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Reconsidering the Role of Food Prices in Inflation
Food prices are generally excluded from measures of inflation most closely watched by policymakers due either to their transitory nature or their higher volatility. However, in lower income countries, food price inflation is not only more volatile but also on average higher than nonfood inflation. Food inflation is also in many cases more persistent than nonfood inflation, and shocks in many countries are propagated strongly into nonfood inflation. Under these conditions, and particularly given high global commodity price inflation in recent years, a policy focus on measures of core inflation that exclude food prices can misspecify inflation, leading to higher inflationary expectations, a downward bias to forecasts of future inflation and lags in policy responses. In constructing measures of core inflation, policymakers should therefore not assume that excluding food price inflation will provide a clearer picture of underlying inflation trends than headline inflation.
The Global Financial Crisis - Explaining Cross-Country Differences in the Output Impact
We provide one of the first attempts at explaining the differences in the crisis impact across developing countries and emerging markets. Using cross-country regressions to explain the factors driving growth forecast revisions after the eruption of the global crisis, we find that a small set of variables explain a large share of the variation in growth revisions. Countries with more leveraged domestic financial systems and more rapid credit growth tended to suffer larger downward revisions to their growth outlooks. For emerging markets, this financial channel trumps the trade channel. For a broader set of developing countries, however, the trade channel seems to have mattered, with countries exporting more advanced manufacturing goods more affected than those exporting food. Exchange-rate flexibility clearly helped in buffering the impact of the shock. There is also some -weaker-evidence that countries with a stronger fiscal position prior to the crisis were hit less severely. We find little evidence for the importance of other policy variables.
Determinants of Foreign Direct Investment
Using a dataset which breaks down FDI flows into primary, secondary and tertiary sector investments and a GMM dynamic approach to address concerns about endogeneity, the paper analyzes various macroeconomic, developmental, and institutional/qualitative determinants of FDI in a sample of emerging market and developed economies. While FDI flows into the primary sector show little dependence on any of these variables, secondary and tertiary sector investments are affected in different ways by countries’ income levels and exchange rate valuation, as well as development indicators such as financial depth and school enrollment, and institutional factors such as judicial independence and labor market flexibility. Finally, we find that the effect of these factors often differs between advanced and emerging economies.
Review of the 2002 Conditionality Guidelines
This paper focuses on the fact that the 2004–2005 conditionality review expands to include a review of the application of the new Guidelines on Conditionality, adopted in 2002. These guidelines were the culmination of a comprehensive and far-reaching review of conditionality that aimed to enhance the effectiveness of IMF-supported programs. They represented the first revision of the IMF’s conditionality guidelines since 1979, and were developed by the IMF after seeking input from civil society and public forums held in several countries. This review comes at an early stage of experience with the new guidelines, and further evidence will be needed before definite conclusions can be drawn. The ultimate test of conditionality is whether it contributes to better economic outcomes, including over the medium term, and these cannot yet be gauged. Moreover, although this review draws in part on case studies, no substitute exists for cross-country analysis for identifying broad trends, and at this stage such analysis is hampered by small sample sizes.
The Future of Asian Finance
Asia’s financial systems proved resilient to the shocks from the global financial crisis, and growth since then has been strong. But new challenges have emerged in the region’s economies, including demographics and aging, the need to diversify from bank-dominated systems, urbanization and infrastructure, and the rebalancing of economic activity. This book takes stock of the challenges facing the region today and how economic systems in Asia’s advanced and emerging market economies compare with the rest of the world.
Inflation and Income Inequality
There is an extensive literature noting that high inflation can add to income inequality, and a parallel literature assessing the effect of rising food prices on the poor. This paper attempts to combine these strands by dividing inflation into food and nonfood inflation and assessing whether food inflation affects income inequality differently from nonfood inflation. In an international sample and a sample of Chinese provinces, nonfood inflation exacerbates income inequality while the role of food inflation is more mixed. In a sample of Indian states broken down into urban and rural areas, we find that nonfood inflation adds to income inequality in both areas, while food inflation has a neutral to positive effect on income inequality in rural areas, providing support for the theory that rural wages may respond elastically to food prices.
The Future of Asian Finance
Asia’s financial systems proved resilient to the shocks from the global financial crisis, and growth since then has been strong. But new challenges have emerged in the region’s economies, including demographics and aging, the need to diversify from bank-dominated systems, urbanization and infrastructure, and the rebalancing of economic activity. This book takes stock of the challenges facing the region today and how economic systems in Asia’s advanced and emerging market economies compare with the rest of the world.
Financing Infrastructure in India
Driving infrastructure development, notably mobilizing financial resources for infrastructure projects, has been challenging in many countries. This study includes two parts: an empirical analysis of macroeconomic risks associated with infrastructure booms, and a case study of four emerging economies about their practice of funding infrastructure development. The study shows that (i) there is no empirical evidence that rapid infrastructure growth would undermine contemporary macroeconomic performance, implying that room is created to accommodate infrastructure booms without compromising fiscal and external sustainability; (ii) banks may play an important role in financing infrastructure, but caution is needed to avoid directed lending and regulatory forbearance that the authorities may use to promote financing; (iii) capital market development is important to accommodate the usually high financing needs, and encouraging private investors to move into infrastructure would require regulatory and institutional improvements; and (iv) public support, including credit guarantees, may help bolster investors' confidence, but the authorities should carefully monitor and manage fiscal risks.
Excerpt: Future of Asian Finance
This paper is an excerpt from The Future of Asian Finance. Asia demonstrated remarkable resilience throughout the global financial crisis and its aftermath. But new challenges have emerged in the region's economies. This book provides a comprehensive assessment of the state of Asia's financial sector, the challenges going forward, and the changes that can be expected. It takes stock of how systems in Asia's advanced and emerging market economies compare with the rest of the world and how reforms to develop equity and bond markets have progressed. Chapters discuss how Asian financial systems will evolve in complexity and interconnectedness and what this means for the regional financial centers of Hong Kong Special Administrative Region and Singapore. Other topics covered in the book include: harnessing the region's demographic dividend to finance infrastructure, the state of economic and financial integration in Association of Southeast Asian Nations, the role of capital flows, how changes to the global regulatory regimes will affect Asian financial systems, and policy responses to address the region's present and future challenges.
The Fiscal and Welfare Impacts of Reforming Fuel Subsidies in India
Rising fuel subsidies have contributed to fiscal pressures in India. A key policy concern regarding subsidy reform is the adverse welfare impact on households, in particular poor households. This paper evaluates the fiscal and welfare implications of fuel subsidy reform in India. Fuel subsidies are found to be badly targeted, with the richest ten percent of households receiving seven times more in benefits than the poorest ten percent. Although subsidy reform would generate substantial fiscal savings, the associated increases in fuel and other prices would lower household real incomes of all income groups. Better targeting of fuel subsidies would fully protect lower income households while still generating substantial net fiscal savings. Lessons from subsidy reforms in other countries are identified and discussed.
