the political economy of public income volatility with an application to the resource curse abstract in recent years many countries have witnessed a great deal of volatility in public budgets be it due to volatility in the access to foreign loans in greece or to unstable oil prices in venezuela we study the political consequences of such public income volatility as is standard in our model political incentives create inefficient policies to increase re election probabilities but we show that making public income uncertain creates specific new effects future volatility reduces the benefit of being in power making policy more efficient yet at the same time it also reduces the re election probability of an incumbent and since some of the policy inefficiencies are concentrated in the future this makes inefficient policy such as patronage public employment less costly our model highlights a new political economy connection between the volatility of the public budget and economic growth in the case where volatility comes from natural resource prices a characteristic of many developing countries we show that volatility in itself may be a source of inefficient resource extraction jointly interacting with increased patronage employment

balanced and unbalanced growth abstract a model is developed that shows how two sectors or regions interact out of steady state through product labor and capital markets and how if the former interaction dominates the growth of one sector pulls along the growth of the other while if the latter interactions dominate one sector or region booms while the other declines it is then shown why liberalization of foreign trade should lead to a transition from a lower to a higher steady state growth rate and why during the course of this transition growth might initially be even slower than before liberalization

earthquake fatalities the interaction of nature and political economy to say that the level of fatalities resulting from an earthquake is inversely related to a country s per capita level of income is hardly novel what makes our approach novel is that we relate fatalities to both per capita income and the level of inequality that exists within a country through their joint impact on the likelihood of collective action being taken to mitigate the destructive potential of quakes we first develop a theoretical model which offers an explanation as to why in some environments different segments of society prove incapable of arriving at what all parties perceive to be an agreeable distribution of the burden of the necessary collective action causing the relatively wealthy simply to self insure against the disaster while leaving the relatively poor to its mercy following this we test our theoretical model by evaluating 269 large earthquakes occurring worldwide between 1960 and 2002 taking into account other factors that influence a quake s destructiveness such as its magnitude depth and proximity to population centers using a negative binomial estimation strategy with both random and fixed estimators we find strong evidence of the theoretical model s predictions that is while earthquakes themselves are natural phenomena beyond the reach of humankind our collective inaction with respect to items like the creation and enforcement of building codes failure to retrofit structures and to enact quake sensitive zoning clearly plays a part in determining the actual toll that a given quake takes and it is through these and other examples of collective inaction that limited per capita income and inequality couple together with a given quake s natural destructive power in determining the actual fatalities resulting from a quake

on the empirics of foreign aid and growth the present paper re examines the effectiveness of foreign aid theoretically and empirically using a standard olg model we show that aid inflows will in general affect long run productivity the size and direction of the impact may depend on policies deep structural characteristics and the size of the inflow the empirical analysis investigates these possibilities overall we find that aid has been effective in spurring growth but the magnitude of the effect depends on climate related circumstances finally we argue that the collier dollar allocation rule should be seriously reconsidered by donor agencies if aid effectiveness is related to climate the usefulness of foreign aid in promoting growth in developing countries has been an area of controversy ever since rosenstein rodan in 1943 advocated for aid to eastern and south eastern europe browsing through successive editions of a leading textbook in development economics provides a telling illustration of how the confidence in aid effectiveness dwindled over the years in the first edition of leading issues in economic development meier 1964 dedicated a full 18 page section to the issue of foreign aid he started out asking how much aid by the time of the sixth edition meier 1995 the treatment of foreign aid had been cut into half and the questions in focus were why official assistance and does aid work in the 2000 edition meier and rauch 2000 foreign aid is not even listed in the index

absorbing a windfall of foreign exchange dutch disease dynamics abstract the permanent income rule is seldom the optimal response to a windfall of foreign exchange such as that from a resource discovery absorptive capacity constraints require domestic investment and investment in structures requires non traded inputs the supply of which is constrained by the initial capital stock this particularly when combined with intra sectoral capital immobility delays adjustment and creates short run dutch disease symptoms as the real exchange rate sharply appreciates and overshoots its long run value optimal revenue management requires investing in the domestic non traded goods sector and a slow build up of consumption accumulation of foreign assets adjusts to accommodate the time paths of domestic consumption and investment

risk attitudes to low probability climate change risks wtp for flood insurance abstract natural disasters may increase in frequency and severity in the future as a result of climate change which is likely to have an impact on the demand for natural disaster insurance insights about individual risk beliefs and behavioural responses to changing risks are relevant for insurers as it allows them for example to estimate the demand for new insurance products that cover weather related damage this study elicits individual risk beliefs and the demand for low probability high impact flood insurance using the contingent valuation survey method among approximately 1000 homeowners in the dutch river delta this study is of practical relevance since currently flood insurance is not available in the netherlands while insurers have been considering to provide such insurance individuals generally do not behave in accordance with the expected utility model since a significant proportion of homeowners neglect the low probability flood risk the willingness to pay wtp of those individuals who demand flood insurance is on average considerably higher than the expected value of the flood risk they face moreover the wtp for flood insurance is less than proportionally related to increased flood probabilities that were presented to respondents in the questionnaire individuals follow a process of bayesian updating of flood probabilities since perceptions of flood risk are an important determinant of the wtp while objective risks derived from geographical characteristics influence the wtp to a lesser extent communication of baseline probabilities and changes in flood probabilities using risk ladders facilitate the comprehension of risk by respondents and has a considerable effect on the level of the wtp and its sensitivity to probability changes the results indicate that the current ex post public compensation scheme of flood damage lowers demand for private insurance

uncertainty of governmental relief and the crowding out of flood insurance this paper discusses the problem of crowding out of insurance by co existing governmental relief programs the so called charity hazard in the context of different institutional schemes of governmental disaster relief in austria and germany we test empirically whether an assured partial relief scheme as in austria drives a stronger crowding out of private insurance than a scheme promising full relief which is subject to ad hoc political decision making as in germany our general finding is that the institutional design of governmental relief programs significantly affects the demand for private natural hazard insurance

