Governance and structural adjustment programs : effects on investment, growth, and income distribution

Abstract: This dissertation consists of three essays (and a short introductory chapter).Essay 1: Growth and Government - Is there a Difference between Developed and Developing Countries?In this essay we examine the role of government for growth in 64 industrialized and developing countries, considering both expenditure and financing aspects of government. Recognizing that there are differences between the two country groups leading to severe heteroskedasticity, we use weighted least squared estimations. The general conclusion is that the means of financing matters more for growth than do government spending. We find that seigniorage and budget surplus are important for growth in LDCs but not in industrialized countries, while capital revenue matters only in the latter group. Moreover, the level of indebtedness is a negative determinant of growth in LDCs.Essay 2: Economic Reforms and the Poor.This essay analyzes the effects of economic reform for different income groups. Our interest is spurred by the international debate on the social consequences of reforms and the potential adverse effects on poverty in particular. We find that the poor are in general positively affected by inflationary control, structural reforms and trade reforms, while reducing government consumption affect the poorest income quintile negatively. In contries having undertaken World Bank financed reforms actual income of the poor was higher than predicted. Moreover, as the impact of reforms was strongest on the poor, World Bank support appears to reduce income inequality.Essay 3: Structural Reforms, Uncertainty and Private Investment.Since almost two decades back a large number of LDCs have embarked on World Bank supported structural adjustment programs with the objective to promote economic growth and private investment. We consider how the design of reform programs can increase reform credibility and thus reduce uncertainty in the economy. Using a unique database on adjustment lending, we test the effects of reform on private investment behavior. We find that while political factors seem to have no effect on private investment response in reforming countries, magnitudes as well as scope of reform are important positive explanatory variables.