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We study herding in Borsa Istanbul between 2001 and 2016, focusing on the effects of international investors and market volatility. Herding explains 31% of total variability in the cross sectional standard deviation of beta values, controlling for market fundamentals. We perform time-series analysis of a herding index and find that herding increases following increased trading by international investors, but falls with overall trading volume on the market. Herding rises in response to increased volatility, rather than leading to it, against previous arguments. Investors do not herd during economic crises, but following important events that raise political tension in the country.

Bu çalışmada Borsa İstanbul'da 2001 ve 2016 yılları arasında sürü davranışı çalışılmış, ve özellikle uluslararası yatırımcı ve volatilite etkilerine odaklanılmıştır. Sürü davranışı, temel pazar göstergeleri kontrol edildiği durumda, yatay-kesitsel beta değerlerindeki hareketliliğin %31'ini açıklamaktadır. Elde ettiğimiz sürü davranışı endeksinin zaman serisi analizi, sürü davranışının uluslararası yatırımcıların ticaret hacmi ile arttığını, ancak toplam ticaret hacmi ile azaldığını göstermektedir. Sürü davranışı, artan pazar volatilitesi ile artmakta, ancak -yazındaki kimi iddiaların aksine- pazarda bir volatilite artışına neden olmamaktadır. Sürü davranışının ekonomik kriz dönemlerinde artmadığı, ancak ülkede politik gerilimi artıran önemli olaylar sonucunda yükseliş gösterdiği bulunmuştur.

Capital flows to Australian commercial property have been US$67 billion over the 2007-2011 period. This places Australia as the sixth most active property market globally. Using the extensive Real Capital Analytics database, this paper examines these Australian property capital flows in a local, Asia-Pacific and global context. The dynamics of these property capital flows are also assessed by major cities, property type and investor type. Overall, Australia is found to be an important commercial property investment market at both a local, Asia-Pacific and global level, with strong investor support from both domestic and international property investors as part of their property investment strategies. Refereed/Peer-reviewed

The recent reversal of capital flows to emerging markets has pointed up the continuing relevance of the sudden stop problem. This paper analyzes the sudden stops in capital flows to emerging markets since 1991. It shows that the frequency and duration of sudden stops have remained largely unchanged, but that the relative importance of different factors in their incidence has changed. In particular, global factors appear to have become more important relative to country-specific characteristics and policies. Sudden stops now tend to affect different parts of the world simultaneously rather than bunching regionally. Stronger macroeconomic and financial frameworks have allowed policy makers to respond more flexibly, but these more flexible responses have not guaranteed insulation or mitigated the impact of the phenomenon. These findings suggest that the challenge of understanding and coping with capital-flow volatility is far from fully met.

South Asia emerged as the fastest growing region in the world in 2015, posting GDP growth of 7 percent. Weak oil and commodity prices, slowing capital flows and shrinking global trade contributed towards a deceleration of growth in most of the world's economies. South Asia - as a net importer of oil - was an anomaly, growing significantly on the back of higher private consumption and public investment. Higher remittances and reserve buffers throughout the region offset the fall in exports caused by the drop in global demand. The region is set to maintain real GDP growth above 7 percent over the next few years. However, the tailwinds are now fading - capital flows have declined and remittances are starting to feel the reality of low oil prices. Pakistan, while not growing as quickly as its neighbors, has continued its steady growth recovery in H1FY16. Strong growth in consumption, rising foreign exchange reserves, fast-growing workers' remittances and a lower import bill compensated for a significant fall in exports. Low oil prices generated a significant boost, driving a 9.1 percent fall in the import bill and reducing inflation significantly, in turn creating scope to reduce the policy rate. Private sector consumption, propelled by higher remittances and a loosened monetary policy, is expected to account for over half of FY16 GDP growth.

This report sets forth details of a financial recovery plan designed to help Vietnam Electricity (EVN), and the Vietnamese power sector more generally, to address a series of complex and interconnected challenges over the next 3 to 10 years. These challenges are operational and institutional as well as financial, and will lead to fundamental changes over time in the way that EVN and the overall power sector operate.

