performance. The forward-run scenarios assume that Yugoslavia will succl~sfurly implement a change in development strategy toward a more open economy with ilicrE-ased exports. Alternative simulations . .' , . - , " ,i ,"',' •. : :'.:.:.,'.... .

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analyze the implications of differences in the severity and composition of austerity measures. The results illustrate the trade-offs between the growth of domestic investment and real wages on the one hand and the balance of payments and debt repayment on the other.

Pyatl,G. Inertia in Employment Number 73 February 1984, p. 32

This paper is concerned with the micro-economic foundations of employment determination at an elementary level and, in particular, with an explanation as to why employment may be insensitive to changes in product market demand. It focuses on the short-run equi1ibrium of a firm. The assumed objective of the firm is to maximize profits with given capital stock. Two types of labor are distinguished: the existing workers currently employed by the firm, and others who might be recruited. A crucial assumption in the analysis allows that internal labor is potentially cheaper than external labor of equal efficiency. An attractive contract is one under which both the firm and the employees are better off with each othe~ than without. The analysis concludes that the mutual interest of the firm and i~s employees in reaching efficient contracts will lead to institutional forms in tlie la~~our market in support of behaviour which is different from profit maximization by the firm, given the wage rate, as normally assumed.

de Melo, J. Sources of Growth and Structural Change In Korea and Number 74 Taiwan: Some Comparisons

'W ' This paper compares the accounting sources Jf growth behind the economic performance of Korea and Taiwan from the mid-fittie; to the early seventies. From the supply side, sources of growth are measured bylhe ~ccumulation of both human and physical capital along with technological progl:ess ... From the demand side, ,changes in the structure of production are decomposed into ch~nges~in intermediate and final demand wilh changes in final demand further broken down into changes in domestic demand and trade. The accounting methodology is also extended to'include measures of the relative importance of labor productivity capital accumnlation, and structural change in accounting for ~he high rates of labor absorption growth in manufacturing. Finally, the paper gives measures of the factor intensity of trade. The quantitative comparisons indicate that both countries experienced an unusually high rate of total factor productivity growth for their level of income per capita and both rapidly shifted resour~es away from low productivity activities towards higher ones. Changing patterns - 45 - Ill\!) Discussion Papers

of comparative advantage within the manufacturing sect.or are compared between the two •• cquntries. The calculations also show benefici~l eflects on employment of the high labor intensity of exports.

Finger, J.M. Ideas count, words inform Number 75 February 1984

The restoraLion of currency convertibiLity 81ld the t"eestablishment of an open classical economics is concerned, a victory of tactics, not of pt"inciple. The leadership commu~ity built on the public's mercantilist perceptions of international trade, but arranged negotiations so that a country had to give up access to its own market in order to obtain access to another. The trading system, codified in the General Agreement on Tariffs and Trade (the GATT), also sanctioned administrative mechanisms through which a country could impose import restrictions after a demonstration of ~~ to domestic producers who competed with imports. Offsetting gains to consumers and other purchasers are not taken into account. Over time, governments became more and more dependent on administrative channels to manage domestic pressures for protection, IJntil the concept on which th~y are based, injury, came to dominate the country's overall conception of the national economic interest in trade.

Injury means much the same as comparative disadvantage -- if international trade will displace a domestic activity, the industry wiLL be, within the meaning of the law, injured. Thus the administered protectio.1 mechanisl"l:ls which the GATT created have the potential to restrict everything a country impc;rts. The GATT also created the better known .trade liberalization mechanisms (the GATT "ro~mds"), but power has been reversed, .ttanal • tne"1"'''' admlnlstered.. protectIon.... mechanlsms are!now dominant.

Westphal, L., Reflections on Korea's Acquisition of Technologiclll Number 76 Kim, L. l: Capability Apd 1 1984 Dahlman, C.