resource curse or not a question of appropriability this thesis presents three self contained essays focusing on empirical questions in growth and development economics each article addresses specific questions on why countries perform differently in particular i analyse the effect of democracy on economic development the relationship between natural resources and growth and the efficiency of foreign development assistance in the first essay democracy consolidation and growth i analyse the effect of democracy on economic growth in this context i argue that an important aspect to consider is how consolidated political systems are put simply i find that it is not only a question of how democratic countries are but also how long they have been democratic in other words economic performance tends to improve with the duration of uninterrupted democracy the performance of autocracies on the other hand tends to deteriorate over time however for newly established political systems there seems to be a cost of being democratic this implies that democracies only bear their fruit after some time the analysis has important policy implications to overcome initial straits international assistance focused on democratic consolidation may be important and a very good investment in fostering long run development the second essay resource curse or not a question of appropriability together with anne boschini and jesper roine is concerned with the relation between natural resources and economic development for most laymen as well as for most economists it would seem reasonable that countries richly endowed in natural resources also benefit from this wealth however a large literature has found a systematic negative effect of natural resource abundance on economic growth we suggest that this so called resource curse is not determined by resource endowments alone but rather by the interaction between the type of resources a country possesses and the quality of institutions in the country this combination of factors determines what we call the appropriability of a resource the concept of appropriability captures the likelihood of natural resources leading to rentseeking corruption or conflicts which in turn will harm economic development our results suggest that if institutions are good enough the curse may be turned into a blessing this may explain why some countries such as norway and botswana tend to benefit from their resources while others such as angola and sierra leone do not the third and final essay of this thesis foreign sectoral aid fungibility growth and poverty reduction is a contribution to the aid efficiency literature which is concerned with the question of whether aid helps or hinders economic development foreign development assistance is often targeted on specific public expenditure sectors if this aid is not used in the sector for which it was granted e g health education it is said to be fungible and donors may end up financing something completely different from what they intended e g military expenditures the major concern about sectoral fungibility is that the alternative use of aid may be less productive or less socially useful however measuring fungibility is not sufficient to determine whether foreign sectoral aid fungibility is actually harmful what is important is how the funds treated as fungible are used the essay starts by obtaining estimates of fungibility for 57 countries the results suggest that sectoral aid is indeed largely treated as fungible by recipient countries next to assess the economic and health effects of fungibility these estimates are incorporated into an empirical model of aid and growth as well as into a model of aid and infant mortality altogether i find no evidence of more fungible sectoral aid leading to worse performance

optimal dutch disease growth models of the dutch disease such as those of krugman 1987 matsuyama 1992 sachs and warner 1995 and gylfason et al 1999 explain why resource abundance may reduce growth however the literature also raises a new question if the use of resource wealth hurts productivity growth how should such wealth be optimally managed this question forms the topic of the present paper in which we extend the growth literature on the dutch disease from a positive to a normative setting we show that the assumptions in the previous literature imply that the optimal share of national wealth consumed in each period needs to be adjusted down however some dutch disease is always optimal thus lower growth in resource abundant countries may not be a problem in itself but may be part of an optimal growth path the optimal spending path of the resource wealth may be increasing or decreasing over time and we discuss why this is the case

rent seeking and resource booms abstract this paper develops a model of rent seeking in which the opportunity cost of rent seeking is foregone entrepreneurship it provides conditions under which resource booms tend to lead to an increase in rent seeking activity and those in which they induce entrepreneurship we identify an important difference between the two activities which leads resource booms to bias gains in favour of rent seeking over entrepreneurship but we also show that this bias depends on the nature of the initial equilibrium

geographic dispersion of economic shocks evidence from the fracking revolution abstract we track the geographic and temporal propagation of local economic shocks from new oil and gas production generated by hydrofracturing each million dollars of new production produces 80 000 in wage income and 132 000 in royalty and business income within a county within 100 miles one million dollars of new production generates 257 000 in wages and 286 000 in royalty and business income roughly two thirds of the wage income increase persists for two years assuming no general equilibrium effects new extraction increased aggregate us employment by as many as 640 000 and decreased the unemployment rate by 0 43 during the great recession jel d86 l14 l81 l82

new ways of looking at old issues inequality and growth abstract the paper uses new cross country data on income and asset land distribution to show that i there is a strong negative relationship between initial inequality in the asset distribution and long term growth ii inequality reduces income growth for the poor but not for the rich and iii available longitudinal data provide little support for the kuznets hypothesis policies that increase aggregate investment and facilitate acquisition of assets by the poor might thus be doubly beneficial for growth and poverty reduction

the open society assesses its enemies shocks disasters and terrorist attacks abstract this paper conducts a systematic investigation of the incidence and economic costs of terrorist attacks at the country level we use newly assembled datasets on terrorist attacks natural disasters and currency crises to answer three different questions what are the determinants of terrorism is there an output cost following a terrorist attack and is that cost larger or smaller in the case of democracies we find that rich countries are the most prone to suffer attacks while democracies are if anything less vulnerable than other countries the cost to output of a terrorist attack is quantitatively small and closely associated with the occurrence of an event rather than the number of casualties finally we find robust evidence that a terrorist attack imposes a lower output cost the more democratic a country is

impact of foreign aid on the fiscal behavior of ldc governments abstract the purpose of this paper is to examine the impact of foreign aid on the behavior of the recipient governments specifically we look at a sample of less developed countries in south and southeast asia and study their response to foreign aid received their response is measured in terms of their public investment and consumption as well as taxation our paper attempts to make two new contributions to the literature first we try to estimate the impact of foreign aid on a sample of five south and southeast asian countries secondly we improve on the earlier method of a combination of single equation and two step least squares by estimating the whole system with a nonlinear three step least squares method the results confirm the hypothesis that aid does affect consumption investment and taxation of these governments but they also show that the relationship is a complex one in particular grants and loans have different effects on investment and taxation

international currency substitution and the income velocity of money abstract this paper presents new empirical evidence on the degree to which international currency substitution destabilizes domestic money demand it also provides an explanation of some apparent discrepancies among previous empirical studies of currency substitution this explanation hinges on the distinction between the elasticity of currency substitution and the cross elasticity of money demand a large small value of one elasticity does not imply a large small value of the other a large cross elasticity is required for currency substitution to destabilize domestic money demand the empirical evidence presented here is consistent with the view that these cross elasticities are typically small