Ukraines vast needs in infrastructure coupled with a constrained fiscal space require concerted efforts in strengthening public investment management. Investments in infrastructure are important for fostering economic growth. Translating public investments into assets crucially depends on how efficiently all types of public investments are management. The structure to handle PPPs is currently inadequate to access the global PPP market. Since a PPP system needs to be built on the foundations of a workable PIM system, the prospects for Ukraine attracting international standard investments from the global PPP market may appear to be out of reach for the time being. Recent reforming legislation aimed at fixing some of the issues highlighted in the 2012 PIM Assessment is encouraging but much will depend on the effectiveness of the implementation and the capacity of the institutional actors to understand and absorb them. This Assessment must by its very nature capture the situation at the time of the Assessment rather than an expectation of future potential.

The objective of this paper is to understand the factors driving the location decisions of multinational corporations. The paper uses literature-review and expert-interview techniques to understand what cities can do to be best positioned to attract international capital.

Using the universe of all externally issued bonds by corporates and sovereigns in emerging and developing economies during 2000-14, this paper analyzes various issuance trends, including the unprecedented post-crisis surge. The paper focuses on external issuance at the country-industry and individual bond levels and finds that global factors matter greatly for emerging and developing economies issuance. A decrease in U.S. expected equity market (or interest rate) volatility, U.S. corporate credit spreads, and U.S. interbank funding costs and an increase in the Federal Reserve’s balance sheet (i) raise the odds that the monthly issuance volume of a country-industry is above its historical average; (ii) decrease individual bond yields and spreads; and (iii) raise bond maturities, after controlling for country pull factors, bond characteristics (for example, type of issuer, industry, and riskiness). Additionally, we document support that the risk-taking channel of exchange rate appreciation also operates for external bond issuance. Moreover, while the paper finds that country pull factors affect the impact of global factors, it does not find consistent evidence for this across the board. This result suggests that, during loose global funding conditions, flows are mostly driven by push factors and do not systematically discriminate between emerging and developing economies. Taken together, the findings suggest that although issuers might be able to benefit from benign international funding conditions, the large issuance volumes, currency risks, and high exposure to global factors could pose external and domestic challenges for policy makers, particularly when global cycles reverse.

Kenya’s economic performance remains solid, underpinned by strong infrastructure spending and consumer demand, which are driving growth. Growth in 2015 is estimated at 5.4 percent, a 0.6 percent downward revision from its estimate in December 2014. The revision reflects the strong headwinds the economy is facing in the foreign exchange market and the monetary policy response to calm those fears.

This background note is intended to assist debt management offices (DMOs) in assessing whether a bond placement scheme combining auctions and syndications is an appropriate strategy in their markets and, if so, to assist them in designing the corresponding procedures.

This is a book about directorship. More precisely, it’s about nominee directors, who are nominated by IFC and other development finance institutions (DFIs) to the boards of investee companies to fulfill a dual mandate: first, they are expected to perform all the duties and tasks of a board member. Second, they are also charged with improving the corporate governance, sustainability, and ethical behavior of the investee company. This need exists because the empirical evidence indicates that in many developing countries it is nearly impossible to create long-term shareholder value without marked improvements in these areas. This book, based on sound research and real-life examples, offers not only a useful learning platform but also, the authors hope, an entertaining read. It focuses on directorship and leadership skills in the boardroom and does not attempt to cover the whole ‘waterfront’ on corporate governance issues. Many other publications (including some found on the IFC website) deal extensively with the structures, processes, and legal frameworks of corporate governance. The story emphasizes the learning and adapting that must go on for a nominee director to be effective in encouraging change and improvement on the board and in the company. It draws on specific situations to illustrate that IFC rules and instructions cannot always be perfectly followed: the nominee director is in the ‘heat of the battle,’ under time pressure, and confronted with dilemmas and uncertainty that only in hindsight can be structured and analyzed clearly. The target audience of the incredible adventures of Carla is nominee directors, especially those who are newly appointed or candidates who are considering taking on such a role. It aims to expose them to the challenges in the behavioral dimension of corporate governance and to help them learn, through Carla’s experience, the actions and communications that can help them, or not help them, achieve the goals they are committed to.

