Exchange Rate Pass-through to Import Prices,and Monetary Policy in South Africa

Abstract

Understanding how import prices adjust to exchange rates helps anticipate inflation effects and monetary policy responses. This article examines exchange rate pass-through to the monthly import price index in South Africa during 1980–2009. Short-horizon pass-through estimates are calculated using both single equation equilibrium correction models and systems (Johansen) models, controlling for both domestic and foreign costs. Average pass-through is incomplete at about 50 per cent within a year and 30 per cent in six months, and in the long-run, from the Johansen analysis including feedback effects, is about 55 per cent. There is evidence of slower pass-through under inflation targeting; pass-through is found to decline with recent exchange rate volatility and there is evidence for asymmetry, with greater pass-through occurring for small appreciations.     

Exchange Rate Pass-through in South Africa: Panel Evidence from Individual Goods and Services

This study estimates pass-through for South Africa using samples of final goods and services, and homogenous imports. Estimated pass-through to consumer goods prices is low, roughly 16 per cent in the two years following an exchange rate change; surprisingly, it is somewhat higher for services. Deviations from long run PPP appear to disappear relatively quickly, with a half-life of about 16 months. For imports, pass-through estimates are much higher, averaging around 60 per cent, but with wide source-country variation. Finally, there is virtually no support for a simple linear trend change in either pass-through or in reversion to PPP during the sample.     

How Vulnerable are Arab Countries to Global Food Price Shocks?

Abstract

We estimate pass-through effects of international food price movements into domestic food prices for 18 countries in the Middle East and North Africa, using threshold regressions. International price movements transmit to various degrees into domestic prices. Transmission is mostly asymmetric, pushing domestic price levels up as increases in international food prices are typically passed through, but declines are rarely transmitted. This situation is indicative of policy and market distortions, notably the presence of food subsidies in the context of fiscal constraints. Hence, both international prices and their volatility matter for domestic inflation, yet domestic factors also play a role.     

Exchange Rate Pass-Through in Developing and Emerging Markets: A Survey of Conceptual,Methodological and Policy Issues,and Selected Empirical Findings

Abstract

Global integration has increased the international linkages of financial markets for emerging market countries. A key channel for the international transmission of inflation and economic cycles is from exchange rate movements to domestic prices, known as exchange rate pass-through (ERPT). This article reviews the conceptual, methodological and policy issues connected with ERPT in emerging market and developing countries, and critically surveys selected empirical studies. A key contribution is to categorise and compare the heterogeneous methodologies used to extract ERPT measures in the empirical literature. Single equation models and systems methods are contrasted; frequent misspecifications that produce unreliable ERPT estimates are highlighted. The discerning policy-maker needs to ascertain by which methods ERPT measures were calculated, the controls and restrictions applied, and the time frame and stability of the estimates.     

The Impact of War on Calorie Food Demand in Bangladesh

Daily per capita calorie intake in Bangladesh averaged almost 2,100 (kilo)calories in the 1960s but fell to 1,840 in 1972 following the war of independence in 1971, and only by 1987 did it reach 2,000 again. This article examines the long-run relationship between per capita income, food prices and per capita calorie intake using aggregate data for Bangladesh for 1962–97 and the recent cointegration procedure of Johansen et al., which permits structural breaks. Results show that a long-run relationship exists and that the war reduced average calorie intake permanently by 10 per cent. Impulse responses show that income Granger-causes calorie intake but not vice versa.     

Food Price Volatility and Vulnerability in the Global South: considering the global economic context

Abstract

Most official analyses of the recent food price crisis have focused on the market fundamentals of supply and demand for food as key explanatory factors. As a result, most of the policy recommendations emanating from the major international institutions include measures to boost supply and temper demand. In this paper I argue that international macroeconomic factors played a key role in fostering both price volatility and vulnerability, and as such they need to be recognised. With respect to the recent price volatility, the weak US dollar and speculation on agricultural commodities futures markets greatly influenced agricultural prices. With respect to price vulnerability, global economic forces played an important role in dampening production incentives in the world's poorest countries over the past 30 years, leading to a situation of food import dependence. Policy responses to the food crisis must consider the role of these broader international macroeconomic forces—both in the immediate context and their longer term impact.     