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

currency substitution and the demand for money some evidence for canada recently the possibility that foreign and domestic currencies are substitutes has received considerable attention see 1 2 3 10 19 21 currency substitution has important implications for the working of flexible exchange rates if the degree of currency substitution is high small changes in the money supply would induce large changes in the exchange rate furthermore currency substitution would transmit the effect of monetary disturbances from one country to another indeed significant currency substitution would seriously undermine the ability of flexible exchange rates to provide monetary independence this paper examines the empirical importance of currency substitution in the framework of the demand function for money if currency substitution is important the expected change in the exchange rate should be a significant determinant of the demand for home currency in section 2 we undertake such a test for the canadian demand for money during the recent flexible exchange rate period there is considerable evidence that the forward exchange rate is a good measure of the expected exchange rate our own tests confirm these results for canadian data since 1970

the dutch disease a disease after all many third world oil producers are encountering serious problems in building up a diversified export base while west european oil and gas producers netherlands united kingdom are suffering a decline in their traded goods manufacturing sector induced by real wage pressures it is becoming increasingly clear that high but temporary oil revenues may be somewhat ora mixed blessing the quip of the economist notwithstanding the mechanism behind this unbalance is clear enough part of the oil revenues is spent on non traded goods which leads to a real appreciation i e a rise in the relative price of non traded goods in terms of traded goods this in turn draws resources out of the non oil traded sector into the non traded goods producing sector corden and neary 1982 van wijnbergen 1980 one may say that this is an efficient response to the increase in income from oil production the united kingdom mexico egypt simply should move into oil derived industries and non traded goods and forget about their manufacturing sector until oil reserves are exhausted however many developing countries are hesitant to take this advice after all the post world war ii success stories in economic development involve without exception countries that promoted their traded goods sector aggressively moreover it is a well established stylised fact that technological progress is faster in the traded non sheltered sectors of an economy than in the non traded sector balassa 1964 is an early reference considering the hypothesis that technological progress rather than taking place exogenously with the passage of time is a function of accumulated experience the concern of countries like egypt mexico or indonesia is much easier to understand since solow 1957 and denison 1962 it is known that capital accumulation explain only a small part of economic growth if most of economic growth is caused by learning by doing induced technologica

the ghost of financing gap testing the growth model used in the international financial institutions abstract the harrod domar growth model supposedly died long ago still today economists in the international financial institutions ifis apply the harrod domar model to calculate short run investment requirements for a target growth rate they then calculate a financing gap between the required investment and available resources and often fill the financing gap with foreign aid the financing gap model has two simple predictions 1 aid will go into investment one for one and 2 there will be a fixed linear relationship between growth and investment in the short run the data soundly reject these two predictions of the financing gap model

development paradigm failures over time the international development community has advocated various development paradigms but countries following these paradigms have often performed poorly we provide an explanation for this poor performance in our model the political leader of a developing country chooses a policy and whether to implement it in an honest or corrupt manner these choices affect domestic production and aid inflows production is high when productive capacity is high and when the policy is appropriate in the country specific circumstances and implemented honestly aid inflows are high when the policy is close to the paradigm in equilibrium countries with low productive capacity and high corruption resulting from weak political institutions follow the paradigm more closely hence our model suggests that development paradigms have a tendency to fail because they are primarily followed by countries that would fail anyway we provide empirical evidence in support of the main assumptions and results

foreign aid fertility and human capital accumulation this paper analyses the effect of foreign aid on population growth and human capital accumulation consistent with empirical evidence from sub saharan africa the model shows that foreign aid can work against its stated goal of alleviating poverty and promoting growth humanitarian aid fosters population growth and adversely affects the recipients incentive to invest in human capital the analysis suggests that foreign aid may lock a recipient economy in a low equilibrium trap

the voracity effect abstract we analyze an economy that lacks a strong legal political institutional infrastructure and is populated by multiple powerful groups powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock in equilibrium this leads to slow economic growth and a voracity effect by which a shock such as a terms of trade windfall perversely generates a more than proportionate increase in fiscal redistribution and reduces growth we also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks jel f43 o10 o23 o40

time varying structural vector autoregressions and monetary policy a corrigendum this note shows how to apply the procedure of kim et al 1998 to the estimation of var dsge factor and unobserved components models with stochastic volatility in particular it revisits the estimation algorithm of the time varying var model of primiceri 2005 the main difference of the new algorithm is the ordering of the various mcmc steps with each individual step remaining the same

natural disasters impact factors of resilience and development a meta analysis of the macroeconomic literature abstract we systematize 64 primary studies published in 2000 2013 on the macroeconomic impact of natural disasters by providing ols and generalized ordered probit meta analyses for 1858 and 1991 regressions respectively we investigate how the reported results in the primary studies are influenced by the empirical design the estimation technique and or publication bias we analyze primary studies on disaster direct costs and indirect costs separately according to our meta analysis disasters on average have a negative impact in terms of direct costs and an insignificant impact in terms of indirect costs mst and fat pet peese estimates motivate the meta analyses showing the need for a multivariate approach to consider strong systematic research heterogeneity time based characteristics of the data and publication bias strongly impact on the results of the primary studies thus implying the need for authors to carefully consider the selection of time period and for research institutions to understand the sources of selection bias in disseminated results we argue that further research is necessary on the heterogeneity of results of indirect cost studies and suggest that future studies on the macroeconomic impact of disasters should explore more often the mitigation role of education investment and openness by including these as explanatory variables