This article reviews the main issues of regulating and supervising banks in emerging markets with a view toward evaluating the long-run options. Particular attention is paid to Latin America and East Asia. These economies face a severe policy commitment problem that leads to excessive bailouts and potential devaluation of claims of foreign investors. This exacerbates moral hazard and makes a case for importing external discipline (for example, acquiring foreign short-term debt). However, external discipline may come at the cost of excessive liquidation of entrepreneurial projects. The article reviews the tradeoffs imposed by external discipline and examines various proposed arrangements, such as narrow banking, foreign banks and foreign regulation, and the potential role for an international agency or international lender of last resort. Liberalization and integration of financial markets have been associated with an increase in capital movements and with the financial crises. In particular, surges in foreign short-term debt have been blamed for crisis episodes in emerging economies in Asia (Thailand, Indonesia, and the Republic of Korea) and Latin America (Mexico, Brazil, Ecuador, and Argentina), as well as in the periphery of Europe (Turkey). These crises have proved costly in terms of output. Several policy responses have been suggested. Among them have been the reduction of short-term debt, the development of stock markets, the improved regulation and supervision of domestic financial system, enhanced transparency requirements and market discipline, and the establishment of an international lender of last resort. A catalog of “solutions” has been proposed to take care of the problems of banking in emerging market economies including moving to a narrow bank system, building a currency union, and leaving banking in the hands of foreign banks and offshore institutions. This article identifies policy responses tailored to the needs of emerging market and developing economies. The question is whether the regulatory policies and

This Report on Observance and Codes-Accounting and Auditing (ROSC-A&A) assesses the corporate sector accounting, financial reporting, and auditing practices in Jamaica. It builds on its predecessor, a 2003 ROSC-A&A, and its aims to assist the Government of Jamaica's efforts to strengthen accounting and auditing practices and to enhance financial transparency in the corporate sector, so as to support the Government's economic reform program and provide greater confidence to current and potential investors with respect to the financial reporting environment. Jamaica has embarked on an economic reform program whose main objectives are to contain the country's growing economic and external vulnerabilities and address economic imbalances, while putting the country on a path to sustainable growth. Important reforms include: (a) strengthening public finances, including through comprehensive tax reform, expenditure rationalization, and improved public debt management and public financial management; (b) enhancing the resilience of the financial sector through strengthened supervisory, regulatory, and crisis-management frameworks; and (c) improving growth generating efficiency through enhancements to the business environment and strengthened institutional capacity and governance.

The auditing profession in Chad is characterized by the existence of numerous practitioners who provide accounting and auditing services illegally, in violation of community regulations, and whose qualifications often do not meet the international standards. To date, Chad has not yet set up a national association of chartered accountants. One of the most pressing areas in transposing community texts relates to the establishment of a national association of chartered accountants, whose existence is essential for the development and practice of the accountancy profession in Chad. It is also important for consolidating accounting and auditing processes, improving the quality of financial reporting, facilitating access to credit and supporting foreign direct investors, as well as improving the competitiveness of national businesses. With regard to the accounting standards, the Uniform Act (UA) organizing and harmonizing accounting systems for businesses, as well as the accounting chart of accounts and the provisions put in place by the Commission Bancaire d'Afrique Centrale (COBAC) and the Conference Interafricaine des Marches d'Assurances (CIMA) code, there has been very little change since their entry into force towards the end of the 1990s. This is due to shortcomings in the functioning of the regional bodies in charge of ensuring that these texts were updated in line with changes in the accounting, economic, and legal fields. Looking ahead, the major areas of focus in seeking to strengthen the legal and regulatory framework governing accountancy and auditing professions in Chad are the following: (i) the reclassification of CEMAC licensed accounting technicians in Chad in the category of public accountants, in accordance with community regulations, (ii) the establishment of a national association of chartered accountants, (iii) the proper functioning of the national accounting standards commission, (iv) the adoption of auditing professional standards and a code of ethics in line with those established by International Federation of Accountants, or IFAC independent standard-setting board, (v) the strengthening of initial training through the improvement of the quality of the national curriculum and by drafting a continuous professional training plan, and (iv) the capacity building of the Court of Accounts to enable it implement INTOSAI auditing standards in order to ensure proper supervision of public enterprises.

This issue includes the following headings: infrastructure - A new direction for New Zealand schools, Primary schools, primary importance, Sustainable school buildings, and PPPs build the future; services - A charter for change, vouching for the future, Low fees, high hopes, Private schools for the poor, and Governments and business schools; innovation - Education for the 21st century, Access for all, Bricks and clicks, Open education goes the distance, Grading teachers, M is for mobile, Online learning; and interviews - Michelle Rhee, Emily Lawson, and Arne Duncan.