This p-aper explores technological devblopmi;!nt in relation to industrial strategy 1n Korea. What technologies does Korea possess? Where did they come from? How were they obtained? What was the role of trade? The paper begins by establishing a conceptual foundation for discussing the Korean experience. Next, it describes the salient aspects of Korea's development in general terms. Then, because of the importance - 46 - DRD Oi scuss.ion Papers

of exports in Korea's strategy, the paper analyzes the interactions between technological development and export activity •

Mohan, R. ., "" The I".Economic j" Determinants of Urbanization: The Number 78 Regional Pattern of Urbanization in India Explained February 1984

The tight relationship between urbanization and economic development linked with economic base .theory and central place theory explains well the regional pattern of urbanization i_n India. ,tso, a logistic relationship between level of per capita state domestic product and lev~ls of urbanization in states fits the data well. Manufacturing employment is found to be a key determinant of population of large cities while employment in agriculture largely generates the demand for urban population in small towns. Thus, growth of small and medium-sized towns results from agricultural growth 1n the backward regions rather than industrial dispersal, while the policy on industrial dispersal is likely to succeed with a concentration of dispersal in large cities rather than dispersal of concentration to small towns. Central place theory is, therefore, relevant to small towns, and economic base theory to larger cities. Different kinds of basic employment can generate succeeding layers of urbanization in small and large towns as income increases with overall economic developme~t.

Balassa, B. Adjustment Policies 1n Developing Countries: Number 79 A Reassessment June 1984

This paper analyzes policy responses to e~ternal shocks of the 1973-76 and 1979- 81 periods in developing economies, grouped a~cording to the level of industrialization and the policies applied. It is shown that o;Jtwar'd-oriented economies relied largely on export promotion and import substitution to o~fset the balance-of-payments effects of external shocks in both periods. Inward-orieqted ~conomies failed to apply such output­ increasing policies of adjustment; rather, th~y fihanced the bal~nce of payments effects of external shocks by foreign loans in the 19!~-76 period and had to take deflationary measures in 1979-81 when their increased indet~ed~~ss limited the possibilities for further borrowing. The policies applied led C~) ral'.es of economic growth substantially higher in outward-oriented than in inward-oriejtedeconomies, with growth rates in 1983 averaging 5 percent in the first case and prac~ically nil in the second • ." , . ,. ~ "

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Balassa, B. External Shocks and Adjustment Policies in Twelve Number 80 Less Developed Countries: 1974-76 and 1979-81 June 1984

This paper provides an analysis of external shocks experienced by less developed countries and the adjustment policies followed by these countries in the years 1974-76 and 1979-81. It is shown that outward-oriented economies accepted a slowdown in their economic growth after the quadrupling of oil prices in 1973 in order to avoid a large external indebtedness, but accele~~ted economic growth in subsequent years as the policies applied encouraged exporL~ and efficient import substitution; they repeated this experience after 1979. In turn, inward-oriented economies lost export market shares and, notwithstanding substantial foreign borrowing were not able to maintain past rates of ·M economic growth in the 1973-79 period. Growth rates in inward-oriented economies declined further after 1979 as they could not continue borrowing at earlier rates.

8alassa, B. Intra-Industry Specialization: A Multi­ Number 82 Country Perspective June 1984, pp. 26

This paper has tested various hypotheses as to the determinants of intra­ industry trad~ in thirty-eight developed and gevel?ping countries exporting manufactured goods. The econometric estimates for the entjre g~oup of countries show that the extent of intra-industry trade increases with the le~el ~f economic development (GNP per head), the size of domestic markets (GNP), and the c'pennc.ss of national economies. The existence of trading partners with common bo\ders"and geographical proximity further contributes to intra-industry trade. .

These hypotheses have also been confirmed for the developing country group. And while similarities in regard to trade orientation ~nd the existence of border trade, as well as intercorrelation between the gross na~ional product and per capita GNP, have reduced the statistical significance of the r~gres~ion coefficients for these variables for the developed country group, the equation ~:has i1 high explanatory power.

MiLra, P. and General Equilibrium MOdels, Investment Policy, Number 83 C. Heady Shadow Prices June 1984

... II I" ... ' This paper analysses the determinanLS of optimal tax and investment policies in a developing country and investigates how th,)sc pul icies should respond to a sustained .,.

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rise in the price of imported intermediate inputs such as oil. The effect on the terms of trade between industry and agriculture are also reported. IL combines in one model the tax and investment policies on shadow pricing and incentives in the presence of tax restrictions with the notion of labour market imperfection central to contributions on the dual economy. This general model is then subjected to external shocks. The numerical analysis demonstrates that the optimal tax structure depends crucially on theexLent LO which agriculture can be taxed and on the assumptions made about the distribution of land ownership among rural and urban residents. Whenever tax restrictions are present, increased prices of imported energy reduce the size of government subsidies. There is also a suggestion tha increases in the energy pr1ce should lead to a reduction in the optimal rate of investment • • If I. I, •• /' TybouL, J. The Algebra of Inflation Accounting Number 84 July 1984

