Korea's Computer Strategy
November 1985

Korea's computer strategy was to target initially relatively low-end products, such as simple peripherals and microcomputers, and then to graduate to more technologically complex lines. The government sought to promote home producers by protecting the domestic market from imports and controlling foreign direct investment. Even though the domestic market had considerable potential, exports were also targeted. The major Korean producers used their prowess at efficient manufacturing and were concerned mainly with establishing large and economical scales of production. The government encouraged domestic R&D and set up public research institutes that were expected to work in cooperation with private firms. The government also encouraged the growth of medium-sized firms by creating venture capital institutions.

Harvard Business School Case Study 0-686-070.

Technological Evolution of the Semiconductor Industry
November 1986

New forces are emerging in the semiconductor industry. These are likely to change the pattern and speed of technical change in that industry. The changes include (1) movement towards greater service and customer orientation; (2) higher prices for technology sales: (3) greater emphasis on strategic alliances for technology and market sharing; and (4) greater U.S. government involvement in protecting the U.S. industry. All factors point to an increase in market power of the large firms. The next five years will be a transitional period during which various adjustments will be made to the evolving strategies of the firms. During this period, we have no reason to believe that there will be any slowing down in the pace of technical change. Thereafter, i.e. once the new structure matures, the pace of change is likely to slow down.

Technological Forecasting and Social Change, 30 (3): 197-205, November 1986, with David Wheeler.

Leapfrogging in Switching Systems
March 1990

The rapid emergence of new technologies has increased the rate of obsolescence. This creates the possibility that developing countries and, in particular, newly industrializing countries may leapfrog older generation of technologies. We lay out the issue and variables to the considered for an understanding of leapfrogging in telephone switching systems. In particular, we distinguish between demand-driven and infrastructure-driven leapfrogging. Data for the early 1980s offer some evidence that demand-driven leapfrogging was most prevalent in countries with intermediate network maturity. Infrastructure-driven leapfrogging has taken place mainly in France, South Korea, Taiwan, and Singapore.

Technological Forecasting and Social Change, 37: 77-83, March 1990, with Ron Sherman.

Information Industries in the Newly Industrializing Countries
January 1989

Conventional trade theory tells us that appropriate product choice (reflecting the country's factor endowments) is important for successful growth. And, for the most part, that is borne out by the achievements of the different countries. However, more complex considerations arise from the multifaceted nature of the information industries: their ability, under certain circumstances, to 'lead' the growth of other sectors, the uncertainty characterizing their evolution, and the relatively rapid pace of technological change. These characteristics call for the need to develop supporting infrastructure and input supplies in parallel to the 'leading' sector. The complexity is resolved by using multiple policy instruments. The most successful country in my sample, Korea, has used both trade and industrial policy instruments to promote the development of the electronics industry. However, from the less successful countries we also learn that the appropriate intervention is a non-trivial task.

In R.W. Crandall and K. Flamm, eds., Changing the Rules: Technological change, International Competition, and Regulation in Communications, The Brookings Institution: Washington, D.C., 1989. In a more extended form, appeared as "Strategies for developing information industries," European Journal of Development Research, 1(1): 38-59, June 1989.

Performance and Potential of Informational Technology: An International Perspective
Introduction to "Diffusion of Information Technology: Opportunities and Constraints," Special Issue of World Development, 20 (12), December 1992, edited with Carl Dahlman.
December 1992

The rising information content of economic activity worldwide is creating the pressure for effective use of information technology (IT) in a broad range of countries and activities. Three factors account for successful adoption of IT. Effective planning and organizational capabilities are essential to successful adoption of the new technologies: authors in this issue conclude that "managerial skills and entrepreneurship" are of critical importance. In addition to human capital development, IT diffusion requires a strategy for generating large investments in telecommunications. Finally, while proactive measures at accelerating the diffusion of IT have their place, they need to be complemented by reduction of barriers to the international flow of services and investment.

World Development, 20 (12): 1703-1719, December 1992, with Carl Dahlman.

Prices, Costs, and Competition at the Technology Frontier: A Model for Semiconductor Memories
Summer 1987

Economic competition, both internationally and within national borders, is being profoundly affected by relative ability to participate in markets with short product cycles and significant learning periods. However, effective tools for examining policies in this context have yet to be developed. This paper attempts a first step by presenting an empirical model for the semiconductor memory industry. As an illustration, the model is used to analyze recent developments in the competition between U.S. and Japanese producers.

Journal of Policy Modeling, 9 (2): 367-382, Summer 1987, with David Wheeler.

Towards a Vanishing Middle: Competition in the World Garment Industry
October/November 1987

The international garment industry falls broadly into two segments. One, which may be referred to as the "fashion" segment, is governed by competition based on new product introduction and quality improvements. The other segment, comprising of mass produced garments is governed price competition. While there is some evidence that the "fashion" sector is growing in importance, our concern in this paper is the "price competitive" sector, which has been and continues to be predominately the main arena in which newly industrializing and developing countries participate. We examine whether the newly industrializing countries will be squeezed by cheap labor from lower wage economies and by automated production techniques from the advanced industrial economies with high wages.

World Development, 15: 1269-1284, October/November 1987, with David Wheeler.

International Trends in Steel Mini-Mills: Keeping Pace with Technological Change
July 1991

The rise of the mini-mill is the single factor most likely to affect the structure of international competition in steel. The study projects the effect of innovative manufacturing techniques that are likely to increase the cost competitiveness of mini-mills and examines their consequences for firms in different countries. Most of the newer techniques dominate the old, in asmuch as they lower the costs of production irrespective of country type. This creates a pressure to keep pace with the technological evolution in the industry, focussing especially on identifying market niches, developing a high-quality workforce, economizing on the use of electricity, and containing the costs of scrap input.

Industry and Energy Department Working Paper, Industry Series Paper 52, July 1991, with Jerry Sanders, Rajan Suri, and Eric Thompson.

Keeping Pace with Change: Organizational and Technological Imperatives
December 1992

Manufacturing processes worldwide are being reconfigured by organizational innovations pioneered by the Japanese and by microelectronics-based technologies. We developed a cost model that simulated "factories" with several variations in production practices and technologies used. The results show that in a period of rapid technical change significant productivity differences can emerge between competing firms, even in "mature" sectors: these differences are amplified if learning across innovations is cumulative. The implications for developing countries are that efforts within the firm at organizational change need to be supplemented by close international relationships and appropriate infrastructure: a passive trust in the product cycle could be unhelpful.

World Development, 20 (12): 1797-1816, December 1992, with Rajan Suri and Jerry Sanders.

Impact of Manufacturing Practices on the Global Bicycle Industry
March 1993

The impact of modern manufacturing technologies and managerial practices was examined for Developed Countries (DCs), Newly Industrialized Economies (NIEs), and Less Developed Countries (LDCs). Based on extensive literature surveys and on-site interviews, analytical models were developed that enable prediction of manufacturing costs in the three types of countries. Key findings are: NIEs are currently the most cost competitive countries; massive infusions of state-of-the art technologies can have dysfunctional consequences for LDCs; and gains from automation for all three types of countries are greater when it is introduced after implementing total quality control (TQC) and just-in-time (JIT) manufacturing practices. Although a DC firm gains significantly from TQC and JIT, product cost differences continue to be substantial, implying that DCs need to target additional criteria to remain competitive. It is also shown that by focusing on flexible manufacturing methods, firms can attain greater product flexibility and shorter lead times without prohibitive increases in costs.

Manufacturing Review, 6(1): 14-24, March 1993, with Rajan Suri, Jerry Sanders, and P.C. Rao.

Keeping Pace with Change: International Competition in the Printed Circuit Board Industry

For long a labor-intensive activity languishing in technological backwaters, printed circuit board assembly was regarded as best conducted in low-wage economies. That has steadily changed. Innovations specific to printed circuit board and component technology have been important, but of equal significance have been generic changes in manufacturing processes. In particular, the system of changes associated with the term "just-in-time" (JIT) must be considered a major technological innovation. In sum, the flux of technological change is placing greater demands on human capital and physical infrastructure. We conclude that LDC firms will need to undertake substantial investment in developing human capabilities if they are to compete on international markets. Our conclusion is bolstered by the observation that the two less developed regions that are increasing their presence on world market are the coastal provinces of China and the maquiladora area of Mexico. In both cases, international firms well experienced in conducting shop floor learning are providing the missing human organizational and learning skills.

Industrial and Corporate Change, 5(3): 583-613, 1995, with Rajan Suri and Mohan Tatikonda.

Advanced Infrastructure for Time Management: The Competitive Edge in East Asia
October 1995

Advanced Infrastructure (AI), as addressed in this article, refers to a spectrum of transportation and communications systems, enhanced by information technology and new management techniques, and delivered by innovative service providers. Al has allowed users to achieve the substantial benefits of reduced costs, improved service and reliability, shorter market response times, and wider market penetration. Now, AI is diffusing to the newly industrialized economies (NIEs) of Asia. Through interviews in Singapore, Taiwan, and Hong Kong with the top management of 20 leading firms, we document the growing use of AI. Skilled manpower and a regulatory approach that permits competitive entry best provide support for AI by innovative service providers. Once in place, AI, in turn, influences the location strategies of global firms. We find that, while the attraction of low wages in Asia will remain, accessibility to AI is becoming a major influence on the choice of regional/headquarters, production operations, and souring locations.

CFS Discussion Paper Series 113 Washington D.C.: The World Bank, October 1995, with William Reinfeld. Also in Ashoka Mody, ed., "Infrastructure for Economic Development in East Asia: The Untold Story," The Economic Development Institute, the World Bank, Washington, D.C, 1997.

Innovation and the International Diffusion of Environmentally Responsive Technology
June 1996

New evidence is presented on environmental innovation and diffusion over the 1970s and 1980s. At a global level, a substantial amount of innovations has occurred. In the U.S., Japan, and Germany, the share of environmental patents in all patents varied between 0.6% and 3%. Certain plausible connections between environmental regulation and innovation emerge. Across these three countries, innovation responded to pollution abatement expenditure. Environmental patenting rates in developing countries were also high, reaching 2% in many years in Brazil. Developing country innovators obtained a non-trivial number of patents, most of which appear geared towards adapting imported technologies to local conditions. However, domestic innovation was only one path to new technologies. Imports of disembodied environmental technology were also substantial.

Research Policy, 25: 549-571, June 1996, with Jean Olson Lanjouw.

