which reforms work and under what institutional environment evidence from a new data set on structural reforms abstract are structural reforms growth enhancing is the effectiveness of reforms constrained by a country s distance from the technology frontier or by its institutional environment this paper takes a new and comprehensive look at these questions by employing a novel data set that includes several kinds of real trade agriculture and networks and financial domestic finance banking securities and capital account reforms for an extensive list of developed and developing countries going back to the early 1970s first pass evidence based on growth breaks analysis and on panel growth regressions suggests that on average both real and financial sector reforms are positively associated with higher growth however on several occasions botched reforms resulted in growth disasters more important the positive reform growth relationship is shown to be highly heterogeneous and to be influenced by a country s constraints on the authority of the executive power and by its distance from the technology fro

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

aid policies and growth a nonlinear reassessment the association between foreign aid and growth has been controversial for decades and the evidence is quite mixed with results sensitive to data samples and modelling approaches we reassess the re

does foreign aid increase private investment evidence from panel cointegration this article uses panel cointegration and causality techniques to examine the long run relationship between foreign aid and private investment our main result is that aid has a statistically significant negative effect on private investment this result is robust to outliers different measures and forms of aid sample selection and the sample period in addition we find that long run causality runs in both directions suggesting that an increase in aid reduces private investment and that in turn higher private investment leads to lower aid inflows

overprovision in chinese hotels abstract zhao jian a post graduate researcher in the faculty of economics university of zagreb describes how disproportionate allocation of funding to the high grade foreign tourist hotel industry in china led to a boom in hotel construction during the 1980s which in spite of overcapacity failed to meet demands lack of planning with respect to demand for specific geographical areas and grades of hotel coupled with inadequate investment in other areas of the tourism industry eg transport have left china with many organizational problems

the effects of health aid on child health promotion in developing countries cross country evidence although epidemiological knowledge in relation to child health has improved in the last few decades around 3 million children die each year in developing countries from preventable diseases the international development community views increased immunization coverage for children as an important step in eliminating or reducing these deaths many developing countries have very limited resources to tackle major health problems and have to rely on external finance this article examines the impact of foreign aid devoted to the health sector on child health promotion in developing countries two proxies for child health promotion are used a immunization against measles and b immunization against diphtheria pertussis tetanus dpt a range of model specifications and panel data econometric techniques are applied to data covering the period 1990 to 2005 this article finds a positive and statistically significant link between health aid and the measures of child health promotion

foreign tourism as an element in pr china s economic development strategy since 1978 china has increasingly relied on foreign tourism as a part of its economic development strategy this article examines this policy and pays particular attention to the risks of dependence on foreign exchange earnings from tourism to variations in such earnings and to their sustainability and it suggests policy measures which may be adopted to reduce this risk problems encountered in managing the supply of hotels and transport systems are reviewed leading to a discussion of the international competitiveness of the chinese tourism industry

the bright side of internal capital markets we examine capital expenditure decisions of discount firms in response to wal mart s entry into their markets before wal mart s entry focused incumbents and discount divisions of diversified incumbents are similar in size geographic dispersion and firm debt levels however discount divisions of diversified firms are significantly more productive after wal mart s entry diversified firms are quicker to either exit the discount business or stay and fight also their capital expenditures are more sensitive to the productivity of their discount business internal capital markets function well as transfers are away from the worsening discount divisions it appears diversified firms make better investment decisions

the flip side of financial synergies coinsurance versus risk contamination this paper characterizes when joint financing of two projects through debt increases expected default costs contrary to conventional wisdom separate financing dominates joint financing when risk contamination losses that are associated with the contagious default of a well performing project that is dragged down by the other project s poor performance outweigh standard coinsurance gains separate financing becomes more attractive than joint financing when the fraction of returns lost under default increases and when projects have lower mean returns higher variability more positive correlation and more negative skewness these predictions are broadly consistent with evidence on conglomerate mergers spinoffs project finance and securitization

corporate diversification and credit constraints real effects across the business cycle we study whether differences in access to credit cause focused firms to perform differently from diversified firms in the product market prior work has identified binding credit constraints for bank dependent firms during recessions we assess whether corporate diversification alleviates these constraints we find that during recessions sales growth rates drop more for bank dependent focused firms than for rival segments of bank dependent diversified firms we also find that during recessions inventory growth rates drop more for bank dependent focused firms than for bank dependent diversified firms even after we control for contemporaneous sales growth consistent with a credit constraint explanation we find no difference in the sensitivities to recessions of bank independent focused and bank independent diversified firms jel g30 g31 g32 copyright 2006 oxford university press

what is the aggregate economic rate of return to foreign aid in recent years academic studies have been converging towards the view that foreign aid promotes aggregate economic growth we employ a simulation approach to i validate the coherence of empirical aid growth studies published since 2008 and ii calculate plausible ranges for the rate of return to aid our results highlight the long run nature of aid financed investments and the importance of channels other than accumulation of physical capital we find the return to aid lies in ranges commonly accepted for public investments and there is little to justify the view that aid has had a significant pernicious effect on productivity

