Working Papers 2007


ST/ESA/2007/DWP/62 Decent Workplaces, Self-Regulation and CSR:
From Puff to Stuff?

The growth of voluntary initiatives to promote socially responsible business practices has been
accompanied by a chorus of criticisms, including claim that much of the activity has been public
relations and attempt to deter governments from implementing effective regulations.
This paper reviews various types of self-regulating initiative and campaigns that have grown up
alongside to assess their effect on labour practices and employment. It concludes by proposing how
there could be greater emphasis on market incentives coupled with more effective public measures to
induce medium- and small-scale firms to improve their labour practices, including radical overhaul
in labour inspectorates functions.
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ST/ESA/2007/DWP/61 Debt Sustainability in Emerging Markets:
A Critical Appraisal

This paper critically assesses the standard IMF analytical framework for debt sustainability in
emerging markets. It focuses on complementarities and trade-offs between fiscal and external
sustainability, and interactions and feedbacks among policy and endogenous variables affecting
debt ratios. It examines current fragilities in emerging markets and notes that domestic debt is of
concern. Despite favourable conditions, many governments are unable to generate a large enough
primary surplus to stabilize public debt ratios. Worsening global financial conditions may create
difficulties for budgetary transfers, posing greater challenges to government debt management since
restructuring often is more difficult for domestic than external debt.
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ST/ESA/2007/DWP/60 What does excess bank liquidity say about
the loan market in Less Developed Countries?

Evidence about developing countries’ commercial banks’ liquidity preference suggests the following
about their loan markets: (i) the loan interest rate is a minimum mark-up rate; (ii) the loan market
is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial
liberalization, can only be effective at very high interest rates that are likely to be deflationary.
The minimum rate is a mark-up over a foreign interest rate, marginal transaction costs and a risk
premium. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate
is consistent with the observed stylized facts.
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ST/ESA/2007/DWP/59 The Instability and Inequities
of the Global Reserve System

This paper argues that the current global reserve system is inherently unstable due to the use of
a national currency as the major international reserve currency, and the high demand for “self-insurance”
by developing countries. The latter is due to the mix of highly pro-cyclical capital flows
and the limited room to maneuver that developing countries have to manage counter-cyclical
macroeconomic policies. Both features imply that the system is also inequitable. An important
insight of the paper is that such inequities feed into the instability of current arrangements. Any
meaningful reform of the system must therefore address these two interlinked features.
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ST/ESA/2007/DWP/58 How Cash Transfers Boost Work and Economic Security

There has long been a minority view that providing people with cash is an effective way of combating poverty and economic insecurity while promoting livelihoods and work. The mainstream view has been that giving people money, without conditions or obligations, promotes idleness and dependency, while being unnecessarily costly. Better, they contend, would be to allocate the available money to schemes that create jobs and/or human capital and that produce infrastructure. This paper reviews recent evidence on various types of scheme and on several pilot cash transfer schemes, assessing them by reference to principles of social justice.
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ST/ESA/2007/DWP/57 The relationship between rainfall and human density and its implications for future water stress in sub-Saharan Africa

This paper uses Geographic Information System (GIS) data on population density, rainfall and climate change scenarios in order to identify areas that will be subject to increased water stress due to insufficient precipitation to support their projected population levels in 2050. Density increases across the continent should lead to a significant increase in the extent of water stressed zones, especially around the Sahel belt and in Eastern Africa. Changes in rainfall, the pattern of which remains inherently uncertain today, could mitigate or compound those effects. Consequences of unsustainably high local densities such as migrations are bound to become more prevalent.
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ST/ESA/2007/DWP/56 Climate Change and Sustainable Development

This paper argues that in the future the primary focus of policy research and global agreements should be the de-carbonization of economic development. Consequently, instead of treating climate stabilization and economic development as separate and equal, the strategy should be to re-integrate the two global policy goals, in part by separating responsibility (and funding) from action. This will require an approach that goes beyond Kyoto. The paper invokes the example of the Manhattan Project to argue for a massive, globally funded public investment program for the deployment of renewable energy technologies in developing countries.