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Firm Strategies for Costly Engineering Learning
April 1989

The models developed in this paper seek to open up the 'black-box' of learning. I suggest that we need to think of learning-by-doing as a process of knowledge creation on the shop floor by specialized teams of engineers. Learning is to be viewed, therefore, as a conscious decision and not a mere by-product of production. The models in this paper provide the basis for understanding international and inter-firm differences in rates of learning. For example, cheaper engineering resources, longer time horizons, faster output growth rates and superior transferability of knowledge from engineers to production workers are shown to be some possible factors responsible for faster learning in Japanese firms compared to U.S. firms.

Management Science, 35(4): 496-512, April 1989.

Institutions and Dynamic Comparative Advantage: The electronics industry in Korea and Taiwan
September 1990

This paper analyses the transitional process in South Korea and Taiwan and outlines how domestic institutional structures lead to different mechanisms to respond to changing international conditions. Comparative advantage cannot be assessed simply by "factor endowments". How these endowments, or capabilities, are built and brought together in production and trade is critical to the "realization" of comparative advantage. The private returns to acquiring these capabilities depend upon the nature of the firm, the product market in which it seeks to operate, and the markets for inputs (particularly capital and information markets). These "micro" features influence whether and to what extent the activity will be undertaken. The main contribution of this paper is to link micro features to the evolution of a country's comparative advantage.

Cambridge Journal of Economics, 14: 291-314, September 1990.

New Environment for Intellectual Property

Although intellectual property protection is not principally a North-South issue as it is often made out to be, developing countries have an important stake in the evolution of an intellectual property system for three reasons. Protection levels are being set so as to restrict the scope of legitimate reverse engineering. These levels are being applied to new technologies and to conventional and mature products. The price of technology is being raised and access to its is being restricted as innovators seek greater rents, particularly from key technologies such as information technology, biotechnology, and new materials technologies. Lastly, the larger concern for developing (and developed) countries is that methods of protection for information services technologies are evolving in an ad hoc manner without a good understanding of the global implications. Although any form of intellectual property protection must by definition retard the diffusion of the technology, poor systems of protection can aggravate this problem.

In F.W. Rushing and C. Ganz Brown, ed., Intellectual Property Rights in Science, Technology, and Economic Performance: International Comparisons, Boulder-San Francisco-London, 1990.

Buyer-Seller Links in Export Development
March 1992

Export development benefits are generated by links between developed country buyers and developing country suppliers. These relationships reduce barriers to entry into developed country markets by acting as conduits for information about marketing and production technology and by providing access to larger industry networks. Benefits are maximized when the relationships are collaborative and long term. In this paper, bicycle and footwear import into the United States are used to illustrate the formation, maintenance and effects on developing country reputations of buyer-seller relationships. Public efforts to support developing country firms in forming and maintaining long-term, collaborative relationships are also discussed.

World Development, 20(3): 321-334, March 1992, with Mary Lou Egan.

Staying in the Loop: International Alliances for Sharing Technology
September 1989

Firms in the Organization for Economic Cooperation and Development (OECD) countries have formed a large number of alliances to share technology. These alliances include various contractual arrangements: formal research consortia, informal ties, and production and marketing joint ventures. The motivation and form of the alliance tend to change as the product cycle and market structure evolve. An analysis of these alliances provides theoretical insights into the growth of firms and the evolution of the product cycle. Additionally, it leads to a better understanding of the changing international technology market and the implications of these changes for developing countries. Recently the technology market has become more oligopolistic. In technologically dynamic industries, open international standards provide a cheap source of technology to developing countries. Developing country firms could also exploit mutually beneficial linkages to obtain technology by manufacturing products designed by industrial country firms. As the case studies in the paper indicate, however, such arrangements lead to genuine technology transfer only when the developing country firm has a strong absorptive capability. Moreover, firms in developed countries will not always be willing to enter into such arrangements if the transfer of technology creates potential competitors. The paper presents evidence showing that firms increasingly are holding on to critical progress technologies. These process technologies are important not only for high technology products but also for many mature products.

World Bank Discussion Papers 61, Washington D.C., The World Bank.

Learning Through Alliances
February 1993

An alliance is a flexible organization that allows firms with complimentary strengths to experiment with new technological, organizational, and marketing strategies. The flexibility is valuable because the project undertaken through the alliance is uncertain. Flexibility is traded off against the weak incentive structure of the alliance. Although the principle goal of the experimental set-up is to learn more about technical and market parameters, learning also occurs about working in an alliance and could lead to greater competence in managing alliances, partially alleviating incentive problems. Through demonstration and externality effects, a few successful alliances can trigger more widespread alliance formation.

Journal of Economic Behavior and Organization, 20: 151-170, February 1993.

Making Institutional Choices

There is a class of intermediate institutions that are neither governmental nor private but are more in the nature or alliances, communities, and coalitions. These institutions interact with each other and can potentially serve the 'public good,' which includes not just the specific group but also a wider interest. The main aim of this paper lies in understanding the role such institutions play and in identifying the conditions under which they can be catalyzed.

In Pranab Bardhan, Mrinal Datta-Chaudhuri, and T.N. Krishnan, ed., Development and Change: Essays in Honour of K.N. Raj, Bombay: Oxford University Press, 1993.

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Environmental regulation and development: a cross-country empirical analysis
June 2001

Our analysis of overall regulatory performance reveals strong cross-country associations with income per capita, security of property rights, and general development of the legal and regulatory system. Surprisingly, however, we find only insignificant or perverse associations with degree of popular representation and freedom of information. For both the Green and Brown indices, performance is again strongly associated with income per capita, freedom of property and (in small samples) measures of regulatory efficiency. The two specifically rural-sector variables (population density, proportion of GDP in agriculture and forestry) are only weakly associated with the Green index. The fit is much better for the manufacturing share in GDP all have the expected signs and relatively high significance. Life expectancy as a proxy for public health priority has no independent effect.

Oxford Development Studies, 29(2): 173-187.  Revision of Policy Research Working Paper 1448, The World Bank, Washington D.C., April 1995, with Susmita Dasgupta, Subhendu Roy, and David Wheeler.

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Industrial policy after the East Asian crisis: from outward orientation to new internal capabilities?
November 1998

Prior to East Asia’s financial meltdown in the second half of 1997, there appeared the prospect of an uneasy consensus on the East Asian "miracle" that recognized the role of the entrepreneurial state in accelerating industrial development but emphasized the "market-friendly" nature of the state’s interventions. Following the financial crisis, East Asian policies and institutions are once again under scrutiny¾ for their failures rather than the miracles they achieved. In this review, I find that prospects for a consensus that incorporated the East Asian experience were ill founded. East Asian policymakers emphasized growth through quantitative targets. Price signals played a significant but secondary role. I illustrate these propositions through the examination of trade policy, industrial conglomerates, and provision of physical infrastructure. The evolving international consensus on industrial policy, which predates the Asian crisis, emphasizes a hands-off approach in which competition policy plays an important role. But the new consensus also proposes "deep integration" or the adoption of uniform standards in areas such as competition policy and labor and environmental standards. For East Asia, the shift to the international consensus may be appropriate because government-driven growth has declined in intellectual respectability and also because it may be time to consolidate the gains from the rapid trade-led growth by focusing on creating a stronger incentive structure for the efficient utilization of resources. However, implementing the new set of policies will require sophisticated new skills in the public administration. Moreover, since the current consensus is based on strong priors rather than on solid empirical evidence, the dangers of international uniformity in policy are evident

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International Investment Location Decisions: The Case of U.S. firms
August 1992

In international 'location tournaments' governments compete for foreign investment with tax and other short-run incentives. Such tournaments can be won if agglomeration economies are sufficiently powerful to overcome investors' desire to spread investments as a hedge against risk. We focus on manufacturing investments by U.S. multinationals in the 1980s. Our econometric results suggest that agglomeration economies are indeed the dominant influence on investor calculations. Paradoxically, short-run incentives have limited apparent impact on location choice. We conclude that high-cost tournament play is unnecessary for countries with good infrastructure development, specialized input suppliers and an expanding domestic market.

Journal of International Economics, 33 (1/2): 57-76, August 1992, with David Wheeler. Reprinted in: Mark Casson. 1997. Structural Change, Industrial Location and Competitiveness. Cheltenham, U.K. Edgar Elgar.

Japanese and United States Firms as Foreign Investors: Do They March to the Same Tune?
October 1998

During the 1980s, U.S. and Japanese multinationals were attracted by some similar country characteristics: low wage inflation, low country risk, good infrastructure, and an educated workforce. Both groups of investors displayed persistence, being strongly attracted to locations with significant past investment. Japanese firms started the decade as somewhat more fluid, but as their investment levels surged, they became much more persistent. Overall, U.S. firms were more influenced by domestic market conditions and moved contrary to changes in host country trade intensity. Japanese investment had a somewhat greater affinity for trade, reflecting their long-standing interest in East Asia. Some limited evidence suggests that facts driving the two groups of investors converged in the second half of the 1980s.

Canadian Journal of Economics, 31(4), with Krishna Srinivasan.

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Japanese Multinationals in Asia: Drivers and Attractors
June 1997

This paper studies the choice by Japanese multinationals of Asia and of specific Asian countries as investment destinations. High costs in Japan exert a general push towards investing in Asia. Unlike investment in the U.S. and Europe, trade barriers do not drive Asian investment. While domestic markets of host countries are important, conditions for efficient production in the host country also determine its attractiveness. In Asia, firms have looked for industrially literate workers, though the new Japanese investment is being guided more by low wages. Japanese investors also stake out early positions in growing markets. The inability to repatriate earnings is the strongest disincentive to Japanese investment. A favorable FDI policy is desirable but its importance declines as a firm gains experience in a country.

Oxford Development Studies, 27 (2), June 1999.  An earlier version of the paper was published as "Japanese multinationals in Asia: capabilities and motivations," Policy Research Working Paper 1634, The World Bank, Washington D.C., with Susmita Dasgupta and Sarbajit Sinha.

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Private information for foreign investment in emerging markets
April 2000

Previous studies have found that new foreign investment is significantly related to the stock of existing investment in the country/region. This paper’s contribution is the finding that a Japanese firm’s new investment in an emerging economy is positively correlated with its own previous investment in that economy and also with the current/planned investments by competitors. These two channels are primarily substitutes, i.e., investment by competitors becomes less salient when the firm has experience in the market. The correlated behavior is not explained by industrial agglomerations but appears to reflect the value of private information when investing in emerging economies.

