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Mid-2018 was a period of intense market volatility and rising economic stress in Turkey that was precipitated by existing macroeconomic imbalances and elevated political tensions with the United Staes. A confluence of burgeoning domestic economic imbalances and a more challenging external environmentled to a dent in investor confidence in Turkish assets and a sharp slowdown in capital flows to Turkey in 2018 Q2-Q3. Though this did not technically amount to a sudden stop, Turkey was particularly badly affected by a general move away from emerging markets (EMDE) due to its accumulated macro imbalances (high current account deficit, high inflation, overheating economy) and perceived policy weaknesses. Market volatility in Turkey has subsided since the turbulence in August, but the economic situation remains fragile. Turkey's large external exposure leaves it vulnerable to further market jitters and external monetary tightening. The external shock in the summer of 2018 also translated into significant real sector impacts, including a sharp acceleration in inflation from already elevated levels. The gap between consumer and producer price inflation widened significantly since July, reflecting suppliers' inability to pass on priceincreases to consumers due to declining demand. High production costs together with slowing demand have prompted supply side adjustments.

Capital Flows --- Economic Growth --- Fiscal Adjustment --- Fiscal and Monetary Policy --- Inflation --- Macroeconomics and Economic Growth

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This Indonesia Economic Quarterly (IEQ) reports on the key developments over the past three months in Indonesia's economy as on January 2017. The return of global policy uncertainty and financial market volatility represent risks to Indonesia's growth outlook. However, Indonesia's recent economic performance and policy reforms can help weather these risks. Gross domestic product (GDP) growth eased in third quarter as government consumption fell. The current account deficit narrowed and direct investment was strong in third quarter. Domestic financial conditions remain robust despite recent global headwinds. Fiscal policy credibility was enhanced through expenditure cuts in 2016 and more realistic revenue targets in the approved 2017 Budget. Baseline projections for real GDP growth remain at 5.1 percent for 2016 and 5.3 percent in 2017. Improving the quality of public spending is critical for Indonesia to achieve its development goals in the short to medium term. Student-centered teaching practices result in better student learning outcomes.

Economic Forecasting --- Economic Growth --- Economic Stabilization --- Finance --- Fiscal & Monetary Policy --- Fiscal Adjustment --- Macroeconomic Management --- Macroeconomics --- Macroeconomics and Economic Growth --- Management

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Repeated attempts at uncovering the relevance of country size for various economic factors have produced discouraging results. The present paper sheds new light on the relevance of country size using micro or firm-level data on firms' experience with the quality of tax administration, an important but neglected element of the business climate. The analysis finds that the quality of tax administration is significantly better for small compared with large countries. The instrumental variables regression method confirms that this finding is robust to various endogeneity concerns. The paper also finds some evidence that the country size and tax administration relationship is non-linear, and much stronger for small than large countries. Implications of these findings for the broader literature on country size are discussed.

Business Climate --- Country size --- Debt Markets --- E-Business --- Emerging Markets --- Fiscal Adjustment --- Macroeconomics and Economic Growth --- Public Sector Development --- Tax Administration --- Taxation & Subsidies

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This paper studies whether budget rigidities affect the probability of countries getting into fiscal distress and reduce the likelihood of governments performing fiscal adjustments. Budget rigidities are constraints that limit the ability of the government to change the size and structure of the public budget in the short term. Budget rigidities stem from different institutional arrangements and therefore can take different forms. To build an indicator of rigid spending that is comparable across a large set of countries, this paper employs a simple definition based on budget components that are naturally inflexible: the sum of public wages, pensions, and debt service. It decomposes this measure into a structural component and a nonstructural component. Then, the paper applies a linear probability model to a panel of 182 advanced and developing countries. A key finding is that relatively high shares of rigid (observed) components of public spending contribute to countries getting into fiscal distress and are a constraint for fiscal consolidation. The paper finds evidence that a relatively high share of nonstructural rigid spending contributes to the probability of fiscal distress and reduces the probability of fiscal consolidation. Moreover, the effect of rigid expenditure seems to be more relevant for economies with high inequality, governments with lower margins of majority, and countries with lower institutional quality. In addition, when looking at the composition of the measure of rigid expenditure, there is also some evidence that higher expenditure on pensions reduces the probability of fiscal adjustment more robustly than higher expenditure on wages.

Budget Rigidity --- Debt Burden --- Fiscal Adjustment --- Fiscal and Monetary Policy --- Fiscal Consolidation --- Fiscal Policy --- Macroeconomics and Economic Growth --- Public Sector Development --- Public Wages

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Barber B. Conable, President of the World Bank, discussed how in Mexico, the decade of the Eighties began with a massive increase in the size of government, its ownership and interventions, and with an unmanageable debt. By the decade's end, Mexico had launched one of the most ambitious, courageous and determined programs of economic reform and institutional change recently undertaken in any country, developed or developing. For those whose incomes were eroded and for those who lost their jobs, these last seven years have been an eternity. But the Government of Mexico is keen to broaden human opportunity and create an efficient and mobile economic structure. The stage is set in Mexico for a resumption of growth and the resultant alleviation of hardship. The Government is aware that the benefits of this development should be distributed widely through emphasis on education and human services. The World Bank shares these goals and expect to contribute to their achievement with analysis, advice, our own funds, and help in mobilizing other sources of finance.

Economic Adjustment and Lending --- Economic Conditions and Volatility --- Economic Growth --- Fiscal Adjustment --- Inequality --- Institutional Change --- Macroeconomics and Economic Growth --- Poverty Reduction