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Also: Russian Version

ST/ESA/2007/DWP/55 Corruption and Democracy

What is the impact of democracy on corruption? In most models, analysts assume a negative relationship, with more democracy leading to less corruption. But recent theoretical developments and case evidence support an inverted U relationship between corruption and democracy. By drawing on a panel data set covering a large number of countries between 1996 and 2003, substantial empirical support is found for an inverted U relationship between democracy and corruption. The turning point in corruption occurs rather early in the life of new democracies and at rather low per capita incomes.
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ST/ESA/2007/DWP/54 Governance, Economic Growth
and Development since the 1960s

Liberal economists have developed a framework of good governance as market-enhancing governance,
focusing on governance capabilities that reduce transaction costs and enable markets to work
more efficiently. In contrast, heterodox economists have stressed the role of growth-enhancing governance,
which focuses on governance capacities to overcome entrenched market failures in allocating
assets, acquiring productivity-enhancing technologies and maintaining political stability in contexts
of rapid social transformation. The two are not necessarily mutually exclusive, but current policy
exclusively focuses on the former, and ignores the strong empirical and historical evidence supporting
the latter to the detriment of the growth prospects of poor countries.
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ST/ESA/2007/DWP/53 Industrial Policy and Growth

The paper highlights how the rationales and instruments of industrial policy have changed since the
1960s. It finds that theories of industrialization have come full circle, as many of the assumptions
behind the market failure paradigm have made a comeback. The policy implications of these
theories, however, have not been similarly resurrected. It makes an explicit comparison between
the strategies of East Asia and Latin America, and reviews the explanations for their divergent
performance. It identifies a “back to the future” quality of Latin America’s situation, pointing to the
region’s balance of payments constraint and dependence on commodity-like industrial products.
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ST/ESA/2007/DWP/52 Have Collapses in Infrastructure Spending led to
Cross-Country Divergence in Per Capita GDP?

This paper explores whether the post-1980 decline in infrastructure investment in developing countries
is a source of growing disparities in world per capita GDP. I start by reviewing the literature on the infrastructure-productivity link,
arguing that a balanced reading of previous studies points to a significant effect of infrastructure provision on productivity.
I then empirically study whether retrenchments in infrastructure provision have played a role in growing disparities using
a data set of country-level infrastructure stocks for 121 countries since 1960. Cutbacks in infrastructure investment appear
to be at most a minor cause of growing divergence in per capita incomes.
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ST/ESA/2007/DWP/51 Openness and Growth: What Have We Learned?

This paper discusses recent evidence regarding the existence of a cross-country empirical relationship between openness
to international trade and economic growth. I discuss the empirical contributions of Warner (2003), Dollar and Kraay (2002),
and Wacziarg and Welch (2003), and argue that these studies fail to convincingly establish a positive link between trade and growth.
I also discuss the 1990-03 experience and show that growth does not display a significant correlation with any measure of trade openness over this period.
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ST/ESA/2007/DWP/50 What we do and don’t know about trade liberalization and poverty reduction

Strong opinions about the impact of globalization on poverty are not always backed by robust factual evidence.
As argued in this paper, however, it is not all that easy to lay our hands on ‘robust’ facts. Quantitative analyses
of trade liberalization appear highly sensitive to basic modelling and parameter assumptions. Altering these could
turn the expectation that, for instance, Africa’s poor stand to gain from further trade opening under the Doha Round
into one in which they would stand to lose. Most studies agree though that trade opening probably adds to aggregate
welfare, but gains are small and unevenly distributed.
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ST/ESA/2007/DWP/49 Growth, employment and poverty: An analysis of the vital nexus based on some recent UNDP and ILO/SIDA studies

This Working Paper explores the role of employment growth in determining the effect of a given rate
of economic growth on the rate of change in poverty. It is based on the findings of 16 country case
studies recently carried out by the United Nations Development Programme and the International
Labour Organization. The principal finding of the paper is that the rate of poverty reduction has
invariably been lower than what it potentially should have been and the main reason for this is both
the low employment intensity of growth and, with few exceptions, low overall growth itself.
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ST/ESA/2007/DWP/48 A Compendium of Policy Instruments to Enhance Financial Stability and Debt Management in Emerging Market Economies

