Journal Issue: World Bank Economic Review, Volume 15, Issue 2

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Mutual Fund Investment in Emerging Markets : An Overview
(Washington, DC: World Bank, 2001-05) Kaminsky, Graciela L. ; Lyons, Richard K. ; Schmukler, Sergio L.
International mutual funds are key contributors to the globalization of financial markets and one of the main sources of capital flows to emerging economies. Despite their importance in emerging markets, little is known about their investment allocation and strategies. This article provides an overview of mutual fund activity in emerging markets. It describes their size, asset allocation, and country allocation and then focuses on their behavior during crises in emerging markets in the 1990s. It analyzes data at both the fund-manager and fund-investor levels. Due to large redemptions and injections, funds' flows are not stable. Withdrawals from emerging markets during recent crises were large, which is consistent with the evidence on financial contagion.
It's Not Factor Accumulation : Stylized Facts and Growth Models
(Washington, DC: World Bank, 2001-05) Easterly, William ; Levine, Ross
The article documents five stylized facts of economic growth: (1) the 'residual' (total factor productivity, tfp) rather than factor accumulation accounts for most of the income and growth differences across countries; (2) income diverges over the long run; (3) factor accumulation is persistent while growth is not, and the growth path of countries exhibits remarkable variation; (4) economic activity is highly concentrated, with all factors of production flowing to the richest areas; and (5) national policies are closely associated with long-run economic growth rates. These facts do not support models with diminishing returns, constant returns to scale, some fixed factor of production, or an emphasis on factor accumulation. However, empirical work does not yet decisively distinguish among the different theoretical conceptions of tfp growth. Economists should devote more effort toward modeling and quantifying tfp.
Comment on 'It's Not Factor Accumulation : Stylized Facts and Growth Models,' by William Easterly and Ross Levine
(Washington, DC: World Bank, 2001-05) Klenow, Pete
William Easterly and Ross Levine document five stylized facts about growth and argue that they imply a bigger role for total factor productivity (tfp) and technology than for physical and human capital. The reader agrees with the first four of their facts and believes facts one and three provide strong support for their conclusion that tfp should be the focus of growth research.
Comment on 'It's Not Factor Accumulation : Stylized Facts and Growth Models,' by William Easterly and Ross Levine
(Washington, DC: World Bank, 2001-05) Romer, Paul
When economists in the 1950s and 1960s used growth models to understand the experience of developing countries, they allowed for the possibility of technology differences between developing countries and the United States. But because they did not have a good theory for talking about the forces that determined the level of the technology-in the United States any more than in developing countries-technology factors tended to be pushed into the background in policy discussions. The new growth theory of the 1980s generated a counter reaction in the 1990s that Pete Klenow and Andres Rodriguez-Clare have called the 'neoclassical revival.' The article by William Easterly and Ross Levine is part of the next swing in the scholarly pendulum. It moves away from the critical assumption in the neoclassical revival that the level of technology is the same in all countries.
Growth Empirics and Reality
(Washington, DC: World Bank, 2001-05) Brock, William A. ; Durlauf, Steven N.
This article questions current empirical practice in the study of growth. It argues that much of the modern empirical growth literature is based on assumptions about regressors, residuals, and parameters that are implausible from the perspective of both economic theory and the historical experiences of the countries under study. Many of these problems, it argues, are forms of violations of an exchangeability assumption that implicitly underlies standard growth exercises. The article shows that these implausible assumptions can be relaxed by allowing for uncertainty in model specification. Model uncertainty consists of two types: theory uncertainty, which relates to which growth determinants should be included in a model; and heterogeneity uncertainty, which relates to which observations in a data set constitute draw from the same statistical model. The article proposes ways to account for both theory and heterogeneity uncertainty. Finally, using an explicit decision-theoretic framework, the authors describe how one can engage in policy-relevant empirical analysis.
Applying Growth Theory across Countries
(Washington, DC: World Bank, 2001-05) Solow, Robert M.
The potential problem of reverse causality has been obvious to everyone. It has usually been met with the standard econometric dodge: using lagged values of slow-moving variables as instruments. But this cannot be a serious solution to the problem. The causality issue points to a deeper question: Do cross-country regressions define a meaningful surface along which countries can move back and forth at will? If this is the idea, what mechanism could underlie such a surface? Brock and Durlauf call such a regression a 'model.' Reader suppose in a statistical sense it is. But an economic model should have some internal structure; its causal arrows should rest on some sort of behavioral mechanism, and that seems to be missing in this literature.
Crisis Transmission : Evidence from the Debt, Tequila, and Asian Flu Crises
(Washington, DC: World Bank, 2001-05) De Gregorio, José ; Valdés, Rodrigo O.
This article analyzes how external crises spread across countries. The authors analyze the behavior of four alternative crisis indicators in a sample of 20 countries during three well-known crises: the 1982 debt crisis, the 1994 Mexican crisis, and the 1997 Asian crisis. The objective is twofold: to revisit the transmission channels of crises, and to analyze whether capital controls, exchange rate flexibility, and debt maturity structure affect the extent of contagion. The results indicate that there is a strong neighborhood effect. Trade links and similarity in pre-crisis growth also explain (to a lesser extent) which countries suffer more contagion. Both debt composition and exchange rate flexibility to some extent limit contagion, whereas capital controls do not appear to curb it.
Comment on 'Growth Empirics and Reality,' by William A. Brock and Steven N. Durlauf
(Washington, DC: World Bank, 2001-05) Pritchett, Lant
World Bank economists are mostly practical people, people who try to answer the question, 'what exactly should this particular country do right now?' But if they had hoped that the growth regression lessons summarized in William Brock and Steven Durlauf's article would enhance their practical advice giving, they might feel some dissatisfaction. How would they change their advice to, say, Brazil? But that is why this article is important conceptually. It goes to the heart of the matter by proposing a change in the empirical growth literature's fundamental methodology, from model testing to decision theoretic. The article's valiant but flawed attempt reveals the difficulties in making this shift, however. The reader likes to make three points: there is a tension between the interests of academics and practitioners in growth regressions; output response heterogeneity is a huge practical problem; and policy decisions can be guided only in broad outlines by growth regressions.
Comment on 'Growth Empirics and Reality,' by William A. Brock and Steven N. Durlauf
(Washington, DC: World Bank, 2001-05) Sala-i-Martin, Xavier
William Brock and Steven Durlauf's article nicely summarizes some of the recent research on Bayesian model averaging. They make a number of important points. One is that the empirics of growth face three key problems: model uncertainty, parameter uncertainty, and endogeneity. They argue that theory uncertainty can be dealt with using Bayesian model averaging methods.