recent years, many central banks have placed increased emphasis on price stability. Monetary policy—whether expressed in terms of interest rates or growth of monetary aggregates—has been increasingly geared toward the achievement of low and stable inflation. Central bankers and most other observers view price stability as a worthy objective because they think that inflation is costly. Some of these costs involve the average rate of inflation, and others relate to the variability and uncertainty of inflation. But the general idea is that businesses and households are thought to perform poorly when inflation is high and unpredictable. The academic literature contains a lot of theoretical work on the costs of inflation, as reviewed recently by Briault (1995). This analysis provides a presumption that inflation is a bad idea, but the case is not decisive without supporting empirical findings. Although some empirical results (also surveyed by Briault) suggest that inflation is harmful, the evidence is not overwhelming. It is therefore important to carry out additional empirical research on the relation between inflation and economic performance. This article explores this relation in a large sample of countries over the last 30 years.

This paper presents evidence that “social capital ” matters for measurable economic performance, using indicators of trust and civic norms from the World Values Surveys for a sample of 29 market economies. Memberships in formal groups—Putnam’s measure of social capital—is not associated with trust or with improved economic performance. We find trust and civic norms are stronger in nations with higher and more equal incomes, with institutions that restrain predatory actions of chief executives, and with better-educated and ethnically homogeneous populations. I.

We exploit di®erences in early colonial experience to estimate the e®ect of institutions on economic performance. Our argument is that Europeans adopted very di®erent colonization policies in di®erent colonies, with di®erent associated institutions. The choice of colonization strategy was, at least in part, determined by the feasibility of whether Europeans could settle in the colony. In places where Europeans faced high mortality rates, they could not settle and they were more likely to set up worse (extractive) institutions. These early institutions persisted to the present. We document these hypotheses in the data. Exploiting di®erences in mortality rates faced by soldiers, bishops and sailors in the colonies during the 18th and 19th centuries as an instrument for current institutions, we estimate large e®ects of institutions on income per capita. Our estimates imply that a change from the worst (Zaire) to the best (US or New Zealand) institutions in our sample would be associated with a ¯ve fold increase in income per capita.

This paper evaluates (1) whether the exogenous component of financial intermediary development influences economic growth and (2) whether cross-country differences in legal and accounting systems (e.g., creditor rights, contract enforcement, and accounting standards) explain differences in the level of financial development. Using both traditional cross-section, instrumental variable procedures and recent dynamic panel techniques, we find that the exogenous components of financial intermediary development is positively associated with economic growth. Also, the data show that cross-country differences in legal and accounting systems help account for differences in financial development. Together, these findings suggest that legal and accounting reforms that strengthen creditor rights, contract enforcement, and accounting practices can boost financial development and accelerate economic growth.

The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. Acknowledgements: We would like to thank Anke Höffler for research assistance in section 2 and Chris Adam, Janine Aron, Kees Burger, Bill Kinsey, Remco Oostendorp, Ritva Reinikka, Francis Teal, Steve Younger and three referees for comments. Abstract: Africa has had slow growth and a massive exodus of capital. In many respects it has been the most capital-hostile region. We review and interpret the aggregate-level and microeconomic literatures to identify the key explanations for this performance. There is a reasonable correspondence of the two sets of evidence, pointing to four factors as being important. These are a lack of openness to international trade; a high-risk environment; a low level of social capital; and poor infrastructure. These problems are to a substantial extent attributable to government behaviour and the paper includes a review of the political economy literature which addresses that behaviour

This paper examines the relationship between the legal system and banking development and traces this connection through to long-run rates of per capita GDP growth, capital stock growth, and productivity growth. The data indicate that countries where the legal system (1) emphasizes creditor rights and (2) rigorously enforces contracts have better developed banks than countries where laws do not give a high priority to creditors and where enforcement is lax. Furthermore, the exogenous component of banking development -- the component defined by the legal environment -- is positively and robustly associated with per capita growth, physical capital accumulation, and productivity growth.

Sakenn pe prie dan sa fason (Everyone can pray as he likes.)-- Mauritian folk wisdom 2 I.

Average incomes of the poorest fifth of society rise proportionately with average incomes. This is a consequence of the strong empirical regularity that the share of income accruing to the bottom quintile does not vary systematically with average income. In this paper we document this empirical regularity in a large sample of 92 countries spanning the past four decades, and show that it holds across regions, time periods, income levels, and growth rates. We next ask whether the factors that explain cross-country differences in growth rates of average incomes have differential effects on the poorest fifth of society. We find that several determinants of growth -- such as good rule of law, openness to international trade, and developed financial markets -- have little systematic effect on the share of income that accrues to the bottom quintile. Consequently these factors benefit the poorest fifth of society as much as everyone else. There is some weak evidence that stabilization from high inflation as well as reductions in the overall size of government not only raise growth but also increase the income share of the poorest fifth in society. Finally we examine several factors commonly thought to disproportionately benefit the poorest in society, but find little evidence of their effects. The absence of robust findings emphasizes that we know relatively little about the broad forces that account for the cross-country and intertemporal variation in the share of income accruing to the poorest fifth of society. _________________________ 1818 H Street N.W., Washington, DC, 20433 (ddollar@worldbank.org, akraay@worldbank.org). We are grateful to Dennis Tao for excellent research assistance. This paper and the accompanying dataset are available at www.worldbank.org/research/gro...

For over a century, economists and policy makers have debated the relative merits of bank-based versus market-based financial systems. Recently, however, proponents of the legal-based view of financial development have argued that the century long debate concerning bank-based versus market-based financial systems is analytically vacuous. According to this view, the critical issue is establishing a legal environment in which both banks and markets can operate effectively. This paper represents the first broad, cross-country examination of which view of financial structure and economic growth is most consistent with the data.

This study explores how social capital and human and economic variations in poor localities influence the capacity for community efficacy. Through a multivariate analysis using 497 households in poor localities of Addis Ababa, we investigate how social capital dimensions (density of membership, informal network, trust and reciprocity) and human and economic characteristics (education and welfare status) of the households are related to community efficacy. Community efficacy is highly associated with increased participation in local associations; trust in the community, confidence in local institutions and pattern of reciprocity among inhabitants. These findings provide qualified support for the systemic model of local social organization but challenge theory of social disorganization that predicts lower levels of social capital in poor communities engendering lower capacity of community efficacy.