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

the big push deja vu a review of jeffrey sachs s the end of poverty economic possibilities for our time jeffrey sachs s new book the end of poverty economic possibilities for our time penguin press new york 2005 advocates a big push featuring large increases in aid to finance a package of complementary investments in order to end world poverty these recommendations are remarkably similar to those first made in the 1950s and 1960s in development economics today as then the big push recommendation overlooks the unsolvable information and incentive problems facing any large scale planning exercise a more promising approach would be to design incentives for aid agents to implement interventions piecemeal whenever they deliver large benefits for the poor relative to costs

the international foreign aid regime who gets foreign aid and how much this paper analyses the data on international foreign aid it examines the basic data on who gets foreign aid how much how aid dependent are the recipient countries and how the international foreign aid regime has evolved it is argued that the pattern of the flow of foreign aid suggests that aid provided has little relationship to human needs in developing and transitional countries

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

assessing foreign aid s long run contribution to growth in development this paper confirms recent evidence of a positive impact of aid on growth and widens the scope of evaluation to a range of outcomes including proximate sources of growth e g physical and human capital indicators of social welfare e g poverty and infant mortality and measures of economic transformation e g share of agriculture and industry in value added focusing on long run cumulative effects of aid in developing countries and taking due account of potential endogeneity a coherent and favorable pattern of results emerges aid has over the past forty years stimulated growth promoted structural change improved social indicators and reduced poverty

financially constrained entry in a game with incomplete information in an earlier paper we presented an entry game with a monopolist and a potential entrant facing financial constraints in which the unique perfect equilibrium involved no entry here we consider a one sided incomplete information variant of the game in which the monopolist allows for the possibility that the entrant is committed to endure a price war to the limit of his capability we find a unique sequentially perfect equilibrium in which entry sometimes occurs when it does predatory price wars may result with the incumbent sometimes driving out the entrant but other times eventually abandoning the fight

aid policies and growth comment in an extraordinarily influential paper craig burnside and david dollar 2000 p 847 find that aid has a positive impact on growth in developing countries with good fiscal monetary and trade policies but has little effect in the presence of poor policies this finding has enormous policy implications the burnside and dollar 2000 henceforth bd result provides a role and strategy for foreign aid if aid stimulates growth only in countries with good policies this suggests that 1 aid can promote economic growth and 2 it is crucial that foreign aid be distributed selectively to countries that have adopted sound policies international aid agencies public policy makers and the press quickly recognized the importance of the bd findings this paper reassesses the links between aid policy and growth using more data the bd data end in 1993 we reconstruct the bd database from original sources and thus 1 add additional countries and observations to the bd data set because new information has become available since they conducted their analyses and 2 extend the data through 1997 thus using the bd methodology we reexamine whether aid influences growth in the presence of good policies given our focus on retesting bd we do not summarize the vast pre bd literature on aid and growth we just note that there was a long and inconclusive literature that was hampered by limited data availability debates about the mechanisms through which aid would affect growth and disagreements over econometric specification see gustav f papanek 1972 robert cassen 1986 paul mosley et al 1987 peter boone 1994 1996 and henrik hansen and finn tarp s 2000 review since bd found that aid boosts growth in good policy environments there have been a number of other papers reacting to their results including paul collier and jan dehn 2001 carljohan dalgaard and hansen 2001 patrick guillaumont and lisa chauvet 2001 hansen and tarp 2001 robert lensink and howard white 2001 and collier and dollar 2002 these papers conduct useful variations and extensions some of which had already figured in the pre bd literature such as introducing additional control variables using nonlinear specifications etc some of these papers confirm the message that aid only works in a good policy environment while others drive out the aid policy interaction term with other variables this literature has the usual limitations of choosing a specification without clear guidance from theory which often means there are more plausible specifications than there are data points in the sample we differentiate our paper from these others by not deviating from the bd specification thus we do not test the robustness of the results to an unlimited number of variations but instead maintain the bd methodology this paper conducts a very simple robustness check by adding new data that were unavailable to bd thus we expand the sample used over their time period and extend the data from 1993 to 1997 easterly department of economics new york university 269 mercer street new york ny 10003 center for global development and national bureau of economic research e mail william easterly nyu edu levine department of finance carlson school of management university of minnesota 321 19th avenue south minneapolis mn 55455 and national bureau of economic research e mail rlevine csom umn edu roodman center for global development 1776 massachusetts avenue nw washington dc 20036 e mail droodman cgdev org we are grateful to craig burnside for supplying data and assisting in the reconstruction of previous results without holding him responsible in any way for the work in this paper thanks also to francis ng and prarthna dayal for generous assistance with updating the sachs warner openness variable and to three anonymous referees craig burnside and henrik hansen for helpful comments 1 see for instance the world bank 1994 2001 2002 the u k department for international development 2000 president george w bush s speech march 16 2002 the announcement by the white house on creating the millennium challenge corporation white house 2002 as well as a washington post editorial february 9 2002 a financial times column by alan beattie march 11 2002 and the economist march 16 2002

