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Natural resources are being discovered in more countries, both rich and poor. Many of the new and aspiring resource exporters are low-income countries that are still receiving substantial levels of foreign aid. Resource discoveries open up enormous opportunities, but also expose producing countries to huge trade and fiscal shocks from volatile commodity markets if their exports are highly concentrated. A large literature on the "resource curse" shows that these are damaging unless countries manage to cushion the effects through countercyclical policy. It also shows that the countries least likely to do so successfully are those with weaker institutions, and these are most likely to remain as clients of the aid system. This paper considers the question of how donors should respond to their clients' potential windfalls. It discusses several ways in which the focus and nature of foreign aid programs will need to change, including the level of financial assistance. The paper develops some ideas on how a donor like the International Development Association might structure its program of financial transfers to mitigate volatility. The paper outlines ways in which the International Development Association could use hedging instruments to vary disbursements while still working within a framework of country allocations that are not contingent on oil prices. Simulations suggest that the International Development Association could be structured to provide a larger degree of insurance if it is calibrated to hedge against large declines in resource prices. These suggestions are intended to complement other mechanisms, including self-insurance using Sovereign Wealth Funds (where possible) and the facilities of the International Monetary Fund.

Climate Change Economics --- Countercyclical Measures --- Debt Markets --- Economic Theory & Research --- Emerging Markets --- Finance and Financial Sector Development --- Foreign Aid --- Hedging --- Low-Income Countries --- Macroeconomic Stabilization --- Macroeconomics and Economic Growth --- Markets & Market Access --- Natural Resources --- Private Sector Development --- Volatility

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The author applies a systems-oriented "holistic" approach to China's radical economic reforms during the past quarter of a century. He characterizes China's economic reforms in terms of a multidimensional classification of economic systems. When looking at the economic consequences of China's change of economic system, he deals with both the impressive growth performance and its economic costs. The author also studies the consequences of the economic reforms for the previous social arrangements in the country, which were tied to individual work units-agriculture communes, collective firms, and state-owned enterprises. He continues with the social development during the reform period, reflecting a complex mix of social advances, mainly in terms of poverty reduction, and regresses for large population groups in terms of income security and human services, such as education and, in particular, health care. Next, the author discusses China's future policy options in the social field, whereby he draws heavily on relevant experiences in industrial countries over the years. The future options are classified into three broad categories: policies influencing the level and distribution of factor income, income transfers including social insurance, and the provision of human services.

Agriculture --- Banks and Banking Reform --- Capital --- Cred Development --- Debt Markets --- Economic Performance --- Economic Reforms --- Economic Systems --- Economic Theory and Research --- Emerging Markets --- Finance and Financial Sector Development --- Financial Literacy --- GDP --- Growth Rate --- Health, Nutrition and Population --- Income --- Industrial Economics --- Influence --- Interest --- International Trade --- Investment and Investment Climate --- Labor Policies --- Macroeconomic Stabilization --- Macroeconomic Stabilization Policy --- Macroeconomics and Economic Growth --- Microfinance --- Mixed Economy --- Outcomes --- Ownership --- Population Policies --- Poverty Reduction --- Private Sector Development --- Pro-Poor Growth --- Production --- Social Protections and Labor

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The number of national export promotion agencies has tripled over the past two decades. Although more countries made them part of their export strategy, studies criticized their efficacy in developing countries. The agencies were retooled, partly in response to these critiques. This paper studies the impact of today's export promotion agencies and their strategies, based on new survey data covering 103 developing and developed countries. The results suggest that on average they have a statistically significant effect on exports. The identification strategies highlight the importance of EPA services for overcoming foreign trade barriers and solving asymmetric information problems associated with exports of heterogeneous goods. There are also strong diminishing returns, suggesting that as far as export promotion agencies are concerned, small is beautiful.