international currency substitution and seigniorage in a simple model of money i introduction currency substitution describes the change in the holdings of domestic and foreign real balances in response to fluctuations in the relative prices of these currencies so far the empirical evidence on the strength of currency substitution has been mixed miles 1978 finds evidence in favor of strong currency substitution between the canadian dollar and the u s dollar bordo and choudhri 1982 criticize miles on the ground that miles has a misspecified model and their estimates of a canadian money demand function indicate little currency substitution in a recent paper rogers 1992 finds that dollarization in a high inflation economy such as mexico s is quite strong and statistically significant imrohoroglu 1994 on the other hand estimates the extent of currency substitution between the canadian dollar and the u s dollar using a gmm approach and finds that the elasticity of currency substitution in canada is quite low between 0 29 and 0 43 depending on the instruments used furthermore the estimate of the share of u s dollar denominated deposits in producing canadian liquidity services is on the order of 1 percent to 3 percent the policy implications of currency substitution have been extensively analyzed most of these studies concentrate on the impact of currency substitution on the volatility of exchange rates and the autonomy of domestic monetary policy under a flexible exchange rate regime 1 recently researchers have started to explore whether currency substitution alters the results in the optimal inflation tax literature for example vegh 1989 shows that it may be optimal to resort to the inflation tax under currency substitution since it reduces the distortion introduced by an exogenously given positive foreign interest rate in his model a positive foreign interest rate creates a distortion because it acts as an indirect consumption tax kimbrough 1991 analyzes a small open economy under currency substitution where domestic agents are required to use domestic real balances to purchase the domestic nontraded good foreign real balances to purchase the imported good and either domestic or foreign real balances to purchase the exportable good he finds that it is optimal to follow the friedman rule of a zero nominal interest rate in this setup since money serves as an intermediate good guidotti and vegh 1993 however argue that kimbrough s 1991 result only applies under very restrictive assumptions on the transactions technology and that in general the optimal inflation rate is positive under currency substitution aizenman 1992 considers a multi country money in the utility function model in a common currency area where there are collection costs associated with income taxation he shows that in the absence of a cartel agreement on how to share the seigniorage revenue the optimal inflation rate for individual countries will exceed the optimal inflation rate under a cooperative solution canzoneri and diba 1992 study the role of currency substitution in a two country money in the utility function model under a flexible exchange rate regime where there are collection costs of lump sum taxes they show that the outcome of a noncooperative seigniorage maximization or welfare maximization game is characterized by the friedman rule the cooperative outcome on the other hand includes the inflation tax as part of an optimal tax package since lump sum taxes are costly to collect the theoretical literature summarized above suggests that currency substitution may have important economic implications most of the attention has been on the role of the elasticity of currency substitution the share of foreign real balances in the residents domestic portfolio has largely been ignored laney radcliffe and willett 1984 and joines 1985 emphasize the distinction between the elasticity of substitution and the cross elasticity of money demand and argue that a high cross elasticity is necessary for currency substitution to have a major destabilizing impact on domestic money demand

aid policies and growth the authors of this paper use a new database on foreign aid to examine the relationships among foreign aid economic policies and growth of per capita gdp in panel growth regressions for 56 developing countries and 6 four year periods 1970 93 they find that the policies that have a great effect on growth are those related to fiscal surplus inflation and trade openness they construct an index for those three policies and have that index interact with foreign aid they have instruments for both aid and aid interacting with policies they find that aid has a positive impact on growth in developing countries with good fiscal monetary and trade policies in the presence of poor policies aid has no positive effect on growth this result is robust in a variety of specifications which include or exclude middle income countries include or exclude outliers and treat policies as exogenous or endogenous they examine the determinants of policy and find no evidence that aid has systematically affected policies either for good or for ill they estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donors pursuit of their own strategic interests in a counterfactual they reallocate aid reduce the role of donor interests and increasing the importance of policy such a reallocation would have a large positive effect on developing countries growth rates

the political economy of government responsiveness theory and evidence from india the determinants of government responsiveness to its citizens is a key issue in political economy here we develop a model based on the solution of political agency problems having a more informed an politically active electorate strengthens incentives for governments to be responsive this suggests that there is a role both for democratic institutions and the mass media in ensuring that the preferences of citizens are reflected in policy the ideas behind the model are tested on panel data from india we show that public food distribution and calamity relief expenditure are greater controlling for shocks where governments face greater electoral accountability and where newspaper circulation is highest

targeting transfers through restrictions on recipients our objective is to design transfer programs that maximize some social welfare function following the optimal income tax formulation we assume that a random process endows individuals with characteristics that influence welfare such as ability to earn income medical condition or unmonitorable income the goal is to maximize the utility of a randomly chosen individual other individualistic social welfare functions would lead to equivalent results if the random characteristics were observable a first best outcome could be achieved by making them the basis for lump sum transfers in practice however we can observe only indicators of these characteristics such as earnings medical expenditures or consumption patterns the challenge for policy is to design an efficient second best transfer program based on indicators in this paper we argue that 1 an optimal transfer program in general must sacrifice productive efficiency to target efficiency this is done by imposing restrictions on the choices made by intended beneficiaries 2 a program that incorporates restrictions such as means tested in kind transfers commodity specific taxes and subsidies and even ordeals i e the imposition of deadweight costs to qualify for a transfer will perform better than programs that rely solely on income taxes and cash transfers

promise and pitfalls in the use of secondary data sets income inequality in oecd countries as a case study this paper examines the role of secondary data sets in empirical economic research taking the field of income distribution as a case study we illustrate problems faced by users of secondary statistics showing how both cross country comparisons and time series analysis can depend sensitively on the choice of data after describing the genealogy of secondary data sets on income inequality we consider the main methodological issues and discuss their implications for comparisons of income inequality across oecd countries and over time the lessons to be drawn for the construction and use of secondary data sets are summarized at the end of the paper

harnessing windfall revenues optimal policies for resource rich developing economies a windfall of natural resource revenue or foreign aid faces government with choices of how to manage public debt investment and the distribution of funds for consumption particularly if the windfall is both anticipated and temporary we show that the permanent income hypothesis prescription of an ever lasting increase in consumption financed by borrowing ahead of the windfall and then accumulating a sovereign wealth fund swf is not optimal for capital scarce developing economies such countries should accumulate public and private capital to accelerate their development and only if the windfall is large relative to initial foreign debt is it optimal to build a swf the optimal time profile of consumption is biased towards the near future as compared to the permanent income hypothesis outcomes depend on instruments available to government we study cases where the government can make lump sum transfers to consumers where such transfers are impossible so optimal policy involves cutting distortionary taxation in order to raise investment and wages and where ricardian consumers can borrow against future revenues in which case the policy response to possible over consumption is a high level of investment in infrastructure