conglomerate entrenchment under optimal financial contracting we provide a formal analysis of the notion that conglomerates are more entrenched as they have deeper pockets using the financial contracting model of bolton and scharfstein 1990 we can isolate two effects that confirm this conjecture the pooling of cash flows which allows to smooth out repayments and the ability to obtain better credit terms for less profitable business segments the internal capital market operated in a conglomerate may however work in the opposite direction increasing the sensitivity of operations to own cash flows and increasing the likelihood of exit

the devolution of declining industries in declining industries capacity must be reduced in order to restore profitability who bears this burden where production is all or nothing there is a unique subgame perfect equilibrium the largest firms exit first ghemawat and nalebuff 1985 in this paper firms continuously adjust capacity again there is a unique subgame perfect equilibrium all else equal large firms reduce capacity first and continue to do so until they shrink to the size of their formerly smaller rivals intuitively bigger firms have lower marginal revenue and correspondingly greater incentives to reduce capacity this prediction is supported by empirical findings

market structure internal capital markets and the boundaries of the firm we study how the creation of an internal capital market an icm can invite strategic responses in product markets that in turn shape firm boundaries icms provide ex post resource flexibility but come with ex ante commitment costs alternatively stand alones possess commitment ability but lack flexibility by creating flexibility integration can sometimes deter a rival s entry but commitment problems can also invite predatory capital raising these forces drive different organizational equilibria depending on the integrator s relation to the product market hybrid organizational forms like strategic alliances can sometimes dominate integration by offering some of its benefits with fewer strategic costs this paper develops a theory of the firm in which internal capital markets affect the ability to compete in product markets in our model a firm s decision to operate an internal capital market affects the fund raising behavior of its product market rivals an internal capital market can either scare away rival firms or else induce them to compete more aggressively raising more capital than they otherwise would in equilibrium these strategic interactions determine the boundaries of the firm

guarantees leverage and taxes this paper considers the optimal joint decision on firm organization and capital structure under a tax bankruptcy trade off stressing the role of guarantees against default conditional guarantees which are embedded in parent subsidiary structures increase joint value and joint debt relative to unguaranteed stand alone firms such guarantees that are unilateral rather than mutual for moderate default costs may dominate the unconditional mutual guarantees built in mergers we study the optimal characteristics of both guarantors and beneficiaries as well as their impact on the self enforcement potential of conditional guarantees

an analysis of tourism policy development in modern china abstract tourism in china has rapidly developed since the adoption of open door economic reform policy in 1978 there is still little understanding about the role played by the chinese government in the development of tourism this paper represents a first attempt to identify the roles played by the chinese government in developing its international inbound tourism the period examined is from 1978 a turning point for china s development to the present generally the chinese government has played the following roles operator involving ownership and provision of the infrastructure for tourism development and operation of tourism business activities regulator formulating and implementing regulations to control tourism business investment stimulator stimulating tourism investment through the provision of financial incentives promoter spending money on the promotion of tourism in the international market coordinator coordinating activities of different government departments with respect to tourism and educator establishing a system of tourism education institutions and providing tourism education and training programs analysis of the policies and government roles in china was examined systematically in terms of demands decisions outputs and impacts for each of the three historical periods identified namely 1978 1985 1986 1991 and 1992 to the present the framework adopted for examining the policies in terms of demands decisions etc represents the specific policy issue components of the tourism policy making process suggested by hall s model 1994 based on china s experiences some implications of the governmental roles for other developing countries are suggested

the small blessing of foreign aid further evidence on aid s impact on democracy in an empirical contribution to the literature of foreign aid we estimate the impact of foreign aid on democracy in a panel of 93 developing economies during 1971 2010 we find that foreign aid promotes democracy with the result robust to different estimation methodologies and control variables and to instrumenting for foreign aid

aid policies and growth in developing countries a new look at the empirics the relationship between foreign aid and economic growth has been the subject of much controversy a recent theme suggesting that aid promotes growth but only in a good policy environment has ratcheted up that debate in this paper we assess the importance of policy and aid in generating growth when the aid policy and growth relationship is nonlinear this allows us to examine the varying effects of aid and policy in different data segments which we do without imposing any particular structure on the underlying relationship we find that policy is an important determinant of growth we also find partial corroboration of the view that aid is growth enhancing in a good policy environment and some evidence of diminishing returns to aid these findings suggest that nonlinearities if not appropriately addressed fail to capture the detailed underlying dynamics and thereby mask some key features of the aid policy growth relationship