The correlation between equity returns and currency returns affects the risk of international equity portfolios. We analyze the equity index and currency returns of 53 countries and find that correlations are mainly positive. Negative correlations are found for currencies which play a special role in the global financial system like the US dollar, the Japanese yen, the British pound, the euro and the Swiss franc. Correla- tions generally increased in recent years and are often larger in extreme equity market conditions. In addition, empirical evidence for an equilibrium relationship between equity returns and currency returns - Uncovered Equity Parity - is only found for a small group of countries. For the majority of countries exchange rates increase the risk of international equity portfolios. JEL classification: F23; F31; G15

Kenya withstood another difficult year in 2012 as policy tightening and weaker global demand slowed economic activity. With decisive fiscal and monetary policies, the government managed to restore confidence in Kenya's medium term prospects. Kenya's growth rate is still below its potential and its peers, external imbalances remain which threaten its future growth, and the pace of economic growth is not generating enough modern sector wage jobs. With the passage of the new constitution in 2010 and its implementation, stronger institutions are emerging, putting Kenya on a sound footing ready to take off. In the very short term, what remains to be done is for Kenya to deliver a credible and peaceful election in March 2013, and thereafter a smooth transfer of power. In the medium term, Kenya will need to start building a stronger foundation for growth, and undertake structural reforms to correct the external imbalances. To generate more jobs for the burgeoning educated youth population, Kenya will also need to reduce the transaction cost for firms, by reducing job-smothering corruption and the cost of doing business (particularly in transport and energy).

The Central America region is a small market. The region contains around 43 million inhabitants (0.6 percent of total world population) who generate around 0.25 percent of the world's Gross Domestic Product (GDP). While the region has successfully embarked on a regional integration agenda and has strong commercial links with the US, extra-regional trade-mainly with large fast-growing emerging economies-remains a challenge. Export performance is analyzed along three dimensions that, together, give a fairly comprehensive picture of competitiveness: 1) the composition, orientation and growth of the export basket; 2) the degree of export diversification across products and markets; and 3) the level of sophistication and quality of their main exports. This analysis allows exports dynamics at the different margins of trade (intensive, extensive, and quality) to be evaluated and individual countries' to be benchmarked with peers in the Central American region. The results of this report allow policy makers to identify key areas to explore in the overall discussion of export competitiveness in the Central American region. This paper relates to the literature on challenges and opportunities that trade liberalization can bring to the Central American region. Much of the recent literature focuses on the role of the free trade agreement negotiated by Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua, with the US.

Real gross domestic product (GDP) growth has slowed to a nine year low of 6.5 percent for FY2011-12, from 8.4 percent in the two previous years. The slowdown was most pronounced in the industrial sector, and more specifically in manufacturing and mining. In the quarter ending in June 2012, industrial output growth as measured by the Index of Industrial Production (IIP) has been negative. The contraction was particularly pronounced in the production of capital goods, which is in line with falling investment demand on the expenditure side of the National Accounts. The current account deficit reached a record 4.2 percent of GDP in FY2011-12, because of decelerating export growth and high crude prices. Merchandise exports grew by 41 percent in September 2011, but their growth slowed to 2 percent by August 2012 (measured as 12-months cumulative exports compared with the same 12 months of the previous year). Inflation reached 7.6 percent in August 2012. This represents a marked slowdown since September 2011, but there has been an uptick in food prices in recent months. Also, higher domestic prices for fuel, which are necessary to rein in spending on subsidies, will contribute to inflationary pressure. Inflation is therefore expected to reach 8 percent at end-March 2013. Real GDP growth is forecast to reach around 6.0 percent in FY2012-13, after 5.3 percent growth Q4 of FY2011-12 and 5.5 percent growth in Q1 of FY2012-13. The slowdown is at least partly caused by structural problems. These include power shortages, which are partly caused by the financial difficulties facing the electricity sector as discussed in the special topic section of this update, the corruption scandals that have hit the mining and telecom sectors, investor uncertainty because of pending changes in legislation (mining, taxes, land acquisition), and the tightening constraints of land and infrastructure. Tighter macroeconomic policies, slow growth in the core Organization for Economic Co-operation and Development (OECD) countries, and worries about another global recession also weigh on growth. Important signals to revive domestic growth drivers to lift sentiment more than produce instant efficiency gains could come from reforms recently announced and, more importantly, the reform of direct taxes, the implementation of the long-delayed Goods and Services Tax (GST), and passage of the land acquisition and mining bills. This update also looks closely at two important topics for medium- and long-term growth, namely India's Right to Education (RTE) Act, which aims to shape elementary education, and the financial difficulties in the Indian power sector.