Asymmetric information --- Bilateral trade --- Budgetary support --- Capacity building --- Consumer preferences --- Consumers --- Debt Markets --- Diminishing returns --- Economic justification --- Economic Theory and Research --- Emerging Markets --- Exports --- Externalities --- Finance and Financial Sector Development --- Free Trade --- GDP --- GDP per capita --- International Economics & Trade --- International Trade --- ITC --- Macroeconomic stabilization --- Positive externalities --- Private Sector Development --- Public Sector Development --- Returns to scale --- Statistical analysis --- Technical assistance --- Trade barriers --- Trade Policy

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This paper contributes to the analysis of spatial poverty in Ecuador by deepening the understanding of the constraints faced by the poor in the country through an investigation of the role of portable characteristics (human capital) and geography in explaining welfare. At the national level, the results indicate that these characteristics explain 72 percent of the differences in welfare level between urban and rural areas, while returns to these characteristics account for 28 percent of the difference. Comparing a leading and a lagging region, such as the coast versus the Amazon, the characteristics explain about 90 percent of the welfare differential in urban areas, while the returns explain about 30 percent of the welfare differential in rural areas. Among the characteristics analyzed, education is the most important variable for explaining differences in living conditions between urban and rural areas in Ecuador.

Economic growth --- Economic shocks --- Extreme poverty --- Health, Nutrition and Population --- Human capital --- Income --- Inequality --- Macroeconomic stabilization --- Poor --- Poor areas --- Poor households --- Population Policies --- Poverty Assessment --- Poverty line --- Poverty Lines --- Poverty Reduction --- Poverty reduction strategies --- Regional Economic Development --- Rural --- Rural areas --- Rural Development --- Rural poverty --- Rural poverty rate --- Rural Poverty Reduction --- Rural sector --- Sanitation

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Transition literature has emphasized stabilization and enterprise restructuring. Both cross-country analyses and country-specific studies have tended to focus on fiscal stabilization and its indicators, highlighting the importance of quantitative fiscal adjustment to stabilization outcomes. Less attention has been paid to the qualitative dimensions of fiscal adjustment in transition. Alam and Sundberg take stock of the extent to which fiscal adjustment has occurred during the first decade of transition in both qualitative and quantitative dimensions. They define quality as the extent to which: (1) pro-growth expenditure essential for creating future economic and social assets are maintained; (2) pro-poor expenditure, such as poverty-targeted transfers, necessary to ensure income for the poor and vulnerable are adequately provided; and (3) fiscal risks, impinging on both expenditure and revenue, are managed through transition. The authors conclude that while the quantitative magnitude of the fiscal adjustment was dramatic, the quality of this adjustment has compromised the social and economic objectives of transition, particularly in the Commonwealth of Independent States (CIS). They draw four main conclusions: Investments in public services fell in both absolute and relative terms; Reduced spending on government transfers contributed to a sharp increase in income inequality in the CIS; Fiscal risks increased during the transition; Initial conditions allowed Central European and Baltic countries to maintain higher expenditures, which may have contributed to their faster economic recovery and political support for the reforms. The authors argue that the challenge today for fiscal policy in these countries is to facilitate the transition-particularly in reallocating resources from large state-owned enterprises to new small and medium-size firms, and providing priority public services and targeted transfers to assist those adversely affected by transition and reverse the deterioration in social outcomes. The interplay between fiscal policies and institutional arrangements is increasingly important as transition economies embark on their second decade of reforms. In particular, incentives embedded in the institutional arrangements for fiscal management needs to be strengthened so that policies, resources, and outcomes can be better aligned, and the fiscal adjustment is consistent with qualitative considerations. This paper-a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region-is part of a larger effort in the region to understand economic transition in former centrally planned economies. The authors may be contacted at aalam@worldbank.org or msundberg@worldbank.org.

Banks and Banking Reform --- Debt Markets --- Economic Recovery --- Expenditures --- Finance and Financial Sector Development --- Financial Literacy --- Fiscal Adjustment --- Fiscal Imbalances --- Fiscal Management --- Fiscal Policies --- Fiscal Policy --- Fiscal Risks --- Fiscal Stabilization --- Fiscal Transition --- Incentives --- Macroeconomic Stabilization --- Outcomes --- Public Enterprises --- Public Sector Economics and Finance --- Public Sector Expenditure Analysis and Management --- Public Services --- Revenues --- Social Outcomes --- Structural Reform --- Tax Systems --- Transition Economies