Drawing on available theory and evidence, this paper attempts to identify some key factors
contributing to international financial instability to develop a taxonomy of policy instruments to
enhance financial stability and debt management in emerging market economies. The purpose is to
relate each instrument to particular aspects of the broader policy challenge, thus clarifying differences
and/or similarities among instruments and proposals. The analysis suggests instruments that could
help increase the efficiency of risk management strategies (such as growth- or GDP-indexed bonds)
and enhance the effectiveness of debt management, growth and development policies (such as a
stability and social investment facility).
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ST/ESA/2007/DWP/47 Labour Market Flexibility and Decent Work

This paper reviews evidence from both industrialized and developing countries on the relationship
between labour market flexibility and employment. It is argued that the notion of flexibility and its
impact is often oversimplified. The evidence, such as it is, does not provide much support for the
view that greater flexibility results in higher employment. There is more evidence for an impact on
the distribution of employment among different groups of the population, but also effects which
vary widely between countries. Flexibility needs to be considered within a wider framework of
policies and institutions to promote decent work.
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ST/ESA/2007/DWP/46 Rethinking the Informal Economy: Linkages with the Formal Economy and the Formal Regulatory Environment

This paper explores the relationship of the informal economy to the formal economy and the formal
regulatory environment. It begins with a discussion of the concept of the informal economy and its
size, composition, and segmentation. It then discusses the linkages between the informal economy
and the formal economy and the formal regulatory environment. The conclusion suggests why and
how more equitable linkages between the informal economy and the formal economy should be
promoted through an appropriate inclusive policy and regulatory environment.
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ST/ESA/2007/DWP/45 Inequality in India: A survey of recent trends

This paper analyses the nature and causes of the patterns of inequality and poverty in India. Since
the economic liberalization in the early 1990s, the evidence suggests increasing inequality (in both
spatial and vertical terms) as well as persistent poverty. The macroeconomic policies possibly responsible
for these trends include—fiscal tightening, regressive tax policies and expenditure cuts;
financial sector reform that reduced institutional credit flow to small producers and agriculturalists;
liberalization of rules for foreign and domestic investment, leading to more regional imbalance and
skewed investment patterns, and trade liberalization, which has affected livelihoods and employment
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ST/ESA/2007/DWP/44 A growth model for a two-sector economy with endogenous productivity

A growth model is developed for an open dual economy. The economy expands due to a higher
growth rate of labour productivity in the modern sector through the Kaldor-Verdoorn channel
and higher eff ective demand through a Keynesian channel. The model incorporates a retardation
mechanism affecting the slopes of productivity and output growth schedules as labour surplus and
economies of scale diminish. A wage or profit-led regime and initial conditions may give rise to:
de-industrialization in terms of both output and employment; a growth trap sustaining a situation of
structural heterogeneity; or sustainable employment and adequate output and productivity growth.
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ST/ESA/2007/DWP/43 The conflict-growth nexus and the poverty of nations

Lack of growth limits poverty reduction while poverty increases conflict risk. Institutional failure and other factors seem to cause both growth failure and civil war. The greed explanation for conflict is common in cross-country econometric investigation, despite its dubious role in directly causing civil war. The relationship between natural resource revenues and conflict onset works through other mechanisms, such as a weakening social contract and withering state capacity. The grievance explanation for contemporary civil war is supported by detailed case studies where horizontal inequality is important. Economic reconstruction following war should therefore be pro-poor and address horizontal inequalities engendering conflict.
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ST/ESA/2007/DWP/42 Modernizing the informal sector