This paper focused on the delivery mechanisms for bilateral, multi-lateral, host government subsidy, and consumer cross-subsidy funding to enhance private sector investment. However, the specific source of funds is not deemed to be especially relevant for the purposes of this working paper. Focus on some of the useful characteristics of Output-Based Aid (OBA) experience to date that may be relevant. Propose an option for how OBA experience could be used to deliver national and programmatic supports to projects in middle- and low-income countries in coordination with other multi-lateral development bank instruments such as concessional loans and credits. This working paper does not: specifically address strengths and weaknesses of the clean development mechanism and only briefly touches on issues with using carbon finance in the current market. Carry out an assessment of experience with feed-in tariffs or advanced market commitments, or indeed other results orientated schemes.

Air and sea transport power the global economy. Since the vast majority of trade is physical, it must travel by plane or ship to reach its market. In fact, high value, time-sensitive goods usually fly through at least two airports, and almost every container passes through at least two seaports. When ports are efficient, people receive the goods theyre waiting for, sellers receive payment, and global economic development is strengthened. Public-private partnerships (PPPs) push this development forward with greater speed and richer benefits. In this issue, handshake turns its attention to air and sea transport (expect a companion issue on road and rail in October 2012). In the air, we deconstruct myths surrounding airport PPPs, learn brutally honest lessons from experiences in airline privatization, and revisit the liberalization of African skies. For seaports, the authors examine private investment, glimpse the post concession era, and witness the PPP evolution.

Kenya is entering a decisive year. Three main developments will make 2012 extraordinary. First, Kenya will hold national elections for the first time since the traumatic post-election violence of 2007-08, which ended Kenya's high growth momentum abruptly. Second, Kenya's economy will need to navigate through a severe economic storm, which could well become a hurricane, especially if Europe enters into a recession. Third, the country will implement its most ambitious governance reforms ever, namely the devolution of responsibility to forty-seven new counties. Kenya's policy makers will need to display tremendous skill and steadfast leadership in order to balance the need for fiscal prudence, with ensuring that resource flows to new local governments are sufficient to meet their needs. High expectations of the promise of devolution need to be met by equally high quality planning and execution of its delivery. Kenya will enter 2012 from a weaker-than expected economic position. Kenya's economy is navigating rough economic waters, where existing structural weaknesses have been compounded by short-term shocks. The most visible sign of Kenya's economic challenge is the depreciating shilling, which reached an all time low against the US Dollar in October 2011. The elements behind this situation are high international food and fuel prices, the drought compounded by conflict in the horn of Africa, the Euro crisis, widening fiscal and current account deficits, and major inefficiencies in Kenya's agriculture sector. The recent developments are also undermining one of Kenya's main strengths over the last decade: the credibility and predictability of its macroeconomic policies.

Afghanistan's economy is growing strongly. The growth drivers in recent years have been above-average agricultural production, strong growth in construction and transportation, and security spending enabled by large aid flows, especially in FY2009/10. Real Gross Domestic Product (GDP) growth reached 8.4 percent in FY2010/11. Afghanistan's fiscal position is strengthening. In the last three years revenues grew by an average of 34 percent p.a., thanks to improvements in customs and tax administration. Larger increases are expected once mining operations and with the introduction of a value-added tax in FY2014/15. However, government expenditures will also increase in the coming years due to higher security spending, the roll out of pay-and-grading reforms for the civil service, rising recurrent obligations from large donor-supported projects (including those financed outside of the core budget) and the fiscal costs of the Kabul Bank bail-out. The first phase of the handover of security responsibilities to Afghan national security forces in six locations has been completed.

