Asian Development Review

This paper illustrates the contribution of public economics to the analysis of public projects. The illustrations pertain to peak-load pricing (electricity) and to second-best pricing under a budget constraint (subways), also taking into account the pricing of substitutes (rail versus canals, fixed link versus air or ferries). The paper next reviews some difficulties in evaluating costs and benefits (for the Channel tunnel), compares briefly private versus public implementation, then turns to funding. After reviewing the pricing of derivatives in the Capital Asset Pricing Model and the computation of risk premia for public projects, the case for funding public projects on world capital markets is presented and applied to the denomination of Third World debt. The paper ends on a plea to consider the merits of a “World Insurance Agency for Development”.

This paper shows that there is no rule that the environment has to first deteriorate with economic growth and improve only later. There is no absolute, invariant income-environment relationship (IER) to imply such a rule. This is shown by estimating IER for Asia and comparing it with the same for other regions of the world. It is found that IERs differ widely across regions and across pollutants, and do not usually conform to the shape implied by the Environmental Kuznets’s Curve hypothesis. This indicates that the role of income in explaining pollution dynamics is limited. With appropriate policies, pollution level can be kept low even during the initial stage of economic growth. In particular, policy measures are urgently needed in Asian countries to reduce solid particulate matter in air, and nitrate and arsenic in water.

At the end of the Second World War, it was uncertain whether Asia would follow Western countries in experiencing a demographic transition, due to its low per capita incomes, apart from Japan. Unexpectedly, most of Asia experienced unprecedented steep mortality declines from 1945 and accounted disproportionately for the so-called global “population explosion”. The movement toward long-term equilibrium began with fertility declines starting in the 1960s. These were produced by both socioeconomic change and strong national family planning programs. Population growth rates declined from 1970, and most of the increase now is taking place in urban areas. Demographic pressures on resources will be greatest in South Asia, which is likely to experience a further population increase of around 70 percent. The East Asian economic “meltdown” is unlikely to slow down the demographic transition. In some countries, notably Indonesia, mortality decline may decrease or temporarily cease, but fertility decline may accelerate.

The People’s Republic of China (PRC) mainly exports labor-intensive manufacturing products, especially textile and apparel, which face fierce international competition. The PRC’s trade is also unevenly distributed, which has led to trade frictions with the United States (US). Given this situation, four factors (challenges) are important for the future of the PRC’s trade: membership in the World Trade Organization (WTO); Sino-US trade relations, which will affect the PRC’s access to the US market and conditions for entering WTO; phasing-out of the Multi-Fibre Arrangement (MFA); and antidumping, a trade policy instrument that makes the PRC’s exports especially vulnerable because of the use of surrogate countries. In the near future the PRC should still be able to obtain reasonable market access because most countries except the US have already given the PRC unconditional most favored nation (MFN) status. A US withdrawal of the PRC’s MFN status will lead to trade wars and is unlikely to happen under normal circumstances. The PRC will not suffer much from the MFA phasing-out because benefits of the agreement are heavily back loaded and will not materialize until years later. Setting up the PRC’s own antidumping regulations is a good strategic move to deter possible abuse of antidumping by other countries.

India’s recently launched economic reforms will only be sustainable if they are accompanied by political reforms, which create the foundations of economic development. Establishing a Weberian-type bureaucracy adequately embedded in society will be useful, but not sufficient to enhance the incentive compatibility of public policies and economic performance. Due to the heterogeneity of the Indian economy and society, this institutional arrangement should be complemented by the concept of Participatory Market-Preserving Federalism, which combines the notion of embedded autonomy with the concept of Market-Preserving Federalism and the principle of subsidiarity. This induces a self-enforcing governance structure that reduces collective action problems, directly involves social groups and subnational governments into political decision making processes, and creates the political foundations of economic growth.