Canadian Journal of Economics, 34(2): 448-464.  Published earlier as: "The usefulness of private and public information for foreign investment decisions," Policy Research Working Paper 1733, The World Bank, Washington D.C., with Yuko Kinoshita.

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Is there persistence in the export of manufactured goods? Evidence from Newly Industrializing Countries
August 1997

Applying cointegration techniques in a panel data setting, we document persistent growth of manufactured exports from certain developing countries. To complement the investigation of persistence (measured by country 'fixed effects'), we analyze asymmetry in income elasticities: for all developing countries, the decline in exports with world income contraction is sharper than is the rise on the upswing; the decline is, however, especially pronounced for countries with low or negative persistence. The results are consistent with long-term buyer-supplier relationships that create "insiders" and "outsiders" in manufactured goods trading. Exports are also influenced the transactional infrastructure (proxied by telecommunications penetration).

Journal of Development Economics, 53 (2): 447-470, August 1997, with Kamil Yilmaz.

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Imported Machinery for Export Competitiveness
March 2001

We analyze the relationship between export competitiveness and investment in machinery, allowing for imperfect substitution between domestically produced and imported machinery.  A translog export price function is estimated for developed, export-oriented developing, and import-substituting developing countries in a panel data setting.  Between 1967 and 1990, imported machinery helped lower export prices for export-oriented developing countries.  Throughout, imported machinery was not a substitute for domestic machinery. Import-substituting developing countries were unable to harness imported machinery to reduce costs in the early years, though from about the early 1980s, with an opening up of their trade regimes, they were also able to benefit from the cost-reducing effect.  Our results also imply that innovative effort based on imported technologies can be a precursor to the development of domestic innovation capabilities, which may ultimately become the main nexus of a country’s innovation efforts.

Forthcoming World Bank Economic Review, With Kamil Yilmaz.

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Imported Machinery

Growth in an Inefficient Economy: A Chinese Case Study
September 1991

The shift in expectations in southern provinces of China occurred when foreign investors were able to consistently produce goods that met international specifications. They brought with them much of the needed infrastructure. Once they demonstrated the feasibility of operating the region as a base for international manufacturing, others were attracted. The critical mass of investors along with government policy initiatives in infrastructure and human capital triggered increasing returns processes which have sustained growth. However, much could still go wrong and the coastal regions are not the whole country. Although China is not going to fade away from world markets, it has to face keen competition from other aspirants such as Indonesia, Thailand, Mexico, and Turkey. Chinese entrepreneurs seem to understand the competition well and are positioning themselves already to move upscale. Their ability or inability to do so will determine the future trajectory of growth.

With Deborah Bateman.

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Explaining Industrial Growth in Coastal China: Economic Reforms ... and What Else?
May 1997

In the 1980s China experienced "an explosion of pent-up entrepreneurship" facilitated by wide-ranging, although often unorthodox, economic reforms. This article uses data on the output of 23 industrial sectors in seven coastal regions (provinces and counties) over the period 1985 to 1989 to study the correlates of growth. Although industry-specific features-the degree of specialization and competition-had some influence on growth, much of the action came from region-specific influences and regional spillovers. Regional influences included the open-door policies and special economic zones that successfully attracted investment from overseas Chinese to particular locations. Existing regional strengths, especially high-quality human capital and infrastructure, also contributed to growth. The results illuminate the interplay between conditions conducive for growth-for example, the contribution of foreign expertise is greatly enhanced by available human capital. China made judicious use of the advantages of backwardness by targeting areas that were less developed and less encumbered by the legacy of existing institutions, although it was fortunate in this regard that the backward regions were in close proximity to Hong Kong and Taiwan (China). Important also was the transmission of growth impulses across the provinces and counties, possibly through perform cadre and administrative networks.

World Bank Economic Review 11(2): 293-325, May 1997, with Fang-Yi Wang.

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Innovation in Cities: Evidence from Chinese Firms
April 1997

We examine the theories of Jacobs, Porter, and Marshall-Arrow-Romer concerning the economic environments most conducive to innovation. Employing data on relatively young firms from China's technologically-dynamic, coastal region, we find that cities which are industrially specialized and which have strong degrees of competition provide the greatest stimulus to firms' R&D expenditures, a set of findings consistent with the views of Porter. Furthermore, the benefits of specialization increase as firms mature, providing some support for the view that within-industry spillovers can be an "engine" of long-run growth.

With Brian Fikkert.

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Informal Meetings for Knowledge Acquisition and Increased Productivity
March 1997

We use a multinomial logit model to show that a firm obtains marketing, new business, and technical knowledge from business associates and labor market information through industry associations. We also show, in an aggregate production function, that such informally acquired information from other firms is important to the firm, and that frequent meetings with other economic agents have a positive relationship with a firm's productivity. Informal communications with business partners (particularly buyers and suppliers) prove more valuable than knowledge obtained through business associations. The analysis uses data collected in interviews with 108 Mexican manufacturing firms.

With Guillermo Abdel Musik.

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Exploiting Competitive Opportunities in Telecommunications
June 1995

As countries throughout the world open the telecommunications market to competition, they are finding that the hurdles they face are largely political and institutional. The good news is that practical ways exist to overcome the hurdles.

Finance and Development, 32: 39-42, June 1995, with Veronique Bishop. Draws on "Exploiting new market opportunities in telecommunications."

Exploiting New Market Opportunities in Telecommunications
November 1996

In most countries, a single, government-owned provider has traditionally delivered telecommunications services. Such state-owned monopolies have only rarely mobilized significant amounts of capital for the telecommunications network, and even in those instances they have a poor record of responding to the evolving needs of businesses and households. As a consequence, monopolies are giving way to a heterogeneous structure where competition exists in numerous market segments. Promoting competition requires liberal market entry rules. Also, to encourage entry by providers who may wish to supply only specific services, traditional cross-subsidization across services needs to be eliminated, which may require sectoral unbundling. The longer-term regulatory task is to implement pricing rules that protect customers and that provide incentives to operators to reduce their costs. At the same time, a regulator in a pluralistic regime must establish rules and price for the interconnection of the multiple networks-and this practice is still evolving. In countries under-taking reform, restructuring of the government-owned monopoly operator and regulatory reform are proving to be tandem efforts. Although the benefits of reform are often evident, incumbent interests can slow the pace of change, and experience shows that sectoral reform has to be led by forces outside the traditional sectoral establishment. In that light, this paper reviews policy reform in a complex sector where the physical elements of the network and institutional aspects are interdependent and where political economy considerations can be critical to success.

With Veronique Bishop and Mark Schankerman in Ashoka Mody, ed., Infrastructure Delivery: Private Initiative and the Public Good. The Economic Development Series, The Economic Development Institute, The World Bank, Washington D.C., 1996.

Infrastructure Delivery: Private Initiative and the Public Good
November 1996

The World Bank's World Development Report 1994 (WDR) spotlighted the incipient but strong move away from the overwhelming government domination of infrastructure delivery to private provision under increasingly competitive conditions. In chapters 3 and 5 of the WDR, technological change, advancements in regulatory design, and evolution of financial markets were identified as forces ushering in a new change. This edited collection presents seven essays written as background to the two WDR chapters and one written subsequently. The first half of the book reviews the interplay of private initiative, competition, and regulation, while the second half traces the ongoing evolution of the financial tools used to fund the world's growing demand for infrastructure. An overview chapter lays out the main themes, highlighting specifically the mechanisms to discipline the private provision of infrastructure: competition, regulation, and finance.

The Economic Development Series, The Economic Development Institute, The World Bank, Washington D.C., November 1996.

Building on East Asia's Infrastructure Foundations
June 1998

The halfway measures taken toward privatizing East Asia's infrastructure have resulted in weak corporate governance, vulnerability to crises, and inefficiency. Faced with slowing growth, the region needs to shift its focus to increasing competition and adopting needed regulation.

Finance and Development 35(2): 22-25 June 1998. Draws on Infrastructure Strategies in East Asia: The Untold Story and Choices for Efficient Private Participation in East Asian Infrastructure.

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Infrastructure Strategies in East Asia: The Untold Story

Infrastructure in East Asia was guided by a strategic vision and propelled by a substantial and sustained drive. A predominantly public sector effort-conceived, financed, regulated, and operated largely by the government or its agencies-infrastructure development often shows the best face of East Asian governments. Yet while the physical achievements are remarkable and their contribution to economic growth is undeniable, some failures were inevitable, including, for example, instances of wasted expenditures, inadequate response to (and sometimes neglect of) growing pressures on the environment, and a disregarded for social and political sensitivities. Infrastructure development in East Asia, as elsewhere, continues to test governments' ability to make the right decisions and to balance many competing interests.

The introductory essay to this edited collection highlights the features of infrastructure strategies that are common across the six East Asian economies examined in the book-Hong Kong, Japan, the Republic of Korea, Malaysia, Singapore and Taiwan (China). At the same time, it recognizes that these economies did not collectively pursue a single, universal infrastructure strategy. Each chose the path best suited to its economic philosophy: witness the emphasis on the private sector in Hong Kong and recently in Malaysia compared with public sector dominance elsewhere. Strategies varied even within economies, reflecting not only sectoral considerations, such as the subsidization of water as a merit good in otherwise commercially oriented Hong Kong, but also historical inheritance, for instance, the private oligopolistic structure of electric power in Japan.

The Economic Development Institute, The World Bank, Washington D.C., 1997.

Choices for Efficient Private Participation in East Asian Infrastructure

The chapters in this book illustrate the policy concerns and choices in moving toward efficient private involvement in infrastructure. Choices arise in the strategy and organization of reform-with regard to sequencing of sectoral reforms, the extent of private participation, the speed of reform, and the planning and coordinating roles of the government. Choices must also be made in the methods for contracting and regulation, the management of environmental and resettlement issues, and the development of financing mechanisms to increase access to long-term funds. The chapters draw on experience in a range of countries-Australia, Chile, and India as well as economies in East Asia-to show choices available and the strategies governments have followed. Experiences from outside East Asia illustrate the payoffs of a more integrated and concerted move toward private provision of infrastructure.

The World Bank, Washington, D.C., 1997. Edited with Harinder Kohli and Michael Walton.