Trade creation,trade diversion and effective protection in the central American common market

Aggregate analyses suggest that the formation of the Central American Common Market (CACM) has resulted in little or no trade diversion, but different conclusions apply when the import data are appropriately disaggregated. Increases in the effective rates of protection for consumer goods have led to increased demand for extra‐regional imports of intermediate inputs and decreased demand for extra‐regional imports of final goods. On balance, the CACM is a trade‐diverting customs union for non‐durable consumer goods: trade‐creating effects are present in Honduras and Costa Rica, but trade‐diverting effects dominate in Guatemala, El Salvador and Nicaragua.     

Introduction to a Special Section on ‘Exchange Rate Pass-through in Developing and Emerging Markets’

Abstract

The interest in exchange rate pass-through (ERPT) in emerging market and developing economies has burgeoned in the last two decades. Small, open and trade-dependent economies embody special features that can make it difficult to obtain reliable estimates of ERPT. This Special Section includes a survey of recent research in developing and emerging market countries on ERPT, focusing on the monetary policy relevance of ERPT.

The frequent misspecifications that produce unreliable ERPT estimates are highlighted. Many empirical issues raised in the survey are illustrated by the macro- and the micro-economic empirical studies on South Africa (SA) included in this Special Section, and an earlier published JDS paper on ERPT in SA.     

The Return to Foreign Aid

Abstract

We estimate the average rate of return on investments financed by aid and by domestic resource mobilisation, using aggregate data. Both returns are expected to vary across countries and time. Consequently we develop a correlated random coefficients model to estimate the average returns. Across different estimators and two different data sources for GDP and investment our findings are remarkably robust; the average gross return on ‘aid investments’ is about 20 per cent. This is in accord with micro estimates of the economic rate of return on aid projects and with aggregate estimates of the rate of return on public capital.     

The Effect of Food Price Changes on Child Labour: Evidence from Uganda

Most people in developing countries spend up to 60 per cent of their income on food, even though the majority of them are farmers. Hence, a change in food prices affects both their revenue as well as expenditure, and it may thereby affect their labour market decisions. Using the Uganda National Panel Survey and monthly regional food prices, this paper examines the effect of changes in food prices on child labour. The empirical evidence shows that an increase in food prices is linked to an increase in the probability and the intensity of child labour. We find the effect of food price increases to be smaller among landowning households, which is consistent with the view that landowning households can better compensate for price shocks. The empirical results suggest that periodic shocks in food prices may have longer lasting effects on economic development in developing countries through the channel of child labour.     

The political economy of Indian planning

Peruvian statistics were examined to see if construction remained labour‐intensive during 1955–67. Data on output, employment, capital, and materials consumption were either lacking or had defects that made a direct comparison of trends impossible. But conclusions could be drawn from relative price and wage trends. If materials and capital had not been substituted for labour, average construction costs would have risen substantially more than they did. Our estimate was that by 1967 they would have been 25 per cent higher.

Evidence from a sample of firms, however, suggested that adoption of labour‐saving techniques cannot be tied simply to changes in wages compared with other costs. All eleven innovations studied, it is true, were markedly labour‐saving; but the rate of adoption did not closely follow wage changes. Adoption came most often during those less tense years when builders were neither overstrained with orders nor lacking credit and clients. One must conclude that both rising wages and innovations can limit employment expansion in relatively poor countries.

Since both agriculture and manufacturing have been unable to absorb the growing labour force of poor countries, economists have turned their attention to other sectors for supplementary employment expansion. One of these is construction. The construction sector creates not only jobs but builds capital goods with a desirable low import content. In association with carefully structured financial institutions, it may even generate savings. How much employment a given expansion of construction will provide depends on the production functions of the sector: their slopes and their potential shifts. One must find the changes in labour productivity that go with likely changes in volume, capital accumulation, trends in material supplies, and alternate technologies.

