Armington's insight that imports and domestically produced goods were imperfect substitutes has unleashed extensive estimates of the associated trade elasticity, primarily for developed countries. This notion of product differentiation, which extends symmetrically to exports and domestic goods, has underpinned trade-focused, computable general equilibrium models of developing countries, including the aggregate, compact version, the 1–2–3 model. Noting that estimates of trade elasticities for developing countries are few, this paper remedies the situation. Using the vector error correction model as the primary method and controlling for global trends and other factors, the analysis derives the long-run elasticity estimates for 191 countries, ranging from China (population of 1.4 billion) to Tuvalu (11,200), including 45 of 48 Sub-Saharan African countries and understudied countries such as Benin, the Republic of Congo, Niger, Fiji, Haiti, Kiribati, and Tajikistan. Import and export elasticities of high-income countries average about 1.4, reflecting the greater diversity of their economies; developing countries' elasticities average around 0.7 for imports and 0.6 for exports. Elasticities generally rise with per capita income. That the elasticity is greater than one for developed and less for developing countries implies asymmetric responses to shocks, which conforms to intuition and corroborates the analytical results from the 1–2–3 model.

Why is governance in resource-rich countries so poor? We argue that it is because governments in these countries do not rely on taxation, which is an important instrument for citizens to hold their govern-ments accountable. Using a game-theoretic model, we show that the combination of low taxes and weak governance can be an equilibrium in an economy with sizeable mineral revenues. As income from natural resources ultimately declines, replacing it with tax revenues may require governments to give control of these proceeds to citizens, in the form of cash transfers say, as a credible commitment to accountability, thereby breaking the country out of its resource curse.(c) 2022 Published by Elsevier B.V.

Noting that a major purpose of multilateral institutions is to deliver international public goods, this paper applies the theory and practice of public economics, as well as papers in this section, to the potential and challenges facing these institutions. First, I show that deviations from the standard model of fiscal decentralization are reflected in the experience of multilateral institutions. Next, I consider the case of one of the largest of such institutions, the World Bank, and show how the nature of the international public good it was originally designed to produce—the pooling of investment risk in developing countries—has changed to those of climate change, peace, and knowledge. I suggest that, in order to deliver on this new set of public goods, the World Bank needs to change the way it is organized—away from the country-based model to regional and subnational groupings—and shift its strategy to one where knowledge leads lending rather than the other way around.

Slowing global warming requires countries to reduce carbon emissions, which imposes costs on their economies. To be effective, most countries must agree collectively to participate (e.g., the Paris Agreement, COP26). However, every country has an incentive not to comply and still reap the benefits of other countries’ actions—a classic free-rider problem. This paper evaluates recent recommendations to use trade policy to solve the free-rider problem associated with climate mitigation strategies. It shows that the European Union’s carbon border adjustment mechanism (CBAM tariffs) are effective at offsetting the unfair competitive advantage of noncompliant countries in the markets of compliant countries but have little effect on the trade of noncompliant countries, who can divert trade to other noncompliers. CBAM tariffs alone have little impact on global CO2 emissions. The paper also examines 'climate clubs' (coalitions of countries that agree to impose carbon taxes or other equivalent policies and impose punitive tariffs on non-club members to induce them to join the club). It finds that punitive climate club tariffs can be effective in inflicting significant damage on the economies of nonmembers, providing a strong incentive for them to join the club. The paper identifies trade dependence between club and non-club members as an important consideration for the success of a climate club. Club members that are strongly linked to non-club members suffer losses when the club punishes non-club members, which would make them hesitant to impose punitive tariffs on a major nonmember trading partner.

Slow growth in manufactured and agricultural exports has been attributed to the high share of natural resources in many African economies. Not only does the resource sector draw labour and capital away from other sectors, but also the spending of resource revenues in the domestic economy bids up the price of non-tradable goods, making the tradable sectors less competitive-a phenomenon known as Dutch disease. This paper argues that an important and neglected channel for this effect is through the public sector. Since government receives a large portion of resource revenues, the public-sector booms alongside the resource sector. But the government is largely unaccountable for the spending of these revenues, since they are not raised via taxes on citizens. The result is this money might be spent in inefficient and distortionary ways, undermining competitiveness. One solution may be for government to transfer natural-resource revenues directly to citizens and then tax them to finance public expenditure. The increased accountability might improve the effectiveness of the public sector and therefore the competitiveness of the private sector.