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Private Capital in Water and Sanitation
March 1997

Governments are drawing on private initiative and capital to address the deficiencies of water and sewage systems and the need for new facilities. What has their experience been and how can they encourage private investment?

Finance and Development, 34 (1): 34-37, March 1997.

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Competition, contracts, and regulation in water and sanitation
June 1998

Three mechanisms to discipline private providers of infrastructure services are competition, regulatory oversight, and monitoring by financial markets. Private water and sanitation service providers face little direct competition and, except in the United Kingdom, private providers have not used capital markets as sources of funds. As such, performance incentives require effective competition for the right to provide services backed-up by a regulatory system that enforces the contractual terms of service. Where regulation is not credible, supplementary commitments, including from third parties, are required. This paper draws upon several recent examples of private provision of water and sanitation services to examine how the various disciplining mechanisms are being used.

With David Haarmeyer.

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West Bank and Gaza: Infrastructure, Institutions, and Growth
August 1996

Major expansion in infrastructure is needed in the West Bank and Gaza to support economic growth. But a meaningful strategy for infrastructure development must be guided by the specific needs of the WBG. Four critical principles emerge. First, establishing transportation links to move people and goods to the rest of the worldæand also within the WBGæis a priority. Second, electricity, water, and telecommunications are urgently needed as inputs to production and to ensure livelihood. Third, a forward-looking strategy could make possible the exploitation of modern information technologies to complement the existing human capital. Fourth, the sources of infrastructure services must be diversifiedæincluding reducing reliance on Israelæin order to maintain continuity of service and expansion plans and make possible competition between suppliers.

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Methods of Loan Guarantee Valuation and Accounting
November 1996

Partial government guarantees of private financing can be an effective tool for maintaining public-private partnerships. Loan guarantees that cover some or all of the risk of repayment are frequently used by governments that cover some or all of the risk of repayment are frequently used by governments to pursue policy objectives such as supporting priority infrastructure projects or corporations in financial distress. Studies show that guarantees are extremely valuable-the value of a guarantee increases with the risk of the underlying asset or credit, the size of the investment, and the time to maturity. The flip side of a guarantee's value to lender is a cost to the government. Such a cost is not explicit, but is nevertheless real. When providing guarantees, governments, therefore, need to set in place risk sharing, valuation, and accounting mechanisms. This paper describes methods of guarantee valuation, reports estimates of guarantee values in different settings, and summarizes methods of guarantee accounting and their implications. While the old method recorded guarantees only when a default has occurred, new methods (illustrated in the federal U.S. Credit Reform Act of 1990) seek to anticipate losses, create reserves, and channel funds through transparent accounts to ensure that costs of guarantees are evident to decisionmakers.

In Ashoka Mody, ed., Infrastructure Delivery: Private Initiative and the Public Good, The Economic Development Institute, The World Bank, Washington D.C. Shorter version of the paper appeared as "Valuing and accounting for loan guarantees," World Bank Research Observer 11 (1): 119-142, February 1996, with Dilip Patro.

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A house of cards: government guarantees
February 1996

Project developers in emerging markets choose government guarantees above other forms of risk mitigation. But is this sustainable? Governments need a strategy to unbundle guarantees and phase them out.

Project and Trade Finance 154: 40-42, February 1996, with Mac Johnston and Robert Shanks.

Contingent Liabilities for Infrastructure Projects: Implementing a Risk Management Framework for Governments
August 1998

To manage their exposure arising from guarantees to infrastructure projects, governments need to adopt modern risk management techniques. Because guarantees come due only if particular events occur and involve no immediate cost to the government, they rarely appear in the government accounts or have funds budgeted to cover them. This Note introduces an integrated risk management system that draws on recent advances in the private sector. The system, adapted for use in the public sector, enables governments to budget for expected losses and to set aside reserves against unexpected losses, thus avoiding budgetary stress associated with redirecting public resources to cover a sudden increase in costs.

Public Policy for the Private Sector: Viewpoint 148, August 1998, The World Bank Group, Finance, Private Sector, and Infrastructure Network, with Christopher M Lewis. Draws on "The management of contingent liabilities: a risk management framework for national governments."

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Risk Management Systems for Contingent Infrastructure Liabilities: Applications to Improve Contract Design and Monitoring
August 1998

Government guarantees for private infrastructure projects represent real liabilities, and their costs can average as much as a third of the amount guaranteed. Most governments do not know the full extent of these liabilities, because they have made no attempt to systematically estimate them. A companion Note (Viewpoint No. 148) proposes a new framework for identifying government exposures, valuing expected and unexpected risks, and budgeting for expected risks and reserving for unexpected ones. This Note shows how governments can use the valuation process to analyze the distribution of risks, decide which risks they should bear and which should be borne by the private sector, and reduce the frequency and size of calls on guarantees.

Public Policy for the Private Sector: Viewpoint 149, August 1998, The World Bank Group, Finance, Private Sector, and Infrastructure Network, with Christopher M Lewis. Draws on "The management of contingent liabilities: a risk management framework for national governments."

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The Management of Contingent Liabilities: A Risk Management Framework for National Governments
June 1997

For a governmental institution, integrated risk management involves: (a) identifying and classifying the risks faced; (b) quantifying the government's exposure from these risks; (c) including those measures of risk in the budgeting process; (d) identifying the government's tolerance for risk; (e) establishing policies and procedures for structuring unexpected loss reserves; and (f) implementing systems for monitoring and controlling exposure over time. Use of integrated risk management systems will vastly improve governments' ability to manage and control risk and will enhance their efforts to improve the allocation of resources in the domestic economy. The focal point of any government risk management program is the systems used for accounting and budgeting for contingent liabilities. Governments are often unaware of their exposure because of their use of cash-based budgets. Cash-based budgeting masks the contingent exposure and creates perverse incentives for issuing guarantees. By not accounting for the budgetary costs of issuing guarantees a simple cash budget encourages the expansion of guarantee liabilities without requiring the government to reserve against future losses. It allows political leaders to increase financial assistance to target groups without being held accountable for the costs of providing the assistance, which will be realized under ensuring administrations. To improve the allocation of resources governments should follow the lead of the private sector and move to a present value basis of accounting.

In Timothy Irwin, Michael Klein, Guillermo Perry, and Mateen Thobani, ed., Dealing with Public Risk in Private Infrastructure, World Bank Latin American and Caribbean Studies, The World Bank, Washington D.C, 1997, with Christopher Lewis.

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Financing Water and Sanitation Projects: The Unique Risks
September 1998

A project finance structure allows water projects with attractive cash flows and risk profiles to secure long-term private capital. This structure provides a direct link between a project's cash flows and its funding to give project sponsors, investors, and lenders strong incentives to ensure that projects are structured and operated to generate stable revenue streams. But even in industrial countries the credit strength of the off-taking municipal governments and the sector's traditional monopoly structure exposes lenders to potentially significant credit, regulatory, and political risks. These risks, combined with the sunk, highly specific, and non-redeployable nature of water investments, means that lenders and investors are vulnerable to government opportunism and expropriation. Reviewing some recent innovative projects, this Note shows that private participation on a limited recourse or nonrecourse basis has required support from multilaterals and federal government agencies to absorb noncommercial risks.

Public Policy for the Private Sector: Viewpoint 151, September 1998, The World Bank Group, Finance, Private Sector, and Infrastructure Network, with David Haarmeyer. Draws on "Tapping the private sector: approaches to managing risks in water and sanitation."

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Pooling Water Projects To Move Beyond Project Finance
September 1998

Many commercial banks have had little interest in water and sanitation projects not only because of noncommercial political and regulatory risks, but also the small size, weak local government credit, and high transactions costs (the legal, consulting, and financial costs of structuring). Most projects have been financed on a limited recourse basis, that is, with project cash flows and assets as the main security for lenders. The move from project to corporate (balance sheet) financing is occurring in stages. Financing project debt from the sponsor company's balance sheet exposes that company to significant risk and thus requires a strong and large balance sheet. Designed in part to shield a company'' balance sheet and improve a project's credit strength, innovative structures and financial instruments are emerging. Ultimately, the goal is for water utilities to raise debt and equity from capital markets on the basis of their own balance sheets, strengthened by a diversified and stable rate-paying customer base. This note reviews the new trends.

Public Policy for the Private Sector: Viewpoint 152, September 1998, The World Bank Group, Finance, Private Sector, and Infrastructure Network, with David Haarmeyer. Draws on "Tapping the private sector: approaches to managing risks in water and sanitation."

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Tapping the Private Sector: Approaches to Managing Risk in Water and Sanitation
February 1998

Worldwide, the public sector finances, builds, operates, and owns most of the assets in the water and sanitation sector; facilities are often inefficient; service coverage and quality are inadequate; and cost recovery is poor. To extend coverage and improve the quality of service provided, municipalities around the world are turning to the private sector to rehabilitate and expand existing systems and building and operate new ones. Based on accumulating experience, this monograph describes strategies to sustain private involvement and investment in the water and sanitation sector. It is addressed both to policy makers and to private operators, investors, and lenders that are engaged-or are likely to participate-in meeting the rapidly growing demand for water and sanitation services. The ability of the public and private sectors to recognize and acknowledge each other's viewpoints and expectations will be key to sustaining the efficient use of the private initiative and capital.

RMC Discussion Paper Series, 122, February 1998, with David Haarmeyer. Also appeared in The Journal of Project Finance 4(2): 1-28, September 1998.

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What Explains Spreads on Emerging Market Debt?
April 1998

Changes in observable issuer characteristics and in the responsiveness of spreads and issues to those characteristics do not provide an adequate explanation for changes over time in the value of new bond issues and launch spreads. In important periods, such as the wake of the Mexican and Asian crises, blanket shifts in sentiment play the dominant role. The obvious implication for policy is that governments should exercise caution when contemplating an economic policy strategy that relies on continuous inflows of foreign capital intermediated by the international bond market. Large quantities of foreign credit may be available when sentiment shifts in their favor, but it can also shift against them for reasons beyond their control, making it impossible to finance large current account deficits and forcing a difficult adjustment. There is an argument for insuring against the capriciousness of the bond market by diversifying sources of international borrowing to include foreign direct investment, equity investment, and syndicated bank loans. And it would be prudent to insure against the sudden evaporation of foreign financing and the sudden appearance of a painful adjustment burden by taking steps to limit the size of the current account deficit.

