Is a country’s ability to enforce contracts an important determinant of comparative advantage? To answer this question, I construct a variable that measures, for each good, the proportion of its intermediate inputs that require rela-tionship-specific investments. Combining this measure with data on trade flows and judicial quality, I find that countries with good contract enforcement specialize in the production of goods for which relationship-specific investments are most important. According to my estimates contract enforcement explains more of the pattern of trade than physical capital and skilled labor combined.

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Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. In addition, differential effects are stronger in developing countries, in countries with less access to foreign finance, and where banking crises are more severe. We examine a number of government interventions during crises, and find that blanket guarantees and regulatory forbearance work best in limiting the effect of banking crises on real activity. * We wish to thank Eisuke Okada for outstanding research assistance. This paper should not be reported as representing the views of the IMF. The views expressed are those of the author and do not necessarily reflect the views of the IMF or IMF policy.- 2-I.

We analyze the likelihood of government bailouts in a sample of 450 politically-connected (but publicly-traded) firms from 35 countries over the period 1997 through 2002. We find that politically-connected firms are significantly more likely to be bailed out than similar non-connected firms. Additionally, politically-connected firms are disproportionately more likely to be bailed out when the IMF or World Bank provide financial assistance to the firm’s home government. Further, among firms that are bailed out, those that are politicallyconnected exhibit significantly worse financial performance than their non-connected peers at the time of the bailout and over the following two years. This evidence suggests that, at least in some countries, political connections influence the allocation of capital through the mechanism of financial assistance when connected companies confront economic distress. It may also explain prior findings that politically-connected firms borrow more than their non-connected peers.

Notes: Center Discussion Papers are preliminary materials circulated to stimulate discussions and critical comments. We thank seminar participants at Yale University and Joe Altonji, Eileen Brooks, and Valery Lazarev for helpful comments and suggestions. Fairlie was partially funded by the William T. Grant Foundation. The views contained herein are solely those of the authors, and do not necessarily represent those of the institutions with which the authors are associated. Menzie D.

I thank Norovsambuu Tumennasan for excellent research assistance, and Murat Iyigun, Patrick Emerson and Erdal Tekin for helpful comments.

The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. There is still little robust evidence of the growth benefits of broad capital account liberalization, but a number of recent papers in the finance literature report that equity market liberalizations do significantly boost growth. Similarly, evidence based on microeconomic (firm- or industry-level) data shows some benefits of financial integration and the distortionary effects of capital controls, while the macroeconomic evidence remains inconclusive. At the same time, some studies argue that financial globalization enhances macroeconomic stability in developing countries, while others argue the opposite. We attempt to provide a unified conceptual framework for organizing this vast and growing literature, particularly emphasizing recent approaches to measuring the catalytic and indirect benefits to financial globalization. Indeed, we argue that the indirect effects of financial globalization on financial sector development, institutions, governance, and macroeconomic stability are likely to be far more important than any direct impact via capital accumulation or portfolio diversification. This perspective explains the failure of research based on crosscountry growth regressions to find the expected positive effects of financial globalization and points to newer approaches that are potentially more useful and convincing. Kose, Prasad and Wei are in the IMF’s Research Department. Rogoff is at Harvard University. We are grateful for helpful comments from numerous colleagues and participants at various seminars where earlier versions of this paper were presented. We are especially grateful to Roger Gordon and three anonymous referees whose comments have helped sharpen the exposition. Lore Aguilar, Cigdem Akin, Dionysios Kaltis and Ashley Taylor provided excellent research assistance. The views expressed in this paper are solely those of the authors and do not necessarily reflect those of the IMF or IMF policy. 1 I.

Africa’s development crisis is unique. Not only is Africa the poorest region in the world, but it was also the only major developing region with negative growth in income per capita during 1980–2000 (table 1). Some African countries grew during the 1990s, but for the most part this growth recovered ground lost during the 1980s. Moreover, Africa’s health condi-tions are by far the worst on the planet. The AIDS pandemic is wreaking havoc, as is the resurgence of malaria due to rising drug resistance and the lack of effective public health systems. Africa’s population continues to soar, adding ecological stresses to the economic strains. Policy-based development lending to Africa over the past twenty years, known as struc-tural adjustment lending, did not solve the problem. A heavy debt burden is evidenced by the 155 Paris Club restructurings of African countries’ debt between 1980 and 2001, much more than for any other region. In general, Africa remains mired in poverty and debt. This paper focuses on the tropical sub-Saharan African countries with populations of at least 2 million people in 2001. We leave out North Africa

Why so many people pay their taxes, even though fines and audit probability are low, is a central question in the tax compliance literature. Positing a homo oeconomicus having a refined motivation structure sheds light on this puzzle. This paper provides empirical evidence for the relevance of conditional cooperation, using survey data from 30 West and East European countries. We find a high correlation between perceived tax evasion and tax morale. The results remain robust after exploiting endogeneity and conducting several robustness tests. We also observe a strong positive correlation between institutional quality and tax morale.

Consistent with the provocative hypothesis of Engerman and Sokoloff (1997, 2000), this paper confirms with cross-country data that agricultural endowments predict inequality and inequality predicts development. The use of agricultural endowments –specifically the abundance of land suitable for growing wheat relative to that suitable for growing sugarcane-- as an instrument for inequality is this paper’s approach to problems of measurement and endogeneity of inequality. The paper finds inequality also affects other development outcomes – institutions and schooling –which the literature has emphasized as mechanisms by which higher inequality lowers per capita income. It tests the inequality hypothesis for development, institutional quality and schooling against other recent hypotheses in the literature. While finding some evidence consistent with other development fundamentals, the paper finds high inequality to independently be a large and statistically significant barrier to prosperity, good quality institutions, and high schooling.