If trade tensions between the United States and certain trading partners escalate into a full-blown trade war, what should developing countries do? Using a global, general-equilibrium model, this paper first simulates the effects of an increase in U.S. tariffs on imports from all regions to about 30 percent (the average non-Most Favored Nation tariff currently applied to imports from Cuba and the Democratic Republic of Korea) and retaliation in kind by major trading partners—the European Union, China, Mexico, Canada, and Japan. The paper then considers four possible responses by developing countries to this trade war: (i) join the trade war; (ii) do nothing; (iii) pursue regional trade agreements (RTAs) with all regions outside the United States; and (iv) option (iii) and unilaterally liberalize tariffs on imports from the United States. The results show that joining the trade war is the worst option for developing countries (twice as bad as doing nothing), while forming RTAs with non-U.S. regions and liberalizing tariffs on U.S. imports (“turning the other cheek”) is the best. The reason is that a trade war between the United States and its major trading partners creates opportunities for developing countries to increase their exports to these markets. Liberalizing tariffs increases developing countries’ competitiveness, enabling them to capitalize on these opportunities.

Since 2014, almost all African countries have experienced an increase in public debt and a change in its nature. The ratio of public debt to GDP has doubled, and sovereign debt is changing from concessional credit provided by official agencies to market-based loans from private institutions. This paper attempts to answer three questions that are being asked with increasing urgency in this setting. First, has the quality of institutions and policies, critical to sustaining higher levels of debt, improved since the debt relief era of the early 2000s? Second, will debt markets get to know emerging Africa well enough before the next crisis? Third, have resolutions of defaults in Africa been orderly so that debtor governments are not herded into traps set by foreign creditors? Our calculations suggest that the answer to all three questions is 'no'. To avoid another debt crisis, the paper recommends preventive measures. The policy responses involve full transparency in debt accounting, greater realism in growth forecasts and diligence in matching the region's seemingly limitless public investment needs with limited long-term development finance and weak public-sector capacity to manage infrastructure investments. More specifically, we recommend that African governments treat increases in commodity prices as temporary-not permanent-shocks; that in deciding how to finance public investment, governments compare the marginal cost of funds from taxation with market terms; and that governments not finance long-term infrastructure projects with short-term money from abroad, regardless of the conditions on which these loans can be contracted.

Globalization—the process by which countries reduce their trade barriers and integrate with the rest of the global economy—has proved to be a contentious issue everywhere. In developed countries, globalization has brought in cheaper imports, but has also been blamed for the decline in manufacturing employment, rising inequality, and, more recently, the surge of populism. In developing countries, the lowering of trade barriers has generally been associated with an increase in the Gross Domestic Product (GDP) growth rate. China and India, the two largest developing countries, experienced a doubling of their growth rates. But other countries, especially those in Latin America and Africa, have seen a decline in their growth rates following globalization. Furthermore, many countries with large pools of low-skilled labor (including India) have not registered the increase in employment that economic theory predicts would accompany trade liberalization. These shortcomings have led many observers to question whether globalization has gone too far: should it be slowed down, or even reversed? In this paper, I make the opposite argument. The problems with globalization have to do with the fact that there has not been enough liberalization, especially of the nontradable sectors (services such as transport, distribution, finance, and telecommunications). The benefits of globalization stem from the fact that it forced monopolies to compete in world markets, breaking down their market power. But this affected the tradable sector only. The nontradable sectors maintained, and in some cases increased, their market power, raising the price of nontradable inputs to the production of tradable goods. Liberalizing the nontradable sector is therefore essential to exports’ becoming competitive in world markets.

On June 1, 2017, President Trump announced the United States'withdrawal from the Paris agreement on climate change. Despite this decision, American firms continued investing in low-carbon technologies and some states committed to tougher environmental standards. To understand this apparent paradox, this paper studies how a weakening of environmental standards affects the behavior of profit-maximizing firms. It finds that a relaxation of emission standards (i) may increase firms'incentives to adopt clean technologies, but not to pollute less; (ii) may negatively affect industry profitability if it is perceived as temporary; and, when this is the case, (iii) the unilateral adoption of stricter standards by large states may increase the expected profitability of every firm.