Indonesia's economic performance through mid-2011 has been positive. Solid growth has been accompanied by further portfolio capital and foreign direct investment inflows. Public and financial sector balance sheets remain strong. However, events over the past quarter serve as a reminder of a number of Indonesia's ongoing policy challenges. At the same time, the launch of the government's master plan 2011-2025 has focused attention on the investments and policy reforms which can help Indonesia reach its future growth potential. Finally, heightened international risk aversion originating from the Greek debt crisis, and the potential market implications of any haircut, were it to occur, are a reminder of the external shocks which could prompt reversals of short-term capital flows to Indonesia. However, events over the past quarter are a reminder of the current challenges which are faced and the need to put in place, and implement, the policies and investments necessary for Indonesia to reach its potential as a leading global growth driver of the next few decades.

Mongolia's prospects in the medium term look excellent from a growth perspective as well as a fiscal management perspective. Staying the course in the medium term means implementing the landmark Fiscal Stability Law (FSL) passed last year, and adopting a supportive integrated budget law this spring session of parliament. The economy grew 6.1 percent year-on-year (yoy) in 2010, following a contraction of 1.3 percent in 2009. The last quarter of 2010 ended with a broad-based recovery, supported by transportation, construction and wholesale and retail trade. The latest survey conducted in informal labor markets in March 2011 revealed no changes in the total number of casual workers compared to December. Mongolia has promising growth prospects. It has the opportunity now to exercise prudent fiscal and macroeconomic policies so it can steer clear of the mistakes made by other resource rich economies and achieve its potential.

This study begins by considering the banking sector and then moves on to issues relating to improving access to finance to support Nigeria's economic growth vision. The second part of the study refers to issues relating to longer-term finance: both the sources of financing, such as pensions and insurance, and their uses in providing financing for resolving Nigeria's crucial infrastructure shortfalls in infrastructure and housing. The final part of the study returns to the fundamental 'plumbing' of the financial system focusing on the legal and regulatory foundation for creditor rights and corporate insolvency, instituting sound corporate governance standards for corporations and banks, and providing secure and low cost transmittal of payments and remittances. While it is difficult to identify a common theme running through this volume without compromising the diversity and nuance of the recommendations, the overarching theme supported by this volume is the importance of exchange of reliable information as the basis for financial transactions between unconnected third parties. Implementation of systems designed to strengthen accounting and reporting standards for banks and corporations, the registration of movable and immovable property, property liens and credit histories as well as exchange of information about prices, interest rates, fees and charges for financials services will considerably enhance the functionality of financial systems and prove crucial in establishing a trusted and robust market-based financial system in support of stable economic growth and development in Nigeria.

Many countries are convinced that Foreign Direct Investment (FDI) should be an important component of their growth strategy. To encourage FDI, they have improved their business climates, developed various guarantees for investors, and offered incentives. In the real world, Investment Promotion Intermediaries (IPIs) face tight budget and human resource constraints. Allocating scarce resources among the various possible activities is a major component of developing an effective promotion strategy. Research, including that covered in this report, suggests that many IPIs are failing to devote enough attention to the most basic-and least costly-promotion function, one that, if it fails, undermines all other promotion activities. Provision of services to potential investors-and particularly the provision of information-is basic to all promotion. Image-building efforts can be hugely expensive. Similarly, targeted missions and personal selling are costly in terms of both time and effort. FDI offers the prospects of growth and jobs to host countries, but attracting it requires a good deal of effort. Effective investment promotion is not only less costly than adding on more incentives for investors; reform and incentives are unlikely to accomplish their goals without promotion. Promotion efforts will, however, fail to attract desired investment if IPIs are not skilled at the most basic function: collecting and providing to potential investors relevant and timely information. Ensuring that this function works well should be the top priority in the promotion strategy and in the development of management systems.

While diversification of exports is often a desirable trade objective, it is far from clear how best to tap into new opportunities. This paper discusses the range of avenues of diversification, including (i) expanding the range of markets into which existing products are sold (geographic diversification); (ii) upgrading the value of existing products, including agricultural exports (quality diversification); and (iii) taking advantage of opportunities to expand non-merchandise exports (services diversification), in addition to introducing entirely new export products. All offer opportunities for cost?effective positive policies relating to the incentive regime, backbone services, and export support institutions.

