Working Papers

Economic development is associated with structural transformation and the increase of complexity of production and exports. This paper examines whether strategic diversification is required to increase economic complexity or whether market incentives would be sufficient to drive this process of catching-up. The paper applies empirical methods of the strand of the literature on economic complexity to examine how path dependency and the demand for potential new products affect economic diversification. It argues that strategic diversification is required in cases when demand factors are very likely to create incentives for diversification towards less complex products, which hinders the…

Economic diversification is very relevant for poorer developing countries to create jobs and foster economic development. That need has been recognized in key internationally agreed development goals. The empirical economic literature has identified several stylized facts about the pattern of diversification of economies, but the development of explanations for those patterns in general has been only loosely associated with economic theory on growth, trade, technology change and structural transformation. Making that connection is relevant because it could inform policymakers in developing countries in designing and implementing policies for promoting diversification. This paper presents…

The international community has advanced in reforming the international aid system. Such reform comes at a time when there is a renewed skepticism about aid effectiveness and when the crisis sheds new doubts about the sustainability of donors´ commitments. At the same time, the international reality has changed as a consequence of the growing heterogeneity of the developing world, the new geography of global poverty, the emergence of new powers from the developing world, the presence of new aid players and, finally, the enlargement of the sphere of international public goods. Such changes demand a deeper reform in the development cooperation system.

The International Finance Facility for Immunization (IFFIm), which securitized future aid commitments by donor countries, has been successful in providing funds to immunize children in poor countries. Since capital is likely to remain scarce, the paper evaluates the prospects of setting up IFFIm-like mechanisms to fund a variety of objectives. Two broad conclusions emerge. First, replicating IFFIm could prove challenging because donor pledges will lack the desired credibility. Second, credit enhancements like third party guarantees, excess coverage, and channeling of pledges through a preferred creditor, could overcome this deficiency. Finally, Advance Market Commitments and Cash on…

This paper argues that the technical and political difficulties of using SDRs for development can be overcome. This requires an SDR-based reserve system and a fully SDR-funded IMF. The IMF would allocate SDRs counter-cyclically and treat them as deposits of countries, which could be used in lending to them. A substitution account is needed for a smooth transition from major reserve currencies to SDRs. To avoid the deficiency payments, a counterpart account – which would be credited when the substitution account is in surplus and debited when in deficit – is required. Alternatively, politically-feasible cost-sharing mechanisms could be designed.

This paper assesses the scope and impact of innovative development finance (IDF) in the Latin America and the Caribbean (LAC) countries in the 2000s. It also reports the views from the region’s relevant actors regarding IDF. The paper finds that very little IDF flowed to LAC in the 2000s, though it was significant for a few, poorer, and smaller countries, such as Haiti and Nicaragua. The views from the region suggest that LAC should fight for greater share of existing and prospective IDF, but also make better use of other available resources, such as remittances and flows through South-South cooperation.

This paper argues that SDRs should become a more relevant instrument of international monetary cooperation. This requires transforming them into a pure reserve asset and the IMF into a fully SDR-funded institution. SDRs would then be issued counter-cyclically and treated as deposits of countries in the IMF, which can in turn lend to countries. This approach would correct basic deficiencies of the current global monetary system. Complementary reforms include a substitution account for an orderly and smooth transition from major reserve currencies to SDRs, and the issuance of SDR-denominated bonds as an alternative to other major short-term assets.

In most developing countries a shortage of long-term, local-currency financing for small-scale infrastructure projects impedes local economic development. Inadequate fiscal transfers, little own source revenue and low creditworthiness make it difficult for local governments to fully fund projects on their own. This paper proposes the use of project finance as a means to attract financing from domestic banks and institutional investors. Donors can play a catalytic role by providing technical assistance to develop projects and credit enhancement to attract commercial financing.

This paper surveys the ways that the structure and magnitude of financial sector compensation can generate incentives for excessive risk taking. It also highlights the underlying economic and institutional forces that have underpinned and sustained these pay structures, including aspects of corporate governance in financial institutions, regulatory capture by financial elites, the nature of the labour market for finance professionals and the extended economic boom of the 1990s and 2000s. The measures endorsed by the Financial Stability Board and the G20 for sound compensation practices do not go far enough in several areas; a broader set of measures need consideration.

To achieve the greatest possible human welfare, the Stockholm Environment Institute’s Climate and Regional Economics of Development (CRED) model calls for rapid reduction of greenhouse gas emissions to keep cumulative 21st century carbon dioxide emissions below 2,000 Gt. We explain why as some other models claim very slow emission reductions are best. We make three changes to the basic assumptions of the well-known DICE model to include the most recent estimates of economic damages from climate change, express greater concern about the well-being of future generations, and expect rich countries to invest in emissions and poverty reduction in poorer countries.

This paper assesses the effects of combining fiscal austerity with flexibilization policies aimed at reducing labour costs and increasing competitiveness. Core to our analysis is a global perspective where the aggregation problem is fully taken into account. We derive a stylized macroeconomic framework of distributive and demand dynamics. We show that even in export-led regimes, after considering global feedbacks, flexibilization policies do not lead to higher income and employment. Rather, the end result is contractionary. Over time, the world economy is essentially wage-led and responds positively to coordinated Keynesian stimuli.

This paper examines whether Official Development Assistance (ODA) is disproportionately allocated to countries that need to make the most progress on the Millennium Development Goals (MDGs). We expect MDG-sensitive distribution of foreign aid – or a good donor-recipient match – to be guided by the principles of the Global Partnership for Development. When we apply the MDG-sensitivity criteria for aid allocation, the results indicate that ODA allocation since the Millennium Declaration has become more MDG-sensitive – ODA is given to countries that need it most. While such trends in aid disbursements are commendable, total aid flows, however, fall short of promised levels.