In developing countries, analyses of the corporate sector often must proceed on the basis of inflation-distorted financial statements. If these distortions are ignored, findings rega~ding firms' financial structures and earnings rates may be grossly in error. This paper develops algebraic representations of the various possible distortions that inflation can introduce in financial stateme0ts and of the associated corrections that have been developed by accountants. Fo~r ba~ic types of inflation bias are identified: input cost understatement, depretiatipn cost understatement, neglect of net monetary losses, and neglect of those capital los~es due to changing relative prices. Adjustments to balance sheets and income sta~.emen'ts are presented for two basic cases: general inflation, and inflation Cllm changini rel~tive prices. Empirical evidence concerning the impact of these adjustments i. rev;ewed. It is noted that when inflation rates are substantial, the change in accounti:!1g ft-gures can be quite dramatic.

Balassa, B. The Determinants of Intra-Industry Number 86 Specialization in United States Trade June 1984, pp. 22

This paper set out to explain the det~rmin.ants of intra-industry specialization in the United States by reference to industry ~s well as country characteristics. It 1S shown that the extent of intra-industry trade ·~s positively correlated with product differentiation, marketing costs, the variabiljty cf profit rates, and offshore procurement, and it is negatively correlated wlth economies of scale, industrial

concentration, foreign direct investment i and tran~portation costs. It is further shown that intra-industry ~pecialization in U.S. trade with individual countries i~ ~osiLively - 49 - DRO Discussion Papers

correlated with the extent of trade orientation In these countries and it is negatively correlated with inequalities in per capita incomes ~nd total GNP and with distance between the U.S. and the individual countries.

Balassa, B. Intra-Industry Among Exporters of Number 87 Manufactured Goods May 1984, pp. 26

This paper examines the determinants of intra-industry specialization in bilateral trade among countries exporting manufactured goods. It is shown that the extent of intra-industry trade between any two countries increases with their average income level, represented by per cHllita incomes, and with their average size, represented by GNP, and it decreases with diff~rences in their income Level and their size. It further appears that the extent of intra-industry trade is positively correlated with the trade orientation of the countries concerned and with the existence of a conunon border and it is negatively correlated with the distance between them.

Ba La 5 sa, B. The Problem of the Debt in Developing Countries Number 88 June 1984

.w , This paper examInes the issues ass6ciat~d with the growing foreign indebtedness of the non-oil developing countries. Follo~ing h review of the principal changes that occurred in the debt situation of these econ;omies between 1973 and 1983, it analyzes the experiences of countries pursuing different deve[opment strategies. It is shown that outward-oriented economies responded to the ~xternal shocks of the Qeriod largely by the application of output-increasing policies of;export promotion and import substitution, limiting their reliance on foreign borrowing, In turn, countries applying inward­ oriented policies borrowed extensively abroad, failed to use the borrowed funds efficiently, and eventually had to impose st~~ng deflationary measures in order to imp'rove thei'i- debt situation. The paper then;e~amines the rationale for alternative debt indicators and reports the results of projections made in 1983 by the use of these indicators. The projections are compared to ~stim.ates for 1984. Finally, the paper considers alternative policies for the developing countries as well as possible future measures that may be taken by the internatioqfll c~mmunity to ease the process of adjustment and to minimize the chances of fut)Jre debt CrIses...... , - 50 - DRD Discussion Papers

Balassa, B. Adjusting to External Shocks: The Newly Number 89 Industrializing Developing Economies in 1974-76 Kay 1984 and 1979-81

.' This paper provides evidence on the differential effects of alternative policy responses to external shocks in newly industrializing economies during the three-year period following the quadrupling of oil prices in 1973-74 and two-and-a-ha1f fold increase in oil prices in 1979-80. It is concluded that, after a temporary slowdown, t continued application of outward oriented policies permitted regaining relatively high rates of economic growth while limiting external indebtedness. In turn, inward orientation was often accompanied by extensive foreign borrowing and, in the absence of the efficient use of borrowed funds, external debt and debt service ratios increased, eventually necessitating the rescheduling of the debt and the application of deflationa policies.