the narrow moving band the dutch disease and the competitive consequences of mrs thatcher notes on trade in the presence of dynamic scale economies abstract this paper presents a model of trade in which comparative advantage instead of being determined by underlying attributes of countries evolves over time through learning by doing in this model arbitrary patterns of specialization once established tend to become entrenched over time the model sheds light on three widely held views that do not make sense in more conventional models first is the view that temporary protection of selected sectors can permanently alter the pattern of comparative advantage in the protecting country s favor second is the view that seemingly favorable developments such as the discovery of exportable natural resources may lead to a permanent loss of other sectors and reduce welfare in the long run third is the possibility that a temporary overvaluation of a currency due to tight money can lead to a permanent loss of competitiveness in some sectors

gold exploitation and socioeconomic outcomes the case of burkina faso abstract in the early 2000s burkina faso launched several legal reforms aimed at increasing gold production this resulted in a gold mining boom making gold the main export product and the main source of economic growth of the country we hypothesize that gold extraction improved population living standards this paper investigates how the gold boom in burkina faso which began in 2007 has affected socioeconomic outcomes we use a simple theoretical model to motivate the testing of several hypotheses regarding these impacts employing a difference in differences strategy as well as panel data models we estimate the impacts using data from household surveys undertaken in 2003 and 2009 and administrative data consistent with our model the results suggest that areas hosting gold extraction have better average living standards in terms of headcount ratios poverty gaps and household expenditures than do areas without gold however the gold boom is also shown to have potentially increased local inequality and child labor in areas with these income gains these results demonstrate the importance of proactive government policy in mitigating negative welfare impacts

natural disaster situations and growth a macroeconomic model for sudden disaster impacts the aim of this paper is to examine the relation between a natural disaster situation and its potential effects on the growth rate of output by means of a simple macroeconomic model which is later applied as a demonstration to a sample of countries affected by major natural disasters in the last two decades this quantitative application appears to support the model the main conclusions are that capital loss is unlikely to have an important effect on growth and that a very moderate response expenditure may be sufficient to prevent the growth rate of output from falling a general derived conclusion is that foreign and public disaster response may be better used to help actual victims and affected activities directly than to proceed on the rather unsound prima facie belief that the economy will be heavily affected by the disaster

institutions and the resource curse countries rich in natural resources constitute both growth losers and growth winners we claim that the main reason for these diverging experiences is differences in the quality of institutions more natural resources push aggregate income down when institutions are grabber friendly while more resources raise income when institutions are producer friendly we test this theory building on sachs and warner s influential works on the resource curse our main hypothesis that institutions are decisive for the resource curse is confirmed our results contrast the claims of sachs and warner that institutions do not play a role

what drives oil prices emerging versus developed economies this paper explores the role of demand from emerging and developed economies as drivers of the real price of oil using a favar model that allows us to identify and compare demand from dierent groups of countries across the world we nd that demand from emerging economies most notably from asian countries is more than twice as important as demand from developed countries in accounting for the uctuations in the real price of oil and in oil production furthermore we

monetary valuation of insurance against flood risk under climate change climate change is projected to increase the risk of natural disasters such as floods and storms in certain regions this is likely to raise the demand for natural disaster insurance we present a stated preference survey using choice modeling with mixed logit estimation methods in order to examine the effects of climate change and the availability of government compensation on the demand for flood insurance by dutch homeowners currently no private insurance against flood damage is offered in the netherlands the results indicate that there are opportunities for the development of a flood insurance market 2012 by the economics department of the university of pennsylvania and the osaka university institute of social and economic research association

migration risk and liquidity constraints in el salvador abstract this article utilizes panel data from el salvador to investigate the use of transnational migration as an ex post risk management strategy i show that adverse agricultural conditions in el salvador increase both migration to the united states and remittances sent back to el salvador i show that in the absence of any agricultural shocks the probability that a household sent members to the united states would have decreased on average by 24 26 i also show that the 2001 earthquakes reduced net migration to the united states a one standard deviation increase in earthquake damage reduced the average probability of northward migration by 37 11 the evidence suggests that the effects of the earthquakes had more to do with households retaining labor at home to cope with the effects of the disaster than with the earthquakes disrupting migration financing

history lessons institutions factor endowments and paths of development in the new world the explanations offered for the contrasting records of long run growth and development among the societies of north and south america most often focus on institutions the traditional explanations for the sources of these differences in institutions typically highlight the significance of national heritage or religion we in contrast argue that a hemispheric perspective across the wide range of colonies established in the new world by the europeans suggests that although there were many influences factor endowments or initial conditions had profound and enduring effects on the long run paths of institutional and economic development followed by the respective economies

natural resources rent seeking and welfare abstract a new and very simple mechanism to explain why natural resource abundance may lower income and welfare is developed in a model with rent seeking a greater amount of natural resources increases the number of entrepreneurs engaged in rent seeking and reduces the number of entrepreneurs running productive firms with a demand externality it is shown that the drop in income as a result of this is higher than the increase in income from the natural resource more natural resources thus lead to lower welfare

inflation employment and the dutch disease in oil exporting countries a short run disequilibrium analysis the author uses nontraded goods and labor shortages in the gulf countries the decline of the traded goods sector in oil producers dutch disease and the absence of employment benefits of higher oil revenues in latin american oil producers higher oil revenues can be likened to a transfer putting pressure on non oil traded nt goods prices and drawing resources out of the t sector the slope of the wage indexation line determines whether classical unemployment or repressed inflation results various policy measures are analyzed 3 references 8 figures