All these questions will get imprecise answers without good statistics on output, labour, capital, and materials, both unit prices and volume. If output varies in composition and in the relative quality of components, problems of weighting and aggregating arise. Because of the sector's ? instability and footloose nature, data on construction remain inferior compared with other sectors even in the most advanced and statistics‐rich countries. Can one make anything of the sorts of data available in poor countries where the sector must play its most crucial role?

In this article, using rather limited data, we note with considerable alarm that steady labour intensity and corresponding employment expansion cannot be taken for granted. Where daily wages are but a fraction of hourly American wages, and where interest rates are a multiple of American rates, the more lavish use of materials and machinery compared with labour can nevertheless begin early.

Peru is the country selected for our study. During 1955–67 Peru had a relatively high national output growth rate of 5.6 per cent together with a moderate rate of inflation of about 9 per cent. Except for the devaluation years of 1958 and 1967, flourishing exports of fishmeal, copper, cotton, and sugar helped carry this rate of growth. Lima was one of the continent's fastest‐growing cities in population and building, particularly in squatter barriadas. But in the 1960s commercial conduction also grew at more than a 15 per cent compound rate, measured in square metres built, according to some estimates.1 During 1964–68, construction had high priority under President Fernando Belaunde, a professional architect. More U.S. foreign aid for housing (direct and guaranteed private loans) went to Peru in absolute terms during this period than to any other country. We shall analyse the consequences by examining (1) trends in relative costs, (2) relative output and import trends, and (3) data about receptivity to innovations in a sample of firms.     

The economic viability and stability of ‘capitalised family farming’: An analysis of agricultural decollectivisation in Peru

Abstract

The overall goal of this study is to examine if there is a dropout problem in rural China and to explore the effectiveness of a Conditional Cash Transfer (CCT) programme on the rate of dropping out. To meet this goal, we conduct a randomised controlled trial (RCT) to assess the impact of the CCT using a sample of the poorest 300 junior high school students in a nationally-designated poor county in Northwest China. We find that the annual dropout rate in the study county was 7.8 per cent and even higher, 13.3 per cent, among the children of poor households. We demonstrate that a CCT program reduces dropout by 60 per cent. The programme is most effective among students with poor academic performance, and likely more effective among girls and younger students.     

Agricultural Production,Dietary Diversity and Climate Variability

Abstract

Nonseparable household modelsoutline the interlinkage between agricultural production and household consumption, yet empirical extensions to investigate the effect of production on dietary diversity and diet composition are limited. While a significant literature has investigated the calorie-income elasticity abstracting from production, this paper provides an empirical application of the nonseparable household model linking the effect of exogenous variation in planting season production decisions via climate variability on household dietary diversity. Using degree days, rainfall and agricultural capital stocks as instruments, the effect of production on household dietary diversity at harvest is estimated. The empirical specifications estimate production effects on dietary diversity using both agricultural revenue and crop production diversity. Significant effects of both agricultural revenue and crop production diversity on dietary diversity are estimated. The dietary diversity-production elasticities imply that a 10 per cent increase in agricultural revenue or crop diversity result in a 1.8 per cent or 2.4 per cent increase in dietary diversity respectively. These results illustrate that agricultural income growth or increased crop diversity may not be sufficient to ensure improved dietary diversity. Increases in agricultural revenue do change diet composition. Estimates of the effect of agricultural income on share of calories by food groups indicate relatively large changes in diet composition. On average, a 10 per cent increase in agricultural revenue makes households 7.2 per cent more likely to consume vegetables, 3.5 per cent more likely to consume fish, and increases the share of tubers consumed by 5.2 per cent.     

Distributional Effects of Maize Price Increases in Malawi

Abstract

In the wake of highly volatile world prices of staple commodities, we examine the impacts of increases in maize prices on various categories of households in Malawi. Using household-level data, changes in household income are calculated taking into account the net maize production status of the household and food price elasticities estimated from a censored demand system. While maize price increases have unequivocal deleterious effects on the incomes of urban households, rural households experience differential impacts. Net producing households in rural areas benefit from price increases with households above the poverty line obtaining proportionally higher incomes.     