~alassa, 11. Comparative Advantage In Manufactured Goods: Number 90 ARe-Appraisal April 1984, pp. 30

This paper has shown that patterns of comparative advantage in manufactured goods can be explained by reference to corrvnpdity Characteristics (factor input ",. "coefficients) and country characteristi,cs (the endowment of physical and human capital). In turn, intercountry differenc~i in the extent of trade orientation, the concentration of exports, and foreign ~irecl investment explain part of the residuals 0 the cross-section regression equations. Finally, it has been found that the method applied permits projecting the factor iptens!ty of trade for individual countries.

Conway, P. and Oil Windfalls in a Controlled Economy: ,A Number 92 Gelb" A. A "Fix--Price" Equilibrium Analysis of ALgerill August 1984

Algeria is distinctive among J~velo~ing c~untries for its highly controlled, planned economy and the overwhelming we,;ght ,of its public sector in production. 8ecausl of these characteristics the Algerian {~spo~se to increased oil revenues after 1973 differed considerably from that of mor~ marlet-oriented oil exporters, in terms of sectoral evolution and real exchange rAte mhvements. This paper reviews the Algerian development strategy and develops and ~stim)tes e~onometrically a fix-price equilibrium model of the Algerian economy.' . - S1 - ORO Discussion Papers

The model. emphasizes spillovers of purchasing power from rationed wage goods onto domestic financial assets as the major equilibrating variable. The results are shown to account for Algeria's unusual adjustment pattern after 1974. They also have implications for a transition towards a flex~price system.

Gelb, A. Cooperative Production and Accelerated Development: Number 93 A Review of Potential and Constraints August 1984

Producer cooperatives or, more generally, firms with exten~~~e worker participation are only marginal to most economies. There is, nevertheless, consideral interest in the potential for greater productivity of such firms, and in their distributional implications. A number of examples suggest that, under the right conditions, cooperatives can make a useful contribution to regional development. Thi! paper discusses three such cases: (i) the Mondragon Group in Spain and the Dairy and Sugar Cooperatives of Gujerat and Mah~rashtra, India. It considers the case for interventions along cooperative lines to assist in the rationalization of indu~Lries. Tentative conclusions are: (i) cooperative or participatory production appears to be easier to organize and sustain in less overwhelming, hierarchical societies; (ii) noL prOductive activities benefit equally from cooperative organiz&tion; (iii) industrial prOducer cooperatives are probRbly most suited to regions of limited labor mobility; ( cooperatives probably require quite broad-based participatory processes, which requirE an incentive structure that links rewards to performance; (v) public role should be limited; and (vi) widespread employee .shar~holding, 1S useful.

Ge 1 b, A. The Oil Syndrome: Adjustment to WindfJll Gains Number 94 in Oil Exporting Countries August 1984 Forthcoming in Conference Volume on Adjustment to External Shocks edited by Piero Ferri and collaborator~, and Ccnferen~e Volume on Natural Resources and the Macroeconomy~ CBP~, London. }

.... This paper provides a compact overview of the adjustment of non-cap~tal-surpl countries to oil windfalls after 1973~

It quantifies windfalls, 'r;crib~ the fiscal response and outlines some consequences for the nonoil economies ,,1. c, ~~m~l~ of counlries .

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Cuddinglon, J. Budget Deficits and the Current Account: Number 97 Vi na L s, J. An Intertemporal Disequilibrium Approach August 1984

." ' The objective of the present paper is to develop an inlertemp·!ral disequilibr model of a monetary economy to explain the effects of fiscal policy on the current account. We wish to emphasize the role of aggregate demand-determined output fluctuations and flexible exchange rates within a microtheoretic pptimizing framewor~. ~urthermore, the differing effects of monetary versus non-monetary (i.e. tax or bond) finance of government expenditures are considered.

Crais, W., A General Equilibrium Estimation of the Effects Number 98 de MeLo, J .. , of Ue~uctions in Tariffs and Quantitative September 1984 & Urata, S. Restrictions in Turkey in 1978

This paper presents general equilibrium estimates of the effects of removIng qu&ntitative restrictions and reducing tariff protection across-the-board by 50% for Turkey in 1978. The paper presents a numb~r of extensions ov~r previous estimates of gains from reducing foreign trade rest~icti~ns. The most important extensions include correct modelling of quantitative restt.'ictions in general equilibrium and an approach the endogenous determination of rent-se.eking activity levels in the presence of quantitative restrictions. The results s4ggest that substantial costs in terms of foregone GDP resulted from import quot~is in' the presence of renl-seeking. Finally, fa reasons explained in the paper, the ad~itio~al gain (measured in terms of real cor) rrl a further iJ% across-the-board reducti~n in: tariff barriers would have been negligible

van der Gaag, J. Fertility Correlates in China Number 99 August 1984 ,tt II /,.41 ,.