post disaster aid and development of the manufacturing sector lessons from a natural experiment in china abstract we adopt a disaggregate approach to study the link between aid and dutch disease dynamics using a natural experiment in china specifically we examine whether post disaster aid provided to a subsample of chinese counties devastated by an earthquake in 2008 affects the sectoral composition of local economies using different methods we consistently find that counties receiving more aid even nearby counties not directly damaged by the earthquake tend to suffer from a contraction of the manufacturing sector innovative features of the paper include its regional perspective its identification strategy resting on a special provision in chinese policy pairwise aid and its focus on dutch disease effects in the context of post disaster aid

the effects of a natural gas boom on employment and income in colorado texas and wyoming improvements in technology have made it profitable to tap unconventional gas reservoirs in relatively impermeable shale and sandstone deposits which are spread throughout the u s mostly in rural areas proponents of gas drilling point to the activity s local economic benefits yet no empirical studies have systematically documented the magnitude or distribution of economic gains i estimate these gains for counties in colorado texas and wyoming three states where natural gas production expanded substantially since the late 1990s i find that a large increase in the value of gas production caused modest increases in employment wage and salary income and median household income the results suggest that each million dollars in gas production created 2 35 jobs in the county of production which led to an annualized increase in employment that was 1 5 of the pre boom level for the average gas boom county comparisons show that ex ante estimates of the number of jobs created by developing the fayetteville and marcellus shale gas formations may have been too large

booming sector and de industrialisation in a small open economy this paper presents a theoretical analysis of the dutch disease the phenomenon whereby a boom in one traded goods sector squeezes porfitability in other traded goods sectors both by directly bi

increasing returns and the genesis of american resource abundance the usa became the world s leading mineral producing nation between 1870 and 1910 a development paralleled by the rising resource intensity of american manufacturing this paper challenges the premise that resource abundance simply reflected the country s geological endowment of mineral deposits instead in the century following 1850 the usa exploited its natural resource potentials to a far greater extent than other countries and did so across virtually the entire range of industrial minerals the paper argues that natural resource abundance was an endogenous socially constructed condition that was not geologically preordained it examines the complex legal institutional technological and organizational adaptations that shaped the us supply responses to the expanding domestic and international industrial demands for minerals and mineral products it suggests that strong positive feedbacks even in the exploitation of depletable resources were responsible for the explosive growth of the american minerals economy

altruism the samaritan s dilemma and government transfer policy this paper shows that altruism provides an efficiency rationale for public provision of insurance to the poor the framework is one in which there are rich altruists and risk averse poor who face some possibility of loss the government represents the rich and makes transfers on their behalf with unconditional transfers the poor may forgo insurance and rely on private charity to bail them out in the event of loss this reliance on private charity has adverse efficiency effects these may be avoided if the government makes in kind transfers of insurance copyright 1995 by american economic association

news droughts news floods and u s disaster relief this paper studies the influence of mass media on u s government response to approximately 5 000 natural disasters occurring between 1968 and 2002 these disasters took nearly 63 000 lives and affected 125 million people per year we show that u s relief depends on whether the disaster occurs at the same time as other newsworthy events such as the olympic games which are obviously unrelated to need we argue that the only plausible explanation of this is that relief decisions are driven by news coverage of disasters and that the other newsworthy material crowds out this news coverage

learning by doing and the dutch disease this paper develops a model of learning by doing and the dutch disease that extends the earlier literature in two ways first it is assumed that both the traded and the non traded sector can contribute to learning second it is assumed that there are learning spillovers between the sectors it is shown that within such a model a foreign exchange gift results in a real exchange rate depreciation in the long run due to a shift in the steady state relative productivity between the traded and the non traded sector in contrast to standard models of the dutch disease production and productivity in both sectors may go up or down the conditions for the different cases are worked out

dutch disease and the mitigation effect of migration evidence from canadian provinces this article evaluates whether immigration can mitigate the dutch disease effects associated with booms in natural resource sectors we derive predicted changes in the size of the non tradable sector from a small general equilibrium model a la obstfeld rogoff using data for canadian provinces we find evidence that aggregate immigration mitigates the increase in the size of the non tradable sector in booming regions the mitigation effect is due mostly to interprovincial migration and temporary foreign workers there is no evidence of such an effect for permanent international immigration interprovincial migration also results in a spreading effect of dutch disease from booming to non booming provinces

on the simultaneity problem in the aid and growth debate this paper shows that foreign aid has a significant positive average effect on real per capita gross domestic product gdp growth if and only if the quantitatively large negative reverse causal effect of per capita gdp growth on foreign aid is adjusted for in the growth regression instrumental variables estimates show that a 1 percentage point increase in gdp per capita growth decreased foreign aid by over 4 adjusting for this quantitatively large negative reverse causal effect of economic growth on foreign aid shows that a 1 increase in foreign aid increased real per capita gdp growth by around 0 1 percentage points

aid catastrophes and the samaritan s dilemma this paper discusses the impact of foreign aid on the recipient country s preparedness against natural disasters the theoretical model shows that foreign aid can have two opposing eects on a country s level of mitigating activities in order to test the theoretical propositions we analyse the eect of foreign aid dependence on ex ante riskmanagement activity proxied by the death toll from major storms floods and earthquakes occurring worldwide between 1980 and 2002 we find evidence that the crowding out eect of foreign aid outweighs the preventive eect in the case of storms while there is mixed evidence in the case of floods and earthquakes

on aid growth and good policies this study provides a critical analysis of the growth regressions in burnside and dollar 2000 first we analyse the relationship between aid and government expenditure in a modified neo classical growth model one of the main results of the analysis is that while good policies spur growths they may at the same time reduce the effectiveness of foreign aid second we show that the econometric results in burnside and dollar emphasising the crucial role of interaction between aid and good policies in the growth process are fragile as they are extremely data dependent finally we demonstrate that the burnside and dollar data lend support to the idea that the association between aid and growth can be approximated by decreasing returns to aid this finding conforms well to regression results in other recent studies