In Sebastian Edwards, ed., Capital Flows and The Emerging Economies: Theory, Evidence, and Controversies, Chicago: The University of Chicago Press, 2000, with Barry Eichengreen.  Earlier version appeared as National Bureau of Economic Research Working Paper 6408, February 1998.

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Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?
October 1998

Past analyses have found a puzzling decline in spreads on primary issues of emerging market bonds when U.S. interest rates rise. Part of the puzzle is resolved by accounting for the selectivity bias: poor credits drop out of the market when interest rates rise. In addition, some, especially East Asian fixed-rate, bond issuers have been able to time their debt issuance to take advantage of favorable market conditions. However, the magnitude of the change in spreads following the movement of U.S. interest rates is small. U.S. interest rates do have a large impact in determining the volume of bond issuance.

International Finance, 1(1): 35-57, October 1998, with Barry Eichengreen.

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Lending Booms, Reserves, and the Sustainability of Short-Term Debt: Inferences from the Pricing of Syndicated Bank Loans
May 1999

This paper analyzes the determinants of spreads on syndicated bank lending to emerging markets, treating the loan-extension and pricing decisions as jointly determined. Compared to the bond market, our findings highlight the role of international banks in providing credit to smaller borrowers about whom information is least complete and, more generally, support the interpretation of bank finance as dominating that segment of international financial markets characterized by the most pronounced information asymmetries. Domestic lending booms and low reserves in relation to short-term debt have been priced in the expected manner by international banks. The high level of short-term debt in East Asia was supported by high growth rates but was characterized by a knife-edge quality.

 Journal of Development Economics 63 (1): 5-44, October 2000, with Barry Eichengreen.  Available also as National Bureau of Economic Research Working Paper 7113, May 1999.

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Asian Restructuring: From Cyclical Recovery to Sustainable Growth
December 1999

This is a chapter from the World Bank's Global Economic Prospects 2000.   It reviewed the recovery that was ongoing in some of the East Asian economies hit by the 1997-1998 financial crisis and highlighted the urgency for continued corporate and financial restructuring for sustainable growth.  The chapter documented the range of policy measures undertaken by the governments of the crises countries.  In general, it supported the notion that delays in restructuring were likely to compound problems and, as such, cautioned against excessive regulatory forbearance in the financial sector and stressed the continued need for policy measures to resolve claims and foster asset mobility.

Chapter 3 of Global Economic Prospects 2000, The World Bank, Washington D.C. The full report is at: http://www.worldbank.org/prospects/gep2000/full.htm.

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Do collective action clauses raise borrowing costs?
April 2004

We compare launch spreads on emerging-market bonds subject to UK governing law, which typically include collective action clauses, with spreads on bonds subject to US law, which do not. Collective-action clauses reduce the cost of borrowing for more creditworthy issuers, who appear to benefit from the ability to avail themselves of an orderly restructuring process. Less creditworthy issuers, in contrast, pay higher spreads. It appears that for less creditworthy borrowers the advantages of orderly restructuring are offset by the moral hazard and default risk associated with the presence of renegotiation-friendly loan provisions. We draw out the implications for the debate over whether to encourage the wider utilisation of these provisions as part of the effort to strengthen the international financial architecture.

The Economic Journal, 114 (April), 247–264, 2004, with Barry Eichengreen.

Earlier versions published as: National Bureau of Economic Research Working Paper 7458, January 2000 and Policy Research Working Paper 2363, The World Bank, Development Prospects Group, June 2000.

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Flight to quality: investor risk tolerance and the spread of emerging market crises
March 2000

In this paper we develop systematic evidence on how the Mexican crisis, the Asian crisis, and the Russian crisis affected price, volume, and maturity of loans extended through the bond market in the 1990s.  Our data set is essentially the universe of emerging market bonds issued in the course of the decade; this allows us to mount a comprehensive analysis of how different types of borrowers were affected.  We estimate a comprehensive model of borrowing and lending, pricing, and maturity decisions, something that does not seem to have been done before.  This permits us to distinguish different margins along which emerging markets were affected.

In Stijn Claessens and Kristin Forbes, eds., International Financial Contagion, forthcoming  Kluwer Academic Publishers, May 2001 (conference background and book chapters available from http://web.mit.edu/kjforbes/www/book_information.htm), with Barry Eichengreen and Galina Hale.

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flight_to_quality_figs.pdf (two figures are a separate file)

Safeguarding against crisis: the near-term agenda
April 2000

This  is a chapter from the World Bank's Global Development Finance 2000.   It deals with the concern that, while the international financial architecture to contain systemic instability is likely to develop only slowly, countries remain exposed to financial fragility.  In that context, the chapter discusses options available to domestic policymakers to protect their economies from the vagaries of international capital flows.  Capital controls and greater international liquidity (foreign exchange reserves and contingent lines of credit) are the options discussed. 

Chapter 5 of Global Development Finance 2000, The World Bank, Washington D.C. The full report is at: http://www.worldbank.org/prospects/gdf2000/index.htm.

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Will self-protection policies safeguard emerging markets from crises?
April 2000

Safeguards against international financial crises are appropriate because the social costs of crises can be severe.  However, safeguards have their own costs, which can be highly country-specific.  Safeguards make the most sense for countries, which despite efforts at sound policy, are vulnerable to speculative attacks.  Contingent lines of credit are likely to be cheaper than holding reserves, though the costs of reserves can be shifted to the private banking system.  Capital controls should be viewed as an extension of domestic prudential controls where the banking and corporate governance systems are underdeveloped.

In Charles Adams, Robert E. Litan, and Michael Pomerleano, eds., Managing Financial and Corporate Distress: Lessons from Asia, Washington D.C.: Brookings Institution Press, with Kenneth Kletzer.

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Priorities for the management of contingent liabilities
May 2000

This paper, part of a set of essays on contingent liabilities, discusses strategies to contain government risk exposure while pursuing prudent policy objectives.   A three-pronged approach is proposed.  First, comprehensiveness is required to ensure that policymakers are aware of both the range of risks faced and also the time period over which they may materialize.  Accordingly, the paper builds on the medium-term frameworks for fiscal and asset-liability management to address such "hidden risks" as contingent government liabilities, the volatility of expenditures and revenues, and asset erosion.  Second, within this overall approach, risk management requires new methods of budgeting and a more extensive use of liquid reserves as well as hedging mechanisms. Finally, governments have a role in helping develop financial risk management markets since private agents would then be better able to manage their own risks and that would ultimately reduce the contingent risks governments take on.

In Hana Brixi, Allen Schick, and Sweder van Wijnbergen, eds., Government at Risk: Contingent Liabilities and Fiscal Risk, Oxford University Press, 2002, with Hana Brixi. 

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Contingent liabilities in infrastructure: lessons from the East Asian crisis
May 2000

For the governments of East Asia’s crisis countries, the transformation of their contingent liabilities into immediate obligations proved an additional blow in an already challenging situation. In all crisis countries (Indonesia, Republic of Korea, Thailand, and Malaysia), the banking sector was the major source of such liabilities. However, except in Korea, infrastructure projects also added to the fiscal stress. Specifically, in so-called public-private partnerships, governments had contingent contractual obligations¾ and these obligations became due as the crisis worsened. With ongoing economic recovery, the fiscal pressure from these obligations will likely decline. However, the pressures will remain where the problems stemmed from inadequate project design and ineffective sector strategy and regulation.

Based on the Indonesian and Malaysian experiences, this paper argues that contingent liabilities are not intrinsically associated with privatized infrastructure. Their manifestation in East Asia reflects a specific privatization strategy undertaken in a period of rapid growth with the objective of rapid new investment in infrastructure. However, even where justified, transitional structures created with government’s direct support and contingent commitments should give way to competitive infrastructure provision with greater risk shifted to the private sector (World Bank 1994). This has not yet happened in East Asia. Latin American economies¾especially Argentina and Chile¾ demonstrate the practical implementation of privatization without the government acquiring contingent liabilities.

In Hana Brixi, Allen Schick, and Sweder van Wijnbergen, eds., Government at Risk: Contingent Liabilities and Fiscal Risk, Oxford University Press, 2002. 

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Bail-ins, Bailouts, and Borrowing Costs
January 2001

We examine how IMF programs and the adoption of collective action clauses affect the terms of market access. Existing practices and prospective reforms have different effects on different types of borrowers. For example, the commitment effects associated with IMF loans appear to do little for either borrowers with very poor credit, who are least likely to be able to stick to the terms of their programs, or borrowers with very good credit, who are presumably able to commit to reform in their absence. In contrast, Fund programs do appear to enhance the market access of borrowers with "intermediate" credit, who as a result of the additional commitment that these mechanisms entail are able to borrow at lower cost. Moreover, there is a suggestion that not all Fund programs are created equal. Those accompanied by limited structural conditions have the most favorable effects on investor confidence, while those accompanied by elaborate structural conditions of a sort that governments are unlikely to be able to deliver in short order have a negative effect and undermine confidence rather than inspiring it. Similar messages emerge with regard to changes in the provisions of loan contracts like the more widespread adoption of collective action clauses. These clauses appear to raise the costs of market access for borrowers with low credit ratings but lower them for borrowers with high ratings.

"Bail-ins, Bailouts, and Borrowing Costs," IMF Staff Papers 47: 155-187, with Barry Eichengreen.

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The Role of Cross-Border Mergers and Acquisitions in Asian Restructuring
August 2000

As troubled firms continue to negotiate debt rescheduling and forgiveness, either directly with their creditors or under government-led programs, severely distressed firms, particularly in the non-tradable sectors, have been compelled to seek buyers for their assets. At the same time, the Korean and Thai governments have introduced a series of policy reforms to attract foreign investment and promote domestic and cross-border mergers and acquisitions to facilitate asset reallocation. However, this study finds that cross-border mergers and acquisitions have not made an immediate contribution to restructuring of the troubled economies. But neither does the evidence support incidence of "fire-sales." The most significant role for cross-border M&As lies in longer-term processes such as operational restructuring and reallocation of assets. After discussing several policy measures to increase the quantum of M&A deals, the paper notes the obvious importance of concomitant enhancements in competition policy and corporate governance.

With Shoko Negishi.  In Resolution of Financial Distress, edited by Stijn Claessens, Simeon Djankov, and Ashoka Mody, World Bank Institute, The World Bank, Washington D.C.

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A summary of this paper was also published in Finance and Development 38 (1): 6-9, under the title "Cross-Border Mergers and Acquisitions in East Asia: Trends and Implications."