Since 2014, almost all African countries have experienced an increase in public debt and a change in its nature. The ratio of public debt to GDP has doubled, and sovereign debt is changing from concessional credit provided by official agencies to market-based loans from private institutions. This paper attempts to answer three questions that are being asked with increasing urgency to avoid another debt crisis. First, has the quality of institutions and policies of African countries, critical to sustaining higher levels of debt, improved since the debt relief of the early 2000s? Second, will debt markets get to know emerging Africa well enough before the next crisis? Third, have the resolutions of recent defaults in Africa been orderly so that debtor governments are not herded into traps set by foreign creditors? Our calculations suggest that the answer to all three questions is ‘no’. To avoid another debt crisis, the paper recommends preventive measures that involve full transparency in debt accounting, greater realism in growth forecasts, and diligence in matching the region’s seemingly limitless public investment needs with weak public sector capacity to manage infrastructure investments. More specifically, we recommend that as a rule African governments treat increases in commodity prices as temporary — not permanent — shocks; that in deciding how to finance public investment, governments compare the marginal cost of funds from taxation with market terms of borrowing; and that governments avoid financing long-term infrastructure projects with short-term money from abroad.

During the 2000s, expenditure inequality in Arab countries was low or moderate and, in many cases, declining. Different measures of wealth inequality were also lower than elsewhere. Yet, there were revolutions in four countries and protests in several others. We explain this so‐called “inequality puzzle” by first noting that, despite favorable income inequality measures, subjective well‐being measures in Arab countries were relatively low and falling sharply, especially for the middle class, and in the countries where the uprisings were most intense. The increasing unhappiness, reflected in perceptions of declining standards of living, was associated with dissatisfaction with the quality of public services, the shortage of formal‐sector jobs, and corruption. These sources of dissatisfaction suggest that the old social contract, where government provided jobs, free education and health, and subsidized food and fuel, in return for the subdued voice of the population, was broken. The Arab Spring and its aftermath indicates the need for a new social contract, one where government promotes private‐sector jobs and accountability in service delivery, and citizens are active participants in the economy and society.

This paper develops a dynamic, stochastic, general-equilibrium model to analyze and derive simple budget rules in the face of volatile public revenue from natural resources in a low-income country like Niger. The simulation results suggest three policy lessons or rules of thumb. When a resource price change is positive and temporary, the best strategy is to save the revenue windfall in a sovereign fund and use the interest income from the fund to raise citizens' consumption over time. This strategy is preferred to investing in public capital domestically, even when private investment benefits from an enhanced public capital stock. Domestic investment raises the prices of domestic goods, leaving less money for government to transfer to households; public investment is not 100 percent effective in raising output. In the presence of a negative temporary resource price change, however, the best strategy is to cut public investment. This strategy dominates other methods, such as trimming government transfers to households, which reduces consumption directly, or borrowing, which incurs an interest premium as debt rises. In the presence of persistent (positive and negative) shocks, the best strategy is a mix of public investment and saving abroad in a balanced regime that provides a natural insurance against both types of price shocks. The combination of interest income from the sovereign fund, transfers to households, and output growth brought about by public investment provides the best protective mechanism to smooth consumption over time in response to changing resource prices.

Malgré un corpus important de recherche et de données probantes sur les politiques et les institutions nécessaires pour générer la croissance et réduire la pauvreté, de nombreux gouvernements n’adoptent pas ces politiques ou ne mettent pas en place ces institutions. Les avancées de la recherche depuis les années 1990 ont expliqué ce syndrome que le présent article appelle de façon générique « défaillance de l’État », en termes d’incitations pour les responsables politiques et les institutions politiques sous-jacentes à l’origine de ces incitations. Pour autant, l’aide au développement, qui vise à générer la croissance et à réduire la pauvreté, n’a guère évolué depuis les années 1950, époque à laquelle on pensait que le problème était dû à une défaillance du marché. L’essentiel de l’aide est encore fourni aux États sous forme de financements et de connaissances regroupés au sein d’un « projet ». En s’appuyant sur des études récentes sur les causes politiques de la défaillance de l’État, cet article montre comment l’aide au développement traditionnelle peut contribuer à la persistance des défaillances de l’État. Il propose un nouveau modèle d’aide au développement qui peut aider les sociétés à opérer une transition vers de meilleures institutions. Cet article suggère en particulier que des connaissances soient apportées aux citoyens en vue de renforcer leur capacité à sélectionner les dirigeants qui ont la volonté politique et la légitimité pour fournir les biens publics nécessaires au développement, et à les sanctionner s’ils n’obtiennent pas les résultats attendus. En ce qui concerne les transferts financiers qui, pour diverses raisons, doivent être fournis à l’État, cet article propose qu’ils soient fournis sous forme de paiement forfaitaire (c’est-à-dire non liés à des projets spécifiques), à la condition que l’État suive des politiques globalement favorables et mette l’information à la disposition des citoyens.