insecure resources bilateral trade and endogenous predation a game theoretic analysis of conflict and trade this article analyzes how interstate conflict over resources affects the incentives to trade and how greater trade openness affects the endogenous decisions of arming by enemy countries we identify conditions under which there is trade between two adversary countries and show that each adversary s arming affects domestic welfare in three different ways the first is an export revenue effect which increases welfare because arming causes export revenue to go up i e there is an arming induced terms of trade improvement the second is a resource predation effect which increases welfare because arming increases the appropriation of a rival country s resource input to produce a consumption good the third is an output distortion effect which reduces welfare because arming lowers the domestic production of civilian goods based on these effects we show circumstances in which greater trade openness reduces the intensity of arming we also discuss the implications of resource security asymmetry for conflict and trade

building resilience to natural disasters an application to small developing states abstract we present a dynamic small open economy model to explore the macroeconomic impact of a major natural disaster in addition to permanent damages to public and private capital the disaster causes temporary losses of productivity inefficiencies during the reconstruction process and damages to the sovereign s creditworthiness we use the model to study the debt sustainability concerns that arise from the need to fully rebuild public infrastructure over the medium term and analyze the feasibility of ex ante policies such as building adaptation infrastructure and fiscal buffers and contrast these policies with the post disaster support provided by donors investing in resilient infrastructure may prove useful in particular if it is viewed as complementary to standard infrastructure because it raises the marginal product of private capital crowding in private investment while helping withstand the impact of the natural disaster in an application to vanuatu we find that donors should provide an additional 50 of pre cyclone gdp in grants to be spent over the following 15 years to ensure public debt remains sustainable following cyclone pam helping the government build resilience on the other hand reduces the risk of debt distress and at lower cost for donors

cointegrating institutions the time series properties of country institutional measures abstracta country s political and economic institutions are critical for economic prosperity the literature abounds with institutional measures precisely because institutions are multidimensional we use panel unit root and cointegration tests to examine the time series properties of several institutional measures to answer two questions first do institutional changes tend to be permanent second which subsets of institutions tend to converge or move together these answers have important implications for whether permanent institutional reform is possible and whether reforms can be undertaken one institutional area at a time or instead must simultaneously encompass multiple institutional areas

kleptocracy and divide and rule a model of personal rule many developing countries have suffered under the personal rule of kleptocrats who implement highly inefe cient economic policies expropriate the wealth of their citizens and use the proceeds for their own glorie cation or consumption we argue that the success of kleptocrats rests in part on their ability to use a divide and rule strategy made possible by the weakness of institutions in these societies members of society need to cooperate in order to depose a kleptocrat yet such cooperation may be defused by imposing punitive rates of taxation on any citizen who proposes such a move and redistributing the benee ts to those who need to agree to it thus the collective action problem can be intensie ed by threats which remain off the equilibrium path in equilibrium all are exploited and no one challenges the kleptocrat kleptocratic policies are more likely when foreign aid and rents from natural resources provide rulers with substantial resources to buy off opponents when opposition groups are shortsighted when the average productivity in the economy is low and when there is greater inequality between producer groups because more productive groups are more dife cult to buy off jel o12 h00

public provision of private goods government may provide a good that can if legally permitted be supplemented by private purchases policy is determined by majority rule under standard assumptions on preferences a majority voting equilibrium exists a regime of positive government provision with no restriction on private supplements is shown to be majority preferred to a regime of either only market provision or only government provision combined public and private expenditure on the good is higher under this dual provision regime than under either of the alternatives under some preference configurations the median income voter is pivotal under others a voter with income below the median is pivotal

humanitarian aid fertility and economic growth this paper examines the effect of humanitarian aid on fertility and economic growth in an overlapping generations model where health status in adulthood depends on health in childhood adult agents allocate their time to work leisure and childrearing activities humanitarian aid influences the probability of survival to adulthood health in childhood and the time that adults allocate to childrearing giving rise to an ambiguous effect on both fertility and growth an empirical investigation for the period 1973 2007 suggests that humanitarian aid has on average a zero effect on the rates of fertility and of per capita output growth

the impact of poor health on total factor productivity a number of recent studies have illustrated the link between health and economic growth this paper argues that a key mechanism through which health affects growth is via total factor productivity tfp we first estimate tfp based on a production function and then estimate the determinants of tfp paying particular attention to three indicators of health that are particularly problematic in developing regions malnutrition malaria and water borne diseases we find the impact of poor health on tfp to be negative significant and robust across a wide variety of specifications

dutch disease dynamics reconsidered abstract in this paper we develop the first model to incorporate the dynamic productivity consequences of both the spending effect and the resource movement effect of oil abundance we show that doing so dramatically alters the conclusions drawn from earlier models of learning by doing lbd and the dutch disease in particular the resource movement effect suggests that the growth effects of natural resources are likely to be positive turning previous growth results in the literature relying on the spending effect on their head we motivate the relevance of our approach by the example of a major oil producer norway empirically we find that the effects of an increase in the price of oil may resemble results found in the earlier dutch disease literature while the effects of increased oil activity increases productivity in most industries therefore models that only focus on windfall gains due to increased spending potential from higher oil prices would conclude incorrectly based on our analysis that the resource sector cannot be an engine of growth

does federal disaster assistance crowd out flood insurance abstract we empirically analyze whether federal disaster aid crowds out household purchase of disaster insurance we combine data on annual household flood insurance purchases for the united states over the period 2000 2011 with data from the two main u s post disaster federal aid programs fema s individual assistance grants and sba s low interest disaster loans estimating both fixed effects and instrumental variable models to account for the endogeneity of disaster assistance grants we find that receiving individual assistance grants decreases the average quantity of insurance purchased the following year by between 4000 and 5000 the reduction we find is roughly 3 of the mean insurance coverage in the sample but larger than the average flood related ia grant in our sample which is 2984 ia is currently limited and larger grants could have different impacts the crowding out is on the intensive margin we find no impact on take up rates likely because there is a requirement that recipients of disaster aid purchase an insurance policy we do not know how take up rates might change without such a requirement low interest post disaster government loans have no systematic effect on insurance purchases