The pa~er!8 main objective is to analyze the relationship between fertility aI economic well being in the People's R~public of China. We employ a rather unique data set consisting of three repeated cro8G-sections for the years 1975, 1980 and 1982 over counties in 4 province~.

During our search for this r~lationship we show (1) how easy it is to oblain lithe standard" but misleading resdts from simple regression analysis, and (2), that el - 53 -

I,,~alt;ller stc:ble in,,:)me-fertility prufiles do not yiQid ~uffici£nt information to predict ,tt It the direction, let alone the magnit.ude, of change or fertility patterns in China.

The first problem is due to the highly heterogeneous environment~ in which the data were collected (especially large inter-provincial differences). The latter stems from the strong government population polici~s in China, whi~h have created a disequilibrium situation tn which discrete chanBl's in policy, rather than marginal changes irr economic variables, Ilre the dominant factors influencing fertility.

The paper should serve as a warning against the use of standard cross-section analysis for prediction purposes ir ~uch an unstable sit~atiDn. van Wijnbergen, s. Government Deficits, Private Investment and th~ Number 100 Current Account: An Intertemporal Disequili~ri~m August 1984 Analysis

We u~e a model with full interteml?oral optimization'and Fi.schl"-Gray type short run real wage rigiditie~ to demonstrate effects of deficit spending In rliffercnt employmen~ regimes. in a departure from the standard disequilibrium literature, we allow for upward price flexibility although pri~~s, 0nce set at the beginning of the period, will be rigid downward until the beginnini of (he next period. We show that under Keynesian unemployment (conditional on a~lausfble assumption about public and private sector di scount rates) cefici t spending r;'duces unemployument, improves the fUlure terms of trade and therefore leads to an increake in private investment (crowding in) and deteriorat~~ the Current Account.

Under classical unemployment (wh\;;p", :~n our definition, goods markets clear but uneml- .oyment persists because of contract 'bsseQ real wage rigidity), fi scal expansi on goes partl)' into prices (terms of trade irriprovement) and only partly into quantities, to the exten: that contract based real consumption wage rigidity coupled with a real appreciati~ allows a lowe~ real product wage. A temporary increase in government , expenditur~ in classical unemployment leads to a bigger terms of trade improvement today ... than tomorrow, so both income and substitution effects lead to a current account _~mpro~ement ~ The cost of capital increases more than the value of future output S0 :-:,,' .: :'. r ' .. :?' .',., ". -t-;.. . ," .... -. .' ',,'. ,:\

. . .~; ~,~':.. '. .;~ , ~ '. .. ; -.,-.' '. . '. .

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given wages an ... p;:-ices) at least partially offsets this surprising positive effect on the first period CA.

Permanent increases in government expenditure have ambiguous affects on the CA but will be negative if a sufficiently large part of the first period expansion goes into prices rather than quantities. A permanent increase also leads to a bigger peri:1d 2 terms of trade improvement than obtains in period one, essentially because of the ~Ioderating effect of the first period fall in real domestic product wages allowed by the first period rea) appreciation coupLed with real consumption wage indexation. This in ,"', turn, implies that tomorrows value marginal pc-oduct of capital goes up more th,p,n todays cost of capital, so investment once again improves: a permanent increase under this regime leads to crowding in, contrary to a temporary increase.

Doyle, C. and Taxation of Foreign Multinationals: A Sequential Number 101 S. van Wijnbergen Bargaining Approach to Tax Holidays September 198:,

~ this paper we view the tax schedule applied to MNE's profits a~ ~he ~utcome of a sequential bargaining process and shq~, u~ing modern game theory developments (the tlperfect equilibrium" solution concept) q;.at ttlX holidays will emerge from such a process if a MNE incurs fixed costs upon entry. ~t th~ core of our results is the recognition that the existence of sunk costs creates ~n e~ post (entry) bilateral monopoly situation.