Rapid growth since 1980 has transformed India from the world's 50th ranked economy in nominal U.S. dollars to the 10th largest in 2005. The growth of per capita income has helped reduce poverty. At the same time, evidence suggests that income inequality is rising and that the gap in average per capita income between the rich and poor states is growing. This paper reviews India's long term growth experience with a view to understanding the determinants of growth and the underlying political economy. The paper looks specifically at the political economy of India's growth transformation from a low-growth environment (pre-1980s) to a rapid-growth environment (post 1980s) and asks how sustainable is this transformation in view of concerns about regional disparity and income inequality. The paper concludes that the pledge that India's post-independence leadership had undertaken to abolish mass poverty remains only partially redeemed. Half the battle still lies ahead. Many more would like the fruits of the economic boom to come to them. The greatest challenge for India's policy makers today is to balance the growth momentum with inclusionary policies.

The article studies the process of financial globalization. The major objective is to study the main paradoxes of financial globalization – the phenomenon of “home bias” and the paradox of "Feldstein-Horioka". Assessment of the paradoxes of financial globalisation is especially important during depression periods, which are taking place in the world economy, because their analysis makes it possible to evaluate the stage of development of the globalisation process as well as its ability to develop even under the conditions of economic depression. The study results in stating that international financial crises of the 1990s did not affect the international investors' confidence in the perspectives of financial globalization. It is proved by the growing mobility of international investment capital and also by the investors' wish to diversify the portfolio of securities by purchasing securities issued in different countries. Apparently, under such conditions financial crises can be considered an additional powerful stimulus for financial globalization rather than a barrier for its development. У статті досліджується процес фінансової глобалізації. Основна мета полягає в тому вивчити основні парадокси фінансової глобалізації - феномен "домашнього зміщення" і Парадокс "Фельдштейн-Horioka". Оцінка парадоксів фінансової глобалізації особливо важливо в періоди депресії, які відбуваються у світовій економіці, так як їх аналіз дозволяє оцінити стадію розвитку процесу глобалізації, як а також його здатність до розвитку навіть в умовах економічної депресії. результати дослідження в якому говориться, що міжнародні фінансові кризи 1990-х років не чинили впливу на міжнародні інвестори " впевненість у перспективах фінансової глобалізації. Це підтверджується зростаючою мобільності міжнародного інвестиційного капіталу, а також за бажанням інвесторів диверсифікувати портфель цінних паперів шляхом придбання цінних паперів, випущених в різних країнах. Мабуть, в таких умовах фінансового кризи можна вважати додатковим потужним стимулом для фінансової глобалізації, а не бар'єр для його розвитку.

The author's 1982 article on the fallacy of composition questioned the feasibility of generalizing the "G4" (Hong Kong (China), the Republic of Korea, Singapore, and Taiwan (China)) growth model based on rapid growth of exports, on grounds that if all developing economies pursued it, their combined manufactured exports would eventually trigger protection in industrial countries. The1984 book of author identified a safe speed limit of about 10-15 percent annually for growth of developing country exports of manufactures, well below the 25-35 percent rate of Korea and Taiwan, China in the 1960s and 1970s. This study revisits this question in the light of a quarter-century of experience. It finds that developing countries' aggregate manufactured exports grew at about 10 percent annually, a robust pace but within the speed limits he had envisioned. Even so, in key sectors such as apparel, import penetration levels have exceeded thresholds that his earlier estimates would have suggested would provoke protection, suggesting the importance of increased World Trade Organization (WTO) discipline. The base of manufactured exports from poor countries remains small relative to that of China and the original G4, so there should be considerable room for export growth from these newcomers. However, a new macroeconomic version of the fallacy of composition problem could arise: the growing tendency of China and some other major emerging market economies to pursue rapidly rising trade surpluses that have their counterpart in an increasingly unsustainable U.S. current account deficit.