For Health,Strength, and Daily Food: The Dual Impact of Remittances and Public Health Expenditure on Household Health Spending and Child Health Outcomes

Abstract

Child and infant mortality in developing countries decreased 33.5 per cent and 30.9 per cent, respectively, during 1995–2009, while remittances and public health spending more than doubled. I examine how remittances and government health spending improve these child health outcomes. Neither government health spending nor remittances causally affect household health spending. Public health spending has an insignificant negative impact on mortality. The increase in remittances causally accounts for 32 per cent and 37 per cent of the decline in child and infant mortality, respectively. Remittances reduce mortality through improved living standards from the relaxation of households’ budget constraints.     

The growth of Indian nitrogen fertilizer manufacture: Some lessons for industrial planning

Large‐scale manufacture of nitrogen fertilizers in India originated during the Second World War as a result of the interruption of the import of rice from Burma. The growth of production has been at the prodigious rate of 22 per cent per annum in the 17‐year period 1949/50–1965/6. Demand has never acted as a constraint; this suggests that agro‐industry can play an important part in an industrializing strategy for development. In spite of this success two negative features have characterized the economic history of fertilizer production: gestation lags and under‐utilized capacity. Had the establishments worked at design capacity and had the average gestation lag not exceeded three years, less than 60 per cent of the 2.1 million tons of nutrient imported into India during these 17 years would have been required. This highlights the need to include in planning models of output expansion both of these variables, getstation lag and low capacity utilization. Some of their causes have been exogenous to the industry. But a number are internal and recurrent. Unjustified technical risks, plant dis‐integration, faulty process selection and inadequate project appraisal in investment decision‐making. Attempts to reduce the balance of payments deficit have had a negative feedback on the foreign exchange flow by reducing the industry's average annual output. Such negative effects should be included in formulating import control, import substitution and export promotion policies. Finally the ubiquity of excess capacity and the invariance of labour force size with the degree of capacity utilization in this sector is shown to lead to large over‐estimates of the future required‐labour force when certain forecasting techniques are used, even in the absence of trends to increasing labour productivity.     

Computer Usage and Labour Regulation in India's Retail Sector

Abstract

A recent survey of 1,948 retail stores in India conducted by the World Bank's Enterprise surveys shows that 19 per cent of all stores use computers. In the state of Kerala, the figure is as high as 40 per cent. Using this survey, we estimate the effect of computer usage on labour employment. Our findings show that this effect depends on the stringency of the underlying labour laws. Stricter labour laws magnify the labour displacing effect of computers significantly.     

Small-Scale irrigation and income distribution in Ethiopia

Abstract

Irrigation stimulates agricultural productivity and economic growth, but this may come at the cost of growing inequality. Using data at community and household level, this paper analyzes the distributional impacts of irrigation in Ethiopia. Regression analyses reveal the direct effects of irrigation on expenditures and labour demand, and the indirect effects of irrigation on food prices and expenditures of non-irrigation households. The results indicate that past development of irrigation stimulated growth without deepening inequality, and that irrigation decreased dependence on food-for-work programs. Thus, irrigation has played a positive role in the development of Ethiopia.     

Trade,taxes and debt repayment in Sri Lanka

The purpose of this article is to estimate the cost of taxing the export, import or domestic sectors of Sri Lanka for the purpose of reducing the national debt. A simple GNP model is used to estimate the elasticities that characterise the three aggregate sectors and are used to simulate the effects of taxing for debt servicing. The results show that a tax on the import sector generates the largest net savings on trade balance and that the savings from not importing can be substantial. However, for the period 1977–87 a 10.0 per cent tax on the import sector caused a decline in the growth of the economy by 3.0 per cent. The burden of the tax falls heavily on the domestic sector in terms of lost production and increased unemployment.