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World Bank Research E-Newsletter, March 2016
  Mar 29, 2016

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March 2016
Arrow-bullet Yes, culture matters for economic development
Arrow-bullet Reducing teacher absence is 10 times more cost-effective than hiring more teachers in India
Arrow-bullet The “white-man” effect on behavior in experiments
Arrow-bullet New model estimates the size of illicit activity and laundered assets in Colombia
Arrow-bullet Private banks lend to politically connected firms in Mexico in exchange for favors
Arrow-bullet How restrictions in land markets hinder movement of labor out of agriculture in Sri Lanka
Arrow-bullet Abolishing access to land based on family size reduces fertility in Ethiopia
Arrow-bullet Income disparities for marginalized groups fell during the post-apartheid period
Arrow-bullet Upcoming Events
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Blogs Latest Media and Blog Posts
Working Papers List of New Policy Research Working Papers
Research Visit the Research Department Homepage
Yes, culture matters for economic development

In this Policy Research Talk, Lead Economist Karla Hoff, who co-led the 2015 World Development Report on Mind, Society, and Behavior, uncovered new findings in behavioral economics and their policy implications for topics that included inequality, corruption, gender, and violence.

Story | Video | Presentation

Reducing teacher absence is 10 times more cost-effective than hiring more teachers in India

Some people argue that increasing education system performance in low-income countries requires hiring more teachers. Others believe that similar gains can accrue by increasing efficiency (getting teachers to show up for work). A new nationally representative data set of schools across 1,297 villages in India shows large investments over the past decade in the education sector have led to significant increases in inputs but little change in teacher absence. According to these data, the fiscal cost of 23.6 percent of teachers absent during unannounced visits is roughly $1.5 billion/year. School monitoring is strongly correlated with lower teacher absence, but hiring more teachers is correlated with increases in absence. Simulations based on these results implies that investing in better governance by increasing the frequency of monitoring could be over ten times more cost effective at increasing teacher-student contact time (net of teacher absence) than hiring more teachers. Thus, policies that decrease the inefficiency of public spending in India and other low-income countries where absence rates are high, are likely to yield substantially higher returns than those that increasing inputs. 

World Bank Policy Research Paper 7579 by Karthik Muralidharan, Jishnu Das, Alaka Holla, and Aakash Mohpal, February 2016.

The “white-man” effect on behavior in experiments

Development economists increasingly use behavioral games to understand how people make decisions that mirror real-life choices. In this study, during a series of dictator games played across 60 villages in Sierra Leone, the researchers varied the presence or absence of a foreign researcher who differed starkly and visibly from that of the players. In dictator games, the first player (“the dictator”) chooses how to split an endowment with a second player. How much the first player chooses to give away is interpreted as a true measure of his/her underlying generosity, since there is no need to give away anything at all. However, the study shows that simply having a white foreigner in the room (who was silent and not otherwise involved in managing the study) increased player contributions by 19 percent. It looks like the white foreigner’s presence prompted players to be more generous than they would be in real life, making their behavior in the game less indicative of true generosity. Second, local participants more exposed to development aid gave less, possibly believing the games were testing them for aid suitability. These results—which show that the race and nationality of evaluators across treatment and control areas can influence what people do in these games—calls into question what we think we know about how people make decisions.

The white-man effect: How foreigner presence affects behavior in experiments by Jacobus Cilliers, Oeindrila Dube, and Bilal Siddiqi, October 2015 | A Strange Study Involving the ‘White-Man Effect’ in Sierra Leone (New York Magazine, September 21, 2015) | Researchers can change the outcome of studies just by being white (Quartz, October 2, 2015).

New model estimates the size of illicit activity and laundered assets in Colombia

A new model estimates that illicit incomes in Colombia increased drastically until 2001, peaking at 12 percent of gross domestic product (GDP), and then decreased to less than 2 percent of GDP by 2013. The decline occurred during a period of high economic growth and the implementation of Plan Colombia. The estimated volume of laundered assets increased from about 8 percent of gross domestic product in the mid-1980s to a peak of 14 percent by 2002, and declined to 8 percent in 2013.The estimates are guided by a long-run growth model, which can also be applied to other countries. The model considers illicit workers and activities alongside a licit private sector and a functioning government. The licit sector operates in a perfectly competitive environment and produces a good through a standard neoclassical production function. The illicit sector operates under imperfect competition (through cartels) and is composed of the production of illicit goods with value in the market (for example illicit drugs) and activities that only redistribute wealth (for example robbery, kidnapping, and fraud). The model provides a framework to assess the effects of changes in productivity, government efficiency, and drug prices on labor and output markets. It also derives a set of estimable equations to measure the size of illicit activities and laundered assets from 1985 to 2013.

World Bank Policy Research Working Paper 7578 by Edgar Villa, Martha A. Misas, and Norman V. Loayza, February 2016.

Private banks lend to politically connected firms in Mexico in exchange for favors

Political rent seeking (surplus value after all costs and normal returns have been accounted for) can distort banks’ lending decisions and hinder efficient resource allocation in financial markets. This relationship is explored using loan-level data from commercial loans in Mexico from 2003 to 2012 by linking loans to the state of origin of a senate committee chairman, as a proxy for a firms’ political relationship. Not only do banks offer favorable loan terms to politically connected firms with larger loan quantities, lower loan spreads, longer