Virmani, A. Moral Hazard in Competitive Loan Markets: Credit Number 102 Ceilings in Domestic and International Le~ding October 1983

This paper analyses the problem t"f wi.~lfui detault by a borrower, who is financially able to repay the loan. This ~Rrobrem termed Moral Hazard, effects the functioning and efficiency of the loan IMrOiet. ',. If lenders are unable to distinguish between honest and dishonest borrowers, bo(roweTs are shown to get smaller loans and at higher interest rates than they would othefwise. It is also demonstrated how this problem can lead to a supply curve '.,;:ch b(~comc:; verticle at some point. This type of supply behavior has recently been mu~:, not~d in international lending. !~e analysis also Itt .. r,eiugogests how moral hazard problems can result in loan markets characteri~ed by fully collateralized loans, sur:b as the housing market. , • • 'I ,~ , " . Vi' • ' : , , . , ~ II: • .,II '" ' . ' . .' , '., . . , . '. " . . P'

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Lal, Deepak Trends In Real Wages 1n Rural India Number 103 1880-1980 June 1984, pp. 43

This paper charts long-term (over a century at the All India level) in rural real wages, which can be derived from available administrative statistics on rural wages, to see if the conclusions of an earlier study (Lal, 1976) based solely on National Sample Survey data (for the post 1950 period) concerning a positive association between trends in rural real wages and in the changing balance between ~he demand and supply of rural labour, are upheld. A real rural wage series for a century is decived, and used time series data on labour supply and agricultural output to estimate a simple neo-classical ," ,I I,,~€ldel of wage determination for the whole 1880-1980 period and for three sub-periods. It is found that some mild support is provided, particularly for the pre 1914 and post 1950's period for a neo-classical model of rural wage determination. The paper also summarises the results from other studies concerning the post Independence performance of rural real wages, which also support the "neo-classical" model of wage determination as a working hypothesis. The paper lends support to the view that, given the likely future growth in the rural labour force, raising the demand for labour remains the single most importan~ means for alleviating rural po~~rty, The paper's estimate of the increase in the rate ~f growth of agricultural output in the post Independence period to 2.4% p.a. over its long-term trend of just l:~our iupply (of about 2% p.a.). Hence, there has been no acceleration of the rate of growth of· rural real wages in the post Independence period over the long-run trend rate of under half a percent per annum, and hence it would be unrealistic to expect any significant reduction in the extent of Indian rural poverty. But to the extent that the supply of rur~l labour is also influenced by the absorption of labour in industry, it is the failure of~modern Indian industry to markedly increase its demand for labour despite high growth rates of investment which must also be assigned a major role in the limited poverty redressal in India.

Lal, Deepak Government Deficits, The Real Interest Ra~e And Number 104 and Sweder van LDC Debt: On Global Crowding Out July 1984, pp. 53 wi jnbergen

This paper links the current problems of protectionism and debt in the global economy to certain longer-term trends and "structural" weaknesses of developed and developing countries exposed by the supply shocks of the 1970's. These are the possibility of an emerging global shortage of savings; the explosive growth of social expenditures in OECD countries; a fiscal problem of prospective structural public sector deficits in both developed and developing ccunrr;n~ ,'!H'''lr;,1t.prj .... it.h certain "~;tructur,1l" . ' " . ..,; , . - . .

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features": the aging of the population in developed and its "greening" in developing countries; the real wage resistance of workers in many industrial countries. Part I of the paper charts these trends and structural weaknesses and their interrelationships. The second part develops a three-region model of global savings-investment balances in which the world interest rate and the LDC/OECD terms of trade are endogenously determined and which is calibrated with date over the 1970's. The final part summarises the global interactions in which there is a link between the actions and reactions of the public sectors in both developed and developing countries through their effects on world interest rates and the terms of trade of LDC's relative to the OECD. In both sets of countries public expenditure is growing, partly fuelled by demographic trends. The financing of this global growth in public expenditure presents the prospect of (a) a global crowding out of private investment, and (b) the growth of OECD deficits to finance consumption-type entitlements threatening to crowd out the more productive social overhead public expenditures in developing countries. Finally, it is argued that the "debt crisis" can be seen as flowing essentially from a global fiscal crisis (with its accompanying upward pressure onr eal interest rates), that is, a crisis of the public sectors in both developed and developing ~ountries.