economic backwardness in political perspective government policies and institutions shape economic incentives and via this channel have a first order impact on economic development why then do many societies adopt policies that discourage investment and maintain institutions that cause economic backwardness perhaps politically powerful groups elites are not in favor of economic growth but why it would appear that economic growth would provide more resources for these groups to take over or tax increasing their economic returns so why don t powerful groups always support economic development in this paper we develop a theory of inefficient government policies and institutions all else equal politically powerful groups would welcome superior institutions and technologies but in practice all else is not equal because superior institutions and technologies may reduce their political power and make it more likely that they will be replaced at the center of our theory is therefore the idea that changes in institutions or the introduction of new technologies often create turbulence eroding the political advantages and future economic rents of incumbent elites alternatively new technologies may enrich competing groups increasing their threat to incumbents these considerations make politically powerful groups fear losing power and oppose economic and political change even when such change will benefit society as a whole to understand the mechanism at work and its potential applications consider a concrete example industrialization in the nineteenth century bairoch 1982 estimates that between 1830 and 1913 world manufacturing output increased by a factor of 5 see table 1 panel a nevertheless this process was highly uneven across regions and countries bairoch also calculates that over the same period manufacturing output in developed countries europe and north america increasedbyafactorofover10 whereasitdeclinedinthe third world among developed countries there were

how do mineral states learn path dependence networks and policy change in the development of economic institutions summary based on case study methods i draw lessons from the political economy of macroeconomic management in chile and peru to explain how mineral states learn to think long term and eventually escape the resource curse i give an institutionalist account of the rise of countercyclical funds showing how the long term development of elite networks qualifies the contemporary making of curse escapes policy networks compose one central avenue of institutional development for both the reproduction of path dependence and the making of institutional change the exposition challenges political economy of development frameworks which over emphasize structural initial conditions and assume steady rent seeking behavior of state agents

studying the role of political competition in the evolution of government size over long horizons here we argue for the use of cointegration and error correction analysis to combine economic factors that are nonstationary with political factors that are stationary into an empirical model of the evolution of public policy over long periods the approach is applied to disentangle the contributions of economics and politics to the evolution of public expenditure by the government of canada over 130 years political competition emerges as the primary political factor affecting government size

political foundations of the resource curse in this paper we argue that the political incentives that resource endowments generate are the key to understanding whether or not they are a curse we show 1 politicians tend to over extract natural resources relative to the efficient extraction path because they discount the future too much and 2 resource booms improve the efficiency of the extraction path however 3 resource booms by raising the value of being in power and by providing politicians with more resources which they can use to influence the outcome of elections increase resource misallocation in the rest of the economy 4 the overall impact of resource booms on the economy depends critically on institutions since these determine the extent to which political incentives map into policy outcomes countries with institutions that promote accountability and state competence will tend to benefit from resource booms since these institutions ameliorate the perverse political incentives that such booms create countries without such institutions however may suffer from a resource curse

boom or gloom examining the dutch disease in two speed economies traditional studies of the dutch disease do not account for productivity spillovers between the booming resource sector and other domestic sectors we put forward a simple theory model that allows for such spillovers we then identify and quantify these spillovers using a bayesian dynamic factor model the model allows for resource movements and spending effects through a large panel of variables while also identifying disturbances to other shocks using australia and norway as representative cases studies we find that a booming resource sector has substantial productivity spillovers on non resource sectors effects that have not been captured in previous analysis

trade matters in the fight against poverty narratives perceptions and lack of evidence in the case of fish trade in africa two opposing views exist in the literature on the potential role that international fish trade plays in economic development while some claim that fish trade has a pro poor effect others denounce the negative effect of fish export on local populations food security and doubt its contributions to the macro economy in this paper we explore this debate in sub saharan africa our analysis did not find any evidence of direct negative impact of fish trade on food security neither did it find evidence that international fish trade generates positive pro poor outcomes this paper discusses the possible reasons for this apparent lack of development impact and highlights the unsupported assumptions underlying the current discourse about international fish trade we suggest that given lack of evidence for the development benefits of fish trade between africa and developed countries fisheries policy could consider support for regional africa to africa trade that meets the growing african demand for lower value fish means of overcoming barriers to intra african trade in fish are discussed

aid and growth what does the cross country evidence really show abstract we examine the effects of aid on growth in cross sectional and panel data after correcting for the possible bias that poorer or stronger growth may draw aid contributions to recipient co

natural resources and the tradeoff between authoritarianism and development abstract why do african and middle eastern countries seem cursed by an abundance of natural resources yet usa australia and norway seem blessed a growing literature has argued that the benevolence or malignance of natural resources depends upon the quality of institutions this paper offers a new explanation based on associational freedom and its interaction with the political system the model predicts that natural resources have an adverse impact on economic performance and transition to democracy in authoritarian regimes but not in democracies it also predicts that repression of associational freedom will be increasing in natural resources in authoritarian regimes i test the model s predictions using fixed effects regressions on an international panel from 1975 to 2000 and find support

aid and growth regressions this paper examines the relationship between foreign aid and growth in real gdp per capita as it emerges from simple augmentations of popular cross country growth specifications it is shown that aid in all likelihood increases the growth rate and this result is not conditional on good policy there are however decreasing returns to aid and the estimated effectiveness of aid is highly sensitive to the choice of estimator and the set of control variables when investment and human capital are controlled for no positive effect of aid is found yet aid continues to impact on growth via investment we conclude by stressing the need for more theoretical work before this kind of cross country regressions are used for policy purposes

aiding violence or peace the impact of foreign aid on the risk of civil conflict in sub saharan africa abstract this paper considers the impact of foreign aid flows on the risk of civil conflict we improve on earlier studies on this topic by addressing the problem of the endogenous aid allocation using gdp levels of donor countries as instruments a more structural addition to the literature is that we efficiently control for unobserved country specific effects in typical conflict onset and conflict continuation models by first differencing the literature often overlooks the dynamic nature of these types of models thereby forcing unlikely i i d structures on the error terms implicitly 1 as a consequence malfunctioning institutions deep rooted political grievances or any other obvious yet unobserved and time persistent determinants of war are simply assumed away we find a statistically significant and economically important negative effect of foreign aid flows on the probability of ongoing civil conflicts to continue the continuation probability such that increasing aid flows tends to decrease civil conflict duration we do not find a significant relationship between aid flows and the probability of civil conflicts to start the onset probability