Private Capital Flows and Growth
June 2001

International capital flows have increased dramatically in recent years, but their impact on developing countries has not been clear.  Whereas capital flows have been associated with higher growth in some countries, they have also been associated with a higher incidence of crises.  Do the benefits justify the costs?

Finance and Development 38(2): 2-5, June 2001, with Deepak Mishra and Antu Murshid .

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Global Development Finance 2001: Building Coalitions for Effective Development Finance

The Global Development Finance is an annual publication of the World Bank.  I was the principal author of the year 2001 report, which asks whether, and in what conditions, international official and private capital flows are effective in raising domestic investment and productivity.  

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Global Development Finance

Modelling Fundamentals for Forecasting Capital Flows

In this paper, we provide capital flows forecasts to 32 developing countries using a vector error correction framework based on underlying domestic (pull) fundamentals and international (push) factors.  In general, pull factors have a heavier weight in determining these capital flows.  However, short-term dynamics of capital flows can be significantly influenced by external developments.  Simulations under various economic scenarios show that while financial variables (such as the US interest rate and high-yield spread) are important, real US activity may be even more potent in influencing capital flow movements.

International Journal of Finance and Economics 6(3): 201-216, 2001, with Mark Taylor and J.Y. Kim. 

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Forecasting Capital Flows

Resolution of Financial Distress: An International Perspective on the Design of Bankruptcy Laws

Recent financial crises involving the corporate and financial sectors in emerging markets, especially in East Asia in 1997-1998, have raised important questions about the proper role of governments in preventing and alleviating financial distress.  This book deals with the principles of and practical approaches to addressing the difficult public policy trade-off involved in systemic corporate and financial sector crises.

World Bank Institute, WBI Development Studies, World Bank, Washington, D.C., edited with Stijn Claessens and Simeon Djankov, 2001.

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Financial Distress

International Public Goods: Incentives, Measurement, and Financing

Many development problems transcend national borders and are regional, or even global, in character.  This book presents a collection of papers on dealing with these cross-border problems--referred to in academic and policymaking discussions as the supply of International Public Goods.

Kluwer Academic Publishers, Boston, and World Bank, Washington, D.C., edited with Marco Ferroni, 2002.

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IPG Front Matter

The first chapter of the book is available in PDF format for download
IPG First Chapter

International Capital Crunches: The Time-Varying Role of Informational Asymmetry

We examine the determinants of capital flows to four developing countries during the 1990s using an explicitly disequilibrium econometric framework in which the supply and demand for capital are not necessarily equal and the actual amount of the flow is determined by the ‘short side’ of the market. We are thus able to detect instances of ‘international capital crunch’ – where capital flows are curtailed because of supply-side rationing – and to relate these instances to movements in the underlying fundamentals. The analysis highlights the role of asymmetric information – as distinct from the traditional concern with default risk – in conditioning capital flows.

Applied Economics, 45(20): 2961-2973, an earlier version appeared as IMF Working Paper, WP/02/43, with Mark Taylor.

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International Capital Crunches

Growing Up With Capital Flows
April 2002, Revision February 2004

We examine the capital flows-domestic investment relationship for 60 developing countries from 1979 to 1999. In the 1990s, even as liberalization attracted new flows, foreign capital stimulated less domestic investment than in the preceding decade. With greater financial integration, governments accumulated more international reserves and domestic residents diversified by investing abroad. Foreign investors were also motivated by diversification objectives rather than by unmet investment needs. Inflows were channeled increasingly through portfolio flows—or through foreign direct investment with the characteristics of portfolio capital—resulting in weak investment stimulus. However, stronger policy environments strengthened the link between inflows and investment.

IMF Working Paper WP/02/75, 2002 and Journal of International Economics 65(1): 249-266, 2005, with Antu Murshid., with Antu Murshid.

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Growing up

Regional Vulnerability: The Case of East Asia

December 2007

In a case study of six East Asian economies, we use dynamic factor analysis to estimate a regional component of the exchange market pressure index (EMPI) as a measure of regional financial stress. The extent to which this indicator is explained by regional economic and financial factors is interpreted as regional vulnerability to crisis. We find that regional external liabilities and exuberance in domestic stock and credit markets, as well as the US high-yield spread, were positively correlated with regional vulnerability. Individual country EMPIs are also explained by regional factors, with country-specific factors and trade linkages playing little role.

Journal of International Money and Finance 26(8): 1292-1310, 2007, with Mark Taylor.

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Common Vulnerabilities

The High Yield Spread as a Predictor of Real Economic Activity:  Evidence of a Financial Accelerator for the United States
August 2002

Studies find the nominal term spread—the difference between long and short rates on government paper—to predict real economic activity in the United States. We find, however, that this relationship appears to be unique to the 1970s and 1980s, in that it appears to break down for the US during the 1990s and was only very weak during the 1960s.  We suggest that the predictive ability in the 1970s and 1980s may have been due to the presence of high and volatile inflation during that period. We find, further, that the spread between below investment grade corporate debt and the government bond yield—i.e. the high-yield spread—does predict real activity well during the 1990s.  In addition, we find evidence of some nonlinearity in that abnormally high levels of the high yield spread have significant additional short-term predictive power.  Further, when the industrial output series is purged of, alternately, demand disturbances, and supply disturbances, the predictive ability of the high yield spread remains strong at all horizons.  We interpret the predictive ability of the high yield spread as evidence in support of a financial accelerator mechanism for the United States.

IMF Staff Papers 50(3): 373-402, 2003, with Mark Taylor.

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High-Yield Spreads

The Global Disconnect: The Role of Transactional Distance and Scale Economies in Gravity Equations

Recent empirical analyses show that asset flows can be modeled by the same “gravity” equations that trade economists have used so successfully for the past few decades.  This is something of a surprise.  Trade economists do not yet have a unified theory of why gravity models should work—and the situation is worse for asset flows.  Reasonable theories would predict that greater distance between countries should generate more asset flows rather than less as the econometric results seem to consistently show.  In this paper we discuss how host and source country GDPs, language, and distance—the core explanatory variables in the traditional gravity models—fare in trade and asset flows estimations.  While the “distance puzzle” is not resolved, it is considerably reduced by going beyond consideration of physical distance to concepts of transactional distance and scale economies.

Scottish Journal of Political Economy 49 (5): 526-43, with Prakash Loungani and Assaf Razin.

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Global Disconnect

Financial Reform: What Shakes It? What Shapes It?
May 2003, Revision June 2004

Despite stops, gaps, and reversals, financial reforms advanced worldwide in the last quarter century. Using a new index of financial liberalization, we conclude that influential events shook the status quo, inducing both reforms and reversals, while learning, more so than ideology and country structure, shaped and sustained widespread reforms. Among shocks, a decline in global interest rates and balance of payments crises strengthened reformers; banking crises were associated with reversals, while new governments brought about both reforms and reversals. Learning occurred domestically—initial reforms raised the likelihood of further reforms—and through observing regional reform leaders. Among structural features, greater openness to trade appears to have increased the pace of financial reform.

American Economic Review, 95 (1): 66-88, March 2005; earlier version as International Monetary Fund Working Paper WP/03/100,  May 1, 2003, with Abdul Abiad.

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Financial Reform Data files

Dancing in Unison
June 2003

Although the increase in financial market comovement is relatively clear and consistent, evidence of increased comovement of the real economy is blurred and controversial. While stock prices in the advanced economies may move in parallel much of the time, the degree of synchronization of the real economy is substantially lower.

Finance and Development, June 2003, pp. 46-49, with Robin Brooks, Jean Imbs, and Kristin Forbes.

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Dancing in Unison

Debt Accumulation in the CIS-7 Countries: Bad Luck, Bad Policies, or Bad Advice?
May 2004

Following the breakup of the Soviet Union in 1992, several low-income countries in the Commonwealth of Independent States (CIS) accumulated substantial external debt in a short time span, about half of which is owed to multilateral financial institutions. Three factors contributed to the current debt burden. First, the initial years of transition brought large systemic economic disruptions, loss of transfers from the center and collapse of trade relations among Council for Mutual Economic Assistance (CMEA) countries, and negative terms of trade shocks. Second, fiscal and other reforms, and consequently, growth revival, took longer than expected. Third, overoptimism by multilaterals contributed to the high debt levels. If external financial assistance, which was needed because of high social costs of the transition, had come in the form of grants in the first two or three years of the transition, the debt burden would have been lower and sustainable.

IMF Working Paper 04/93, May 2004, with Thomas Helbling and Ratna Sahay

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 Debt Accumulation in the CIS-7 Countries

Is FDI Integrating the World Economy?
January 2004

The spectacular growth and diverse forms of FDI during the past two decades represented an important force generating greater economic integration. Capital flows through FDI increased substantially in relation to global productive capacity, the growing importance of the mergers and acquisitions component of FDI put domestic corporate laggards on notice, and the spread of FDI to non-tradable service sectors generated the possibility that these traditionally low productivity sectors would be brought closer to the standards of international efficiency. Yet, FDI did not perform an integrating role in a more fundamental sense. There is little evidence that FDI served to speed up income convergence across countries. This was the case for two reasons. First, FDI flows remained highly concentrated. Second, the benefits from FDI appear to have accrued principally where conditions were already conducive to investment and growth. Hence, though cross-country disciplines through bilateral, regional, and multilateral efforts are important in reducing the distortions that lead to misallocation of capital, but ultimately domestic efforts to raise absorptive capacity will be critical. Efforts to increase labor mobility, as foreseen, for example, under GATS, could have a significant effect in raising the benefits from FDI as the more mobile labor serves to bridge the cultural, institutional, and contractual differences across nations.

The World Economy, 27 (8): 1195-1222, 2004

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Is FDI Integrating the World Economy?


Catalysing Private Capital Flows: Do IMF Programmes Work as Commitment Devices?

July 2006

In this article, we examine whether IMF programmes influence the ability of developing country issuers to tap international bond markets and if they improve spreads paid on the bonds issued. We find that Fund programmes do not provide a uniformly favourable signalling effect. Instead, the evidence is most consistent with a positive effect of IMF programmes when they are viewed as likely to lead to policy reform and when undertaken before economic fundamentals have deteriorated significantly. The size of the Fund’s programme matters but the credibility of a joint commitment by the country and the IMF appears to be critical.