La 1, Dcepak The Political Economy of the Predatory State Number 105 June 1984, pp. 35 ... , This paper builds on the insight of B.ennan and Buchanan that most states in the past and present are best viewed as predatory, :seeking to maximise the profits of government, rather than as is usually assluned bS being benevolent, se~king to maximise the welfare of their constituents. Part I explores the positive political economy of a predatory state by examining the macro his~oric~l record to answer four broad questions: are there likely to be differe~tes 0mong states in the extent of their predation? If so, what type of predatory s.';:ate''is likely to emerge and over what territoriaJ.· area under different technical,.economic and ecological conditions? When is a self-interested predatory state likely toinstltute an efficient set of property rights required for a market economy? The first part of the paper provides some speculations on the endogenous determination of the form and e~tent of predation and the type of economic organisation likely to emerge in a particul~r area by a simple application of the recent theory of "contestable markets" and industrial structures. The second part attempts an explanation of e particular form of predatory state that has existed in my view for millenia in India, whilst the final part of the paper draws some general conclusions on the feasibility of establiShing market economies in areas where the "natural" instincts of the predatory state are inhibiting. . . . - . . , .

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Yoon Je Cho Capital Market Structure and Barriers to Number 106 Financial Liberalization September 1984

This paper studies financial liberalizaLion policy in an economy where there is no well cfeveloped securities market. It emphasizes the role of securities marlt.ets, especially the equity market, in a financially liberalized economy. It is important not only for efficient allocation of capital but also for risk sharing and absorbing external shock in a world of uncertainty. Thus, in the absence of a well developed equity market, or of reforms which allow or promote the establishment of onc, financial liberalization, which emphasize the elimination of interest rate ceilings and the establishment of free competition among banks, may not be efficient, adequate, or sustainable. Until a country has a substantial development of equity market, government may have to maintain some control over the banking system, while it keeps the interest rate ceilings close to market equilibrium rate.

Ho lmes, P. Trade Liberalization in Structural Number 107 and Jonas, O. Adjustment Lending September 1984

Many trade liberalization steps have been taken recently by a number of developing countries -- in contrast to intensifying political pressures for protection • if " ~'\h& increased use of non-tariff forms of prot~ction in industrial countries. The World Bank's Structural Adjustment Loan program, ini,tiated in March 1980, has supported tariff reductions, the relaxing of quantitative restrictions on imports, the elimination of export licensing systems, and other specific t~ade liberalizations in fourteen developeen countries, including Thailand, Kenya, the~vor~ Coast, Pakistan, and Turkey. Many of these trade policy reforms have been acco~panied by exchange rate policy changes which support these trade liberalizations. This. program of liberalizations will benefit both the implementing countries and their tradi~g partners.

Condon, T., Capital Inflows, the Current Account, and ~he Number 108 Corbo, V. and Real Exchange Rate: Tradeoffs for Chile 1~77-~1 November 1984 de Melo, J.

After trying a crawling peg exchange ra~e and controlling inflows of foreign capital, Chile fixed its.exchange rate in 1979 and opened its capital account. Drawing on recent contributions to the analysis of the current account, the paper builds a computable general equilibrium model to aanalyze what might have happened if Chile had - 58 - DRD Discussion Papers

followed a constant policy course during 1977-81. We explore the effects of Chile's continuing to constrain the inflows of foreign capital, taking those inflows as a p01icy variable and using an estimated equation to predict the effect of those inflows on savings apd investment. The results show that Chile's loss of output would have been small rat~er than great, even with large cuts in inflows of foreign capital.

Urata, S. Economic Growth and Structural Change Number 109 in the Soviet Economy: 1959-1972 October 1984

This paper analyzes changes in the structure of production, employment and capital stock, along with the sources of these changes, in the Soviet economy for the 1959-72 period.

The structure of production, employment and capital stock shifted from agriculture to manufacturing, and especially to heavy manufacturing. The sources of growth in output, employment and capital stock are analyzed in terms of demand factors by utilizing"the input-output model framewo~k. The growth of consumption, foreign trade and interindustry linkages became increasingly im~ortant sources of output growth over time, while the role of investment expansion bei:;ame Jess significant. The analysis of the sources of growth of labor and capital re~~irements shows that labor productivity increased in all sectors while capital prg'd4ctivity decreased in most sectors. These differences in factor productivity are at~ibu~able to the Soviet Union's development policy, which emphasized capital accumulat~on:

Ba lassa, B Policy Responses to External Shocks in Huncary Number III and L. Tyson and Yugoslavia: 1974-76 and 1979-81 November 1984

