Journal Issue: World Bank Research Observer, Volume 23, Issue 1
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Walking up the Down Escalator : Public Investment and Fiscal Stability
(World Bank, 2008-03-01) Easterly, William; Irwin, Timothy; Servén, Luis
When growth-promoting spending is cut so much that the present value of future government revenues falls by more than the immediate improvement in the cash deficit, fiscal adjustment becomes like walking up the down escalator. Although short-term cash flows matter, too tight a focus on them encourages governments to invest too little. Cash-flow targets also encourage governments to shift investment spending off budget by seeking private investment in public projects, irrespective of its real fiscal or economic benefits. To deal with this problem, some observers have suggested excluding certain investments (such as those undertaken by public enterprises deemed commercial or financed by multilaterals) from cash-flow targets. These stopgap remedies may help protect some investments, but they do not provide a satisfactory solution to the underlying problem. Governments can more effectively reduce the biases created by the focus on short-term cash flows by developing indicators of the long-term fiscal effects of their decisions, including accounting and economic measures of net worth, and, where appropriate, including such measures in fiscal targets or even fiscal rules.
Governance Indicators
(World Bank, 2008-03-01) Kaufmann, Daniel; Kraay, Aart
Progress in measuring governance is assessed using a simple framework that distinguishes between indicators that measure formal rules and indicators that measure the practical application or outcomes of these rules. The analysis calls attention to the strengths and weaknesses of both types of indicators as well as the complementarities between them. It distinguishes between the views of experts and the results of surveys and assesses the merits of aggregate as opposed to individual governance indicators. Some simple principles are identified to guide the use and refinement of existing governance indicators and the development of future indicators. These include transparently disclosing and accounting for the margins of error in all indicators, drawing from a diversity of indicators and exploiting complementarities among them, submitting all indicators to rigorous public and academic scrutiny, and being realistic in expectations of future indicators.
Why OECD Countries Should Reform Rules of Origin
(World Bank, 2008-03-01) Cadot, Olivier; de Melo, Jaime
With preferential trade agreements on the rise worldwide rules of origin—which are necessary to prevent trade deflection—are attracting increasing attention. At the same time, preference erosion for Generalized System of Preferences (GSP) recipients is increasing resistance to further multilateral negotiations. Drawing on different approaches, this article shows that the current system of rules of origin that is used by the European Union and the United States in preferential trade agreements (including the GSP) and that is similar to systems used by other Organisation for Economic Co-operation and Development countries should be drastically simplified if developed economies really want to help developing economies integrate into the world trading system. In addition to diverting resources for administrative tasks, current rules of origin carry significant compliance costs. More fundamentally, it is becoming increasingly clear that they are often been designed to force developing economies to buy inefficient intermediate products from developed economies to "pay for" preferential access for the final product. The evidence also suggests that a significant share of the rents associated with market access (net of rules of origin compliance costs) is captured by developed economies. Finally, the restrictiveness of rules of origin is found to be beyond the levels that would be justified to prevent trade deflection, suggesting a capture by special interest groups. The article outlines some alternative paths to reforms.
Two Comments on "Governance Indicators : Where Are We, Where Should We Be Going?" by Daniel Kaufmann and Aart Kraay
(World Bank, 2008-03-01) Johnson, Simon; Devarajan, Shantayanan
What Can Countries in Other Regions Learn from Social Security Reform in Latin America?
(World Bank, 2008-03-01) Ozer, Ceren; Gill, Indermit S.; Tatucu, Radu
About a dozen countries in Latin America have enacted reforms that include elements being contemplated elsewhere, including the partial privatization of social security. It is not easy to draw universal lessons for social security reform from the experience of countries such as Argentina, Chile, and Mexico, however, where sizeable public pension systems went bankrupt before the populations aged, mainly because of mismanagement. Most developing economies have much smaller social security systems. Relatively well-managed systems in industrial countries face problems that are long term in nature and have been brought about by an aging population. The experiences of Latin America nevertheless offer some general lessons for countries in other parts of the world. These lessons relate to changes in labor market incentives accompanying reforms and how workers react to them, government actions that have met with success in managing the transition to funded pensions, and the expectations of individuals from social security systems. Latin America's reforms suggest that the most effective approach is to keep payroll taxes low, governments solvent, and social security systems focused on providing reasonable insurance against poverty in old age.