The Economic Journal, 116 (July), 843–867,  2006, with Diego Saravia

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Catalysis and Commitment

What is an Emerging Market?

Summer 2004

As developing economies become richer, they seek to contract with the global economy in increasingly complex ways. Dealing with that complexity often implies the need to renegotiate contracts. However, such recontracting is viewed with concern, particularly by market participants. At the same time, iron-clad commitments to abstain from recontracting are untenable. Sovereign debt experts have long dealt with this dilemma. This paper argues that the acute trade-off between commitment and flexibility is not unique to sovereign debt. Instead, it is the defining characteristic of an emerging market. Examples of World Bank guarantees on behalf of sovereign governments to private lenders, exchange rate regimes, and international bond contracts, highlight the evolution from commitment to flexibility. Early interaction with international markets typically benefits from strong transaction-specific commitment. However, the goal is to grow out of transactional commitments to achieve commitment through credible institutions. Institutional commitment allows the benefits of flexibility, with the country’s “word” acting as the necessary assurance to behave responsibly.

Georgetown Journal of International Law, 35(4), Summer 2004.

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What is an Emerging Market

Can Budget Institutions Institutions Counteract Fiscal Indiscipline?

October 2006

The budget is an expression of political rather than economic priorities. We confirm this proposition for a group of new and potential members of the European Union, finding that politics dominates. The contemporary practice of democracy can increase budget deficits through not only ideological preferences, but also more fragmented government coalitions and higher voter participation. Long-term structural forces, triggered by societal divisions and representative electoral rules, have more ambiguous implications but also appear to increase budget pressures, as others have also found. However, our most robust, and hopeful, finding is that budget institutions–mechanisms and rules of the budget process–that create checks and balances have significant value in curbing fiscal pressures even when the politics is representative but undisciplined, and when long-term structural forces are unfavourable.

Economic Policy October 2006: 689–739; earlier version as International Monetary Fund Working Paper WP/06/123,  May 2006, with Stefania Fabrizio.

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A Cross-Country Financial Accelerator: Evidence from North America and Europe

February 2007

A growing literature has examined the importance of credit-market imperfections for macroeconomic fluctuations, the so-called ‘financial accelerator.’ A related literature has provided evidence of international and regional comovements in macroeconomic fluctuations. We tie together these strands of the literature in that we investigate the importance of both cross-country and country-specific credit cycles in explaining output fluctuations. Using data for four major economies and two world regions from 1973 to 2001, we find that both regional and country-specific components of indicators of credit availability are powerful in explaining output movements. This research provides the first empirical evidence of a cross-country financial accelerator.

Journal of International Money and Finance 26(1): 149-165, 2007, with Lucio Sarno and Mark Taylor.

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Financial integration, capital mobility, and income convergence

April 2009

Recent studies have found that capital moves 'uphill' from poor to rich countries, and brings little or no growth dividend when it does flow into poor economies. We show that Europe does not conform to this paradigm. In the European experience of financial integration, capital has flown from rich to poor countries, and such inflows have been associated with significant acceleration of income convergence. Analysing broader samples of countries, we find that 'downhill' capital flows tend to be observed above certain thresholds in institutional quality and financial integration. But Europe remains different even when allowing for such threshold effects, and its experience is similar to that of interstate flows within the United States. Our findings are consistent with the notion that financial diversification reduces countries’ incentives to save in order to self-insure against specific shocks.

Economic Policy 24: 241-305, April 2009, an earlier version appeared as "International Finance and Income Convergence: Europe is Different," IMF Working Paper, WP/07/64, March 2007, Washington D.C., with Abdul Abiad and Daniel Leigh.

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Financial integration, capital mobility, and income convergence

Exits from Heavily Managed Exchange Rate Regimes

February 2005

A widely held nostrum is that countries should exit heavily managed exchange rate regimes when the going is good, rather than when the exchange rate is under pressure to depreciate. Have countries followed this advice in practice? And, if so, how good has the going been? We find that in the past 25 years or so, almost all exits to more flexible regimes were followed by a depreciation of the exchange rate, and that exits were about evenly divided between disorderly and orderly cases. A logit econometric model, indicates that the general circumstances of orderly and disorderly exits have been broadly similar: an overvalued real exchange rate, falling reserves, a difficult fiscal position, and high world interest rates. Wellestablished pegs were less likely to end.

IMF Working Paper, WP/05/39, February 2005, Washington D.C. with Enrica Detragiache, and Eisuke Okada.

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The Demographic Dividend: Evidence from the Indian States

February 2011

Large cohorts of young adults are poised to add to the working-age population of developing economies. Despite much interest in the consequent growth dividend, the size and circumstances of the potential gains remain under-explored. This study makes progress by focusing on India, which will be the largest individual contributor to the global demographic transition ahead. It exploits the variation in the age structure of the population across Indian states to identify the demographic dividend. The main finding is that there is a large and significant growth impact of both the level and growth rate of the working age ratio. This result is robust to a variety of empirical strategies, including a correction for inter-state migration. The results imply that a substantial fraction of the growth acceleration that India has experienced since the 1980s - sometimes ascribed exclusively to economic reforms - is attributable to changes in the country’s age structure. Moreover, the demographic dividend could add about 2 percentage points per annum to India’s per capita GDP growth over the next two decades. With the future expansion of the working age ratio concentrated in some of India’s poorest states, income convergence may well speed up, a theme likely to recur on the global stage.

IMF Working Paper, WP/11/38, February 2011, with Shekhar Aiyar

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The Demographic Dividend

Sources of Corporate Profits in India: Business Dynamism or Advantages of Entrenchment?

January 2011

Some see India’s corporate sector as the fundamental driver of recent and future prosperity. Others see it as a source of excessive market power, personal enrichment, and influence over the State, with an ultimately distorting influence. To inform this debate, this paper analyses the correlates of profitability of firms listed on the Bombay Stock Exchange, covering a dynamic period—in terms of firm entry and growth—from the early 1990s to the late 2000s. Overall, the results do not provide support for the systematic exercise of market power via the product market. At least for this period, the story is more consistent with a competitive and dynamic business sector, despite the continued dominance of business houses and public sector firms in terms of sales and assets. Those with opposing views can, with justification, argue that our analysis does not cover influences, such as corporate governance and state-corporate relations, which may paint a less flattering picture of the corporate sector’s role. Those broader themes deserve further attention.

India Policy Forum, 7: 43-96, 2010-11, an earlier version appeared as IMF Working Paper, WP/11/8, January 2011, with Anusha Nath and Michael Walton.

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Sources of Corporate Profits in India

Spillovers of Domestic Shocks: Will They Counteract the "Great Moderation"?

March 2010

The protracted decline in output volatility – the Great Moderation – began to reach its limits by the mid-1990s, and volatility even showed a mild rise in some countries. Domestic shocks did not typically rise but we find that they did spread more rapidly across borders. One reason for the faster transmission of domestic shocks was the increased fragmentation of production across multiple global locations that increasingly included the more volatile emerging markets. Although this development was generally benign, it had latent implications for triggering spikes in volatility since domestic stresses could rapidly spillover across borders. The cascading effects of such spillovers were vividly demonstrated by the trade collapse during the Great Recession of 2008–09.

International Finance 15(1): 69–97, 2012, an earlier version appeared as IMF Working Paper, WP/1078, March 2010, with Alina Carare.

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Spillovers of Domestic Shocks

International Pricing of Emerging Market Corporate Debt: Does the Corporate Matter?

January 2010

We examine risk spreads charged on corporate bonds placed by emerging market borrowers on international exchanges. While global developments have an important effect on spreads, changes in firm-level default risk also matter significantly in a way consistent with theory and experience in mature markets. In contrast, except during periods of financial crisis, country factors play a limited role. These findings go against the supposition that limited information on emerging market firms or significant agency problems prevent firm-level credit discrimination by international investors. The firm-level information capitalization into spreads possibly reflects protection afforded by the exchange listing on international markets.

IMF Working Paper, WP/10/26, January 2010, with Sonja Keller

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International Pricing of Emerging Market Corporate Debt

After the Crisis: Lower Consumption Growth but Narrower Global Imbalances?

January 2010

We estimate consumption dynamics in the G-7 economies, paying particular attention to the possibility of precautionary behavior in the face of uncertainty. We find that in the short run, continued income uncertainty will significantly dampen consumption growth. As such, consumption in the G-7 economies is unlikely to be the engine that revives global growth. Differences in the pace and timing of consumption moderation have implications for the evolution of global imbalances. With the U.S. experiencing a sharper rise in unemployment and, perhaps, more widespread loss of financial wealth than elsewhere in the G-7, the relative rise of the U.S. savings rate is helping narrow global imbalances. But with a likely earlier recovery in the U.S., this narrowing could be short-lived. Moreover, long-term differences- in economic and financial volatility and in demographic structures-have been an important source of the imbalances and could soon reassert their prominence.

IMF Working Paper, WP/10/11, January 2010, with Franziska Ohnsorge

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After the Crisis

From Bear Stearns to Anglo Irish: How Eurozone Sovereign Spreads Related to Financial Sector Vulnerability

May 2009

This paper attempts to explain the recent rise and differentiation of sovereign spreads across the countries of the eurozone. Following the onset of the subprime crisis in July 2007, spreads rose but mainly on account of common global factors. The rescue of Bear Stearns in March 2008 marked a turning point. Countries thereafter were increasingly differentiated. Sovereign spreads of a eurozone country tended to rise when the prospects of its domestic financial sector worsened. It appears, therefore, that the rescue of Bear Stearns created a link between financial sector vulnerabilities and a larger contingent liability on public finances. Following the failure of Lehman Brothers, spreads also rose faster for countries with higher ratios of public debt-to-GDP. These transitional dynamics appear to have concluded with the nationalization of Anglo Irish: sovereign spreads throughout the eurozone jumped, with the jump emphasizing the differentiation by financial sector vulnerability and public debt levels. The results imply that, to varying degrees, countries may have moved to a new regime of weak economic outlook, financial sector fragilities, and strains on public finances.