The multiplicity of policies proposed to support the informal sector reflects the lack of a common
definition. Although they may produce positive effects, these are limited and fail to constitute
a comprehensive strategic approach. The different interpretations in the absence of a common
definition as well as the strategies emerging from them are reviewed. The identification of
informality with illegality and labour precariousness, although conceptually related, is often
misleading. Lastly, it explores a strategic option to regulate the informal sector, tracing the
different approaches to formalizing informal activities, to facilitate their full integration into the
modernization process.
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ST/ESA/2007/DWP/41 Developing Countries, Donor Leverage,
and Access to Bird Flu Vaccines

In early 2007, the Indonesian government decided to withhold its bird flu virus samples from
WHO’s collaborating centres pending a new global mechanism for virus sharing that had better
terms for developing countries. The 60th World Health Assembly subsequently resolved to establish
an international stockpile of avian flu vaccines, and mandated WHO to formulate mechanisms
and guidelines for equitable access to these vaccines. Are there analogous opportunities for study
volunteers or donors of biological materials in clinical trials or other research settings to exercise
corresponding leverage to advance health equity?
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ST/ESA/2007/DWP/40 Transforming the developmental
welfare states in East Asia

This article attempts to explain changes and continuity in the developmental welfare states in Korea
and Taiwan Province of China (hereafter Taiwan) within the East Asian context. It first elaborates
two strands of welfare developmentalism (selective vs. inclusive), and establishes that the welfare
state in those countries fell into the selective category of developmental welfare states before the
Asian economic crisis of 1997. Secondly, this paper argues that the policy reform toward an inclusive
welfare state in Korea and Taiwan was triggered by the need for structural reform in the economy.
Lastly, this paper argues that the idea of an inclusive developmental welfare state should be explored
in the wider context of economic and social development.
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ST/ESA/2007/DWP/39 A counter-cyclical framework for a development-friendly
international fi nancial architectur

The major task of a development-friendly international financial architecture is to mitigate procyclical
effects of financial markets and open “policy space” for counter-cyclical macroeconomic
policies in the developing world. This paper explores a series of policy instruments for this purpose:
counter-cyclical prudential regulatory and supervisory frameworks; market mechanisms that better
distribute the risk faced by developing countries through the business cycle; multilateral instruments
that encourage more stable private flows; and better provision of counter-cyclical official liquidity.
It also suggests that regional macroeconomic consultation, and common reserve funds or swap
arrangements among developing countries can play a role in this regard.
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ST/ESA/2007/DWP/38 Central banks as agents of employment creation

Employment creation has dropped off the direct agenda of most central banks. The so-called �global best practice� approach to central banking has not focused on economic growth or employment generation but rather on keeping inflation in the low single digits. However, the policy record shows that employment generation and economic growth are often not by-products of inflation focused central bank policy. This chapter argues that there should be a return to the historical norm of central bank policy in which employment creation and more rapid economic growth join inflation and stabilization more generally as key goals of central bank policy. Supporting this argument, the chapter summarizes major lessons of a multi-country research project undertaken by an international team of economists which show that, within the constraints of contemporary economic conditions, there are viable alternatives to inflation targeting that can focus more on important social, real sector outcomes such as employment generation and poverty reduction.
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ST/ESA/2007/DWP/37 Regional Social Policy

This paper argues why countries should give priority to developing cross-border regional
social policies. The first part presents the conceptual case for regional social policies in terms
of how the social dimension of regionalism can provide an alternative to the current pattern
of globalization. The second presents the concept and dimensions of regional social policies.
The third part reviews progress to date, which suggests that the time is right to pursue this
agenda. The paper closes with some institutional issues related to how regional social policy
might be advanced, including options for financing regional social policies.
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ST/ESA/2007/DWP/36 Constraints to achieving the MDGs through domestic resource mobilization

The present paper focuses on the role of domestic resource mobilization for financing poverty reduction strategies. Policy makers should be aware of important macroeconomic trade-offs associated with MDG strategies financed from tax increases or domestic borrowing. The trade-offs are largely intertemporal: can poor and middle-income countries absorb the initial financing costs in order to achieve expected gains in productivity and human development over time? This calls for a dynamic economy-wide framework to identify the importance of such trade-offs. The paper presents such a framework and illustrates its usefulness in applications for Costa Rica and Ecuador.
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