International mutual funds are one of the main channels for capital flows to emerging economies. Although mutual funds have become important contributors to financial market integration, little is known about their investment allocation, and strategies. The authors provide an overview of mutual fund activity in emerging markets. First, they describe international mutual funds' relative size, asset allocation, and country allocation. Second, they focus on fund behavior during crises, by analyzing data at the level of both investors, and fund managers. Among their findings: Equity investment in emerging markets has grown rapidly in the 1990s, much of it flowing through mutual funds. Collectively, these funds hold a sizable share of market capitalization in emerging economies. Asian, and Latin American funds achieved the fastest growth, but are smaller than domestic U.S. funds and world funds. When investigating abroad, U.S. mutual funds invest more in equity than in bonds. World funds invest mainly in developed nations (Canada, Europe, Japan, and the United States). Ten percent of their investment is in Asia, and Latin America. Mutual funds usually invest in a few countries within each region. Mutual fund investment was very responsive to the crises of the 1990s. Withdrawals from emerging markets during recent crises were large, which squares with existing evidence of financial contagion. Investments in Asian, and Latin American mutual funds are volatile. Because redemptions, and injections are large, relative to total funds under management, fund's flows are not stable. The cash held by managers during injections, and redemptions does not fluctuate significantly, so investors' actions are typically reflected in emerging market inflows, and outflows.

Despite a trend toward more flexible rates, more than half the world's countries maintain fixed or managed exchange rates. In the 1980s and 1990s, developing countries as a group progressively liberalized their trade regimes, but some governments defend their exchange rate in actions that run counter to long-run plans for liberalization. Without discussing the relative merits of fixed and flexible exchange rate systems, the authors note that exchange rate management in many countries has resulted in overvaluation of the real exchange rate. Roughly twenty five percent of the countries for which data are available have overvalued exchange rates, with black market premiums from 10 percent to more than 100 percent. After surveying the literature, the authors present lessons from experience about what has worked (or not) in response to crises involving external shocks and external trade deficits - and why. Trying to defend an overvalued exchange rate with protectionist trade policies is a classic pattern, but experience shows such protection does significantly retard the country's growth, and delay its integration into the world trading community. In fact, and overvalued exchange rate is often the root cause of protection, preventing the country from returning to more liberal trade policies that allow growth and integration into the world community without exchange rate adjustment. Most developing countries have downward price and wage rigidities and, with an external trade deficit, require some form of nominal exchange rate adjustment to restore external equilibrium. The authors present cross-country econometric and case study evidence - citing examples from Argentina, Chile, Ghana, the Republic of Korea, Malaysia, Turkey, Uruguay, and Sub-Saharan Africa (including the CFA zone) - that overvalued exchange rates reduce economic growth. Defending the exchange rate, they show, has nor no medium-term benefits, since falling reserves will eventually force devaluation. Better to have devaluation occur without further debilitating losses in reserves and lost productivity because of import controls. After devaluation the exchange rate will reach a new equilibrium, strongly influenced by government and central bank policies.

Among 51 countries studied, there are large regional differences in the proportion of private wealth held abroad, ranging from 3 percent in South Asia to 39 percent in Africa. Three variables explain capital flight in Africa: exchange rate overvaluation, adverse investor risk ratings, and high indebtedness. Collier, Hoeffler, and Pattillo examine flight capital in the context of portfolio choice. They estimate the stock of flight capital held abroad and compare it with the stock of real (nonfinancial) capital held within each country. For 51 countries, they construct estimates (as of 1990) of private domestic capital and flight capital - which combined add up to domestic wealth. There are large regional differences in the proportion of private wealth that is held abroad, ranging from 3 percent in South Asia to 39 percent in Africa. They explain differences in portfolio choice in terms of the capital to labor ratio, indebtedness, exchange rate distortions, and risk ratings-all proxies for differences in the risk-adjusted rate of return on capital. They then apply the results to four policy questions in which private portfolio choices are potentially important: the effect of the East Asian crisis on domestic capital outflows; spillovers; the effect of HIPC debt relief on capital repatriation; and why Africa has so much of its private wealth outside the continent. Their conclusions: The four most severely affected East Asian countries will eventually lose about $250 billion in domestic wealth as a result of the deterioration in risk between March 1997 and September 1998. They found some support for a spillover model. The effect of the HIPC debt relief initiative on capital repatriation will vary massively between HIPC-eligible countries. Africa has by far the lowest capital per worker, which makes massive capital flight from Africa all the more distinctive. Three variables explain capital flight in Africa: exchange rate overvaluation, adverse investor risk ratings, and high indebtedness. This paper-a joint product of the Development Research Group and the International Monetary Fund-is part of a larger effort to understand how growth in low income countries can be increased. Paul Collier may be contacted at pcollier@worldbank.org.