IMF Working Paper, WP/09/108, May 2009

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From Bear Stearns to Anglo Irish

"The Second Transition: Eastern Europe in Perspective," Paper prepared for the Workshop: "Five years of an enlarged EU – a positive-sum game" Brussels, 13-14 November 2008

March 2009

The countries of Eastern Europe achieved two remarkable transitions in the short period of the last two decades: from plan to market and, then, in the run-up to and entry into the European Union, they rode a wave of global trade and financial market integration. Focusing on the second transition, this paper reaches three conclusions. First, by several metrics, East European and East Asian growth performances were about on par from the mid-1990s; both regions far surpassed Latin American growth. Second, the mechanisms of growth in East Europe and East Asia were, however, very different. East Europe relied on a distinctive—often discredited—model, embracing financial integration with structural change to compensate for appreciating real exchange rates. In contrast, East Asia contained further financial integration and maintained steady or depreciating real exchange rates. Third, the ongoing financial turbulence has, thus far, not had an obviously differential impact on emerging market regions: rather, the hot spots in each region reflect individual country vulnerabilities. If the East European growth model is distinctive, is it sustainable and replicable? The paper speculates on the possibilities.

European Economy Economic Papers 366, March 2009, http://ec.europa.eu/economy_finance/publications, also as IMF Working Paper, WP/09/43, March 2009, with Stefania Fabrizio and Daniel Leigh.

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The Second Transition

"Speed of IMF Response," an earlier version appeared as "From Crisis to IMF-Supported Program: Does democracy impede the speed required by financial markets?"

December 2008

More severe crises were more likely to enter a program arrangement with the Fund, and the time from a crisis to a program was smaller the more serious the crisis. Political links to the United States were associated with higher program likelihood but a faster response speed occurred mainly for "major" crises. While the IMF response has not, in general, become faster over time, the sensitivity to crisis severity did increase after the Latin American crises of the 1980s. Similarly, democracies that had tended to stall program initiation turned neutral, as if responding to financial markets' demands for quicker action.

IMF Working Paper, WP/08/276, December 2008, with Diego Saravia

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Speed of IMF Response

Breaking the Impediments to Budgetary Reforms: Evidence from Europe

November 2010

In addition to the known effects of government fractionalization, we find that larger deficits are associated with a reduced likelihood of budgetary reforms. In a war of attrition setting, larger deficits signify stronger entitlements on the budget, generating unwillingness to impose self discipline. A sense of crisis emerges only when macroeconomic imbalances appear. However, while a crisis creates the opportunity for reform, policy credibility is important for effectively using that opportunity. We find that one way of establishing credibility is by undertaking measures in opposition to the government's known ideological position – these presumably signal motivation by broader social welfare considerations.

Economics and Politics 22(3): 362–391, November 2010, an earlier version appeared as IMF Working Paper, WP/08/82, March 2008, with Stefania Fabrizio.

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Breaking the Impediments to Budgetary Reforms

Can Domestic Policies Influence Inflation?

November 2007

Globalization operates not only by reducing domestic pressures on inflation but also by reducing the scope of domestic authorities to influence the pace of inflation. First, as markets are integrated, the common, cross-border sources of inflation increase, reducing the extent of domestically-generated inflation. Based on a methodology identifying common time and sectoral trends, we find this to be especially the case in the countries of the eurozone, with their longer histories of product market integration. Second, even the domestically-generated component of inflation may be difficult to manipulate. Policies act, especially in the shortrun, through managing domestic demand. But the relationship between domestic demand (proxied by the output gap and unit labor cost growth) and inflation has been weak, constrained in part by trade openness. Moreover, the domestic component of inflation contains a country-specific international catch-up process that generates price equalization across countries. The evidence is that catch-up has accelerated with increasing market integration. Thus, for the eurozone economies, there may be limits on the use of fiscal and labor market policies to contain inflation. The new member states may not have policy leverage to meet the Maastricht inflation limit necessary for entering the eurozone. Casestudies show that fiscal consolidation needed to comply with the inflation criterion can be large and sustained only briefly to get under the Maastricht wire.

IMF Working Paper, WP/07/257, November 2007, with Franziska Ohnsorge

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Can Domestic Policies Influence Inflation?

The Dynamics of Product Quality and International Competitiveness

April 2007

Despite the appreciation of the exchange rate, the eight Central and Eastern European countries (the CEE-8) that entered the European Union in May 2004 have achieved a decade of impressive export growth, expanding significantly their shares of world markets. Does this mean that the real exchange rate is irrelevant? If not, what other factors compensated for the appreciation to explain the apparently strong competitiveness of these economies? And will these favorable factors continue to power export growth? This paper places in international context the achievements of the CEE-8 and helps more broadly to identify the determinants of international competitiveness. Building from data at the six-digit level of disaggregation, it shows that the CEE-8 made an impressive shift in product quality and in the technological intensity of exports, and that these shifts associated with the structural transformation were also associated with increased market share. The analysis strongly suggests that, when trading in international markets, countries benefit from higher product quality. However, while the structural transformation achieved was valuable in raising market shares, the easy gains from this process may be over.

IMF Working Paper, WP/07/97, April 2007, with Stefania Fabrizio, and Deniz Igan

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Dynamics of Product Quality

Growth from International Capital Flows: The Role of Country-Specific Volatility Regimes

April 2011

Despite the appreciation of the exchange rate, the eight Central and Eastern European countries (the CEE-8) that entered the European Union in May 2004 have achieved a decade of impressive export growth, expanding significantly their shares of world markets. Does this mean that the real exchange rate is irrelevant? If not, what other factors compensated for the appreciation to explain the apparently strong competitiveness of these economies? And will these favorable factors continue to power export growth? This paper places in international context the achievements of the CEE-8 and helps more broadly to identify the determinants of international competitiveness. Building from data at the six-digit level of disaggregation, it shows that the CEE-8 made an impressive shift in product quality and in the technological intensity of exports, and that these shifts associated with the structural transformation were also associated with increased market share. The analysis strongly suggests that, when trading in international markets, countries benefit from higher product quality. However, while the structural transformation achieved was valuable in raising market shares, the easy gains from this process may be over.

IMF Working Paper 11/90, April 2011, with Antu Murshid.

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Growth from International Capital Flows

International Financial Crises and the Multilateral Response: What the Historical Record Shows

August 2011

We provide a synoptic description of ?nancial crises and the multilateral response over the course of the last four decades. We present both indicators of economic performance around crisis dates and a comprehensive description of multilateral rescue efforts. While emergency lending has grown, reliance on debt restructuring, broadly speaking, has declined. This leads us to ask what can be done to rebalance the management of debt problems toward a better mix of emergency lending and private sector burden sharing. In particular, we explore the idea of sovereign cocos, contingent debt securities that automatically reduce payment obligations in the event of debt-sustainability problems.

forthcoming Journal of International Economics, an earlier version appeared as NBER Working Paper No. 17361, August 2011, with Bergljot Barkbu and Barry Eichengreen.

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International Financial Crises and the Multilateral Response

Precautionary Savings during the Great Recession


Heightened uncertainty since the onset of the Great Recession has materially increased saving rates, contributing to lower consumption and GDP growth. Consistent with a model of precautionary savings in the face of uncertainty, the paper ?nds for a panel of advanced economies that greater labor income uncertainty is signi?cantly associated with higher household savings. These results are robust to controlling for other determinants of saving rates, including wealth-to-income ratios, the government ?scal balance, demographics, credit conditions, and global growth and ?nancial stress. The estimates imply that at least two-?fths of the sharp increase in household saving rates between 2007 and 2009 can be attributed to the precautionary savings motive.

IMF Economic Review 60 (1): 114-138, 2012, with Franziska Ohnsorge and Damiano Sandri.

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Precautionary Savings during the Great Recession

The Eurozone Crisis: How Banks and Sovereigns Came to Be Joined at the Hip

April 2012

The eurozone sovereign and banking crisis evolved in three phases. Following the onset of the subprime tremors in July 2007, the risk premia (spreads) on bonds issued by eurozone sovereigns rose from historically low levels; but they rose largely in tandem across the eurozone membership along with global banking stresses. The rescue of the US investment bank, Bear Stearns, in March 2008, oddly enough, marked the start of a distinctively European banking crisis accompanied by increased differentiation of countries within the eurozone. With the greater expectation of public support for distressed banks, the spreads that a sovereign paid tended to rise following evidence of stress in its domestic financial sector. This was especially so in countries with lower growth prospects and higher debt burdens. But there was as yet no feedback from banks to sovereigns. Finally, as the limits of fiscal support for domestic banks became clearer, and coinciding with the nationalization of Anglo Irish in January 2009 but gathering steam with evidence of the Greek sovereign’s distress in May 2010, sovereign weaknesses also came to be quickly transmitted to a more pessimistic assessment of the financial sector's prospects, creating the potential of mutual destabilization.

Economic Policy, 27: 199-230, April 2012, with Damiano Sandri.

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The Eurozone Crisis

Paths to Eurobonds

April 2012

This paper discusses proposals for common euro area sovereign securities. Such instruments can potentially serve two functions: in the short-term, stabilize financial markets and banks and, in the medium-term, help improve the euro area economic governance framework through enhanced fiscal discipline and risk-sharing. Many questions remain on whether financial instruments can ever accomplish such goals without bold institutional and political decisions, and, whether, in the absence of such decisions, they can create new distortions. The proposals discussed are also not necessarily competing substitutes; rather, they can be complements to be sequenced along alternative paths that possibly culminate in a fully-fledged Eurobond. The specific path chosen by policymakers should allow for learning and secure the necessary evolution of institutional infrastructures and political safeguards.

IMF Working Paper 12/172, July 2012, with Stijn Claessens and Shahin Vallée.

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Paths to Eurobonds

How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads

September 2012

How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? To shed light on this question we use principal components analysis to identify common factors in the movement of banks' credit default swap spreads. We find that fortunes of international banks rise and fall together even in normal times along with short-term global economic prospects. But the importance of common factors rose steadily to exceptional levels from the outbreak of the Subprime Crisis to past the rescue of Bear Stearns, reflecting a diffuse sense that funding and credit risk was increasing. Following the failure of Lehman Brothers, the interdependencies briefly increased to a new high, before they fell back to the pre-Lehman elevated levels -- but now they more clearly reflected heightened funding and counterparty risk. After Lehman's failure, the prospect of global recession became imminent, auguring the further deterioration of banks' loan portfolios. At this point the entire global financial system had become infected.

Journal of International Money and Finance 31(5): 1299–1318, September 2012, an earlier version appeared as NBER Working Paper 14904, August 2009,with Barry Eichengreen, Milan Nedeljkovic, and Lucio Sarno.

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How the Subprime Crisis Went Global