While currency crises have been extensively studied, the opposite phenomenon, large appreciations, has been far less researched. We fill this gap by providing an empirical exploration of historical episodes of large real exchange rate appreciations, using a sample of 28 advanced and 25 emerging market economies, with annual data going back to 1970. We focus on the impact of large appreciations on output growth. Our first finding is that countries experiencing large real exchange rate appreciations display distinct patterns: large appreciations significantly lower export growth and boost import growth on impact. Strikingly, however, output growth is higher, on average, despite the adverse impact on exports. Our second finding is that these aggregate numbers hide substantial heterogeneity, which we link to the nature of the shocks that cause the appreciation. In particular, appreciations associated with so-called “capital flow bonanzas” have a marked downward effect on growth. This pattern is consistent with the insights from a simple model that contrasts the impact of productivity shocks with that of capital inflows shocks. Higher productivity in the traded sector leads to a boom in traded output and a current account surplus, while higher foreign lending leads to a boom in non-traded output and an external deficit as traded output falls and consumption increases.
In their celebrated contribution on credit rationing, Stiglitz and Weiss (1981) showed that the expected return to the borrower on a loan is increasing in the risk of the project it funds. In this paper, I show that their results do not necessarily carry over to the case where the agents’ preferences can be described by rank-dependent expected utility (RDEU). In particular, a pessimistic probability distortion function for borrowers can yield sufficient concavity in returns for the latter to be decreasing in risk, thus eliminating adverse selection. Whether credit rationing can obtain or not is then shown to depend upon the interaction between borrower pessimism and lender optimism.
This paper surveys the recent literature on the links between public debt and economic growth in advanced economies. We find that theoretical models yield ambiguous results. Whether high levels of public debt have a negative effect on long-run growth is thus an empirical question. While many papers have found a negative correlation between debt and growth, our reading of the empirical literature is that there is no paper that can make a strong case for a causal relationship going from debt to economic growth. We also find that the presence of thresholds and, more in general, of a non-monotone relationship between debt and growth is not robust to small changes in data coverage and empirical techniques. We conclude with a discussion of the challenges involved in measuring and defining public debt and some suggestions for future research which, in our view, should emphasize cross-country heterogeneity.
We provide a simple model for considering the interaction between multiple legal regimes existing simultaneously within a single jurisdiction. We demonstrate that, even when the fundamental relationship between outputs of such regimes is to behave as substitutes for one another, the existence of negative externalities between the enforcement technologies can result in the withdrawal of enforcement efforts. We term this phenomenon legal dissonance – the situation in which legal regimes interact negatively in their production technologies. This reduction in aggregate enforcement efforts can result in high levels of crime and disorder within the pluralistic society. This model is then demonstrated in regard to the post-colonial state of Papua New Guinea where significant negative production externalities are present, enforcement levels are low, and levels of crime and disorder are high. Survey data is introduced to demonstrate that these outcomes are in part attributable to the co-existence of the customary legal regime providing for “payback killing” with the overlaid state regime criminalising the same. Disorder may be the outcome of too much law.
African politics are often said to be dominated by ethnic divides, with the ensuing policies implemented by leaders being based almost exclusively on their ethnic power base. In this paper, we demonstrate that the village of origin of democratically-elected leaders matters for the attribution of development projects in the context of one of the largest Community-Driven Development (CDD) programs in Senegal. After showing that leadership matters, we consider those factors that determine who is elected president (and vice-president) of a Conseil rural, the smallest administrative unit in Senegal. We also consider the link between power in the Conseil rural and that in the Conseil de Concertation et de Gestion (CCG), an assembly coopted by the Conseil rural president that is typical of local institutions set up in the context of CDD programs, and which is responsible for the participative identification of the development projects that constitute the priorities of villagers. Using a unique dataset, we show that ethnicity plays almost no role in determining who becomes president (or vice-president) of a Conseil rural, while party politics, age, political experience, village loyalty, and educational and professional qualifications do. Our findings highlight the crucial importance, in terms of development policy, of the local political institutions that are often reinforced or created alongside CDD programs.
We develop a dynamic discrete choice model of a self-interested and unchecked ruler making decisions regarding the exploitation of a resource-rich country. This dictator makes the recursive choice between either investing domestically to live off the productivity of the country while facing the risk of being ousted, or looting the country’s riches by liquefying the resources and departing. We demonstrate that important parameters determining this choice include the level of resources, liquidity and indebtedness. We find that the dictator’s choice regarding the timing of departure is significantly related to external lending, investment and debt. We then argue that this looting phenomenon provides an explanation for the generation of corrupt economies in resource-rich countries. An empirical analysis of available corruption indices suggests that instability-led looting provides a more fundamental explanation of perceived corruption than do various social and cultural indicators or the economic theory of internal political competition.
Community Driven Development (CDD) programs are an extremely important component of the World Bank’s portfolio in the developing world, representing close to $7 billion in 2003, yet solid empirical evidence on their impact is relatively scarce, especially for Subsaharan Africa. In this paper, we consider the impact on access to basic services, household expenditures and child anthropometrics of the PNIR (Programme National d’Infrastructures Rurales) CDD project in Senegal using a unique multidimensional panel dataset on rural households that we followed over a two-year period. Using a variety of estimation procedures, including instrumental variables, and working at different levels of aggregation, we find no evidence for an impact of the PNIR on household expenditures, but find statistically significant effects of the program on access by villagers to clean water and health services, as well as on two standard measures of child malnutrition. The latter effects are particularly important, quantitatively, for children in poor households. The identification strategy we adopt in order to assess the impact of completed projects on beneficiary welfare highlights the importance of the role played by village chiefs and sub-regional politics in determining which eligible villages receive projects and which villages do not.
We consider essential heterogeneity in the impact of a large-scale Community-Driven Development (CDD) program in Senegal. Essential heterogeneity arises when unobservables determine the idiosyncratic gains from participation in a program, thereby generating correlation between treatment effects and selection. Standard instrumental variables estimates are shown to provide an extremely poor estimate of the impact of the program on child nutrition. Application of the local instrumental variables (LIV) estimator using semi-parametric techniques reveals extensive heterogeneity in the impact of the program, with children living in villages with unobservables that make them more likely to receive a completed project benefitting much more than children in villages whose unobservables induce a low likelihood of receiving a project. These techniques provide a sensible and easily applicable manner of assessing whether the decentralized allocation of projects that is inherent to CDD programs is resulting in those who benefit most from treatment actually receiving it.