This paper follows an earlier pa\"ji!r by the two authors, entitled "Adjustment to External Shocks in Socialist and Private ~1i1rkel Economies," World Bank, Development ... , Research Department, Discussion Paper No.;.61, /«ovember 1983. While the earlier paper compared the policy experience of Hungary~~nd ~ugoslavia with that of newly­ industrializing countries during the peri:ld fo~lowing the quadrupling of oil prices in 1973-74, the present paper evaluates the ildjus'lment policies adopted by Hungary and Yugoslavia in response to the external sh6cks they suffered during th~ 1974-76 and 1979- 81 pe ri od s. . . . ; \, ~ ; / I

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Neither of the two countries took macroeconomic adjustment measures in response to the external shocks of the years 1974 and 1975. Rather, they maintained earlier rates of consumption growth and increased investment, largely by borrowing abroad. In the same period, both countries lost export market shares in trade with private market economies as the policies applied adversely affected exports; in turn, increased import protection led to import substitution •

• If , As the two countries incurred a large indebtedness vis-a-vis foreign banks, they had limited possibilities for further borrowing at the time of the external shocks of 1979-81. The situati~n was aggravated by the reluctance of the banks to increase their exposure in Eastern Europe. In response to these circumstances, both countries adopted strong macroeconomic adjustment measures that bore heavily on investment.

At the same time, owing to the repeated devaluations, Yugoslavia was able to improve ~ts export position in private market economies while the opposite happened in Hungary whose real exchange rate appreciated until the devaluation that occurred in mid- 1982. In turn, both Hungary and Yugoslavia made increased use of import restrictions giving rise tb further import substitution in trade with private market economies. van Wijnbergen, S. Macro-Economic Aspects of the Effectiveness Number 112 of Foreign Aid: on the Two-Gap Model, September 1984 Home Goods Disequilibrium and Real Exchange Rate Disalignment .

We construct an open economy dis~quilibrium model to assess the welfare effects of aid in different macroeconomic regime~. Aid is shown to have different effects in different unemployument regimes because it increases the social cosLs of wage-price rigidities in the classical regime but d~creaaes them in the Keynesian unemployment regime. A link is made with the two-gap,'moQel, but we highlight Lhe role -if real .exchange rate misalignment (failure to cJear"the NT goods market)" , If 'I ",11 I' ' - 60 - DRO Oiscussion Papers

Nogues, J. The Extent of Non-Tariff Barriers to Industrial Number 115 ot echowski, A. Countries' Imports January 1985 Winters, L.A.

This paper examines the extent of non-tariff barriers to sixteen industrial .countries' visible imports. Using three alternative measures it shows that governmental I' '. "'·c'ommodity-specific border-measures affect over 27% of all imports and over 34% of imports from developing countries. It also sho~s that during the period 1981 - 83, NTBs became significantly more extensive. Detailed statistics reveal considerable variations in NTB coverage by commodity, type of barrier, importer and exporter. The data on which these conclusions are based are compiLed from officiaL information at the finest Level of disaggregation; they are described in the paper.

Balassa, B. Intra-Industry Specialization in a Multi­ Number 116 Country and Multi-Industry Framework December 1984, pp. 31

The paper tests alternative hypotheses as to the factors determining the extent of intra-industry trade, defined as the share of this trade in total trade, in a multi­ country and multi-industry framework. Th~ empirical results show that the extent of intra-industry trade in a particular industry between any two countries depends on the characteristics of the industry and the c~untries concerned.

The explanatory power of the reg.ressi,ons for the entire group of countries exporting manufactured goods, as well as jor trade among the developed countries, is relatively high and practically all the bypotbeses concerning the impact of industry and country characteristics on intra-industr~ tra~e are supported by the empirical results. l.ower coefficients of determination have: been obtained for trade between developed and developing countries and for trade among developing countries, but the estimates generally suppor.:. the hypotheses put f09"ard:· in the paper in these cases al so.

Bnwke, A. Modeling Systems and Nonlinear Programming in a Number 118 Drud, A. Research Environment April 1985 Meerilus, A.

Nonlinear programming (NLP) algorithms are often designed for expert users and users from other fields can find them hard to work with. This paper argues that High - 61 - DRD Discussion Papers

Level Modeling Systems can help researchers from other fields use NLP productively. It describes the traditional approach to NLP modeling, outlines its limitations, and shows with examples from a particular modeling system, the General Algebraic Modeling System (GAMS), how the limitations can be removed. Finally, the paper reports on the use of CAMS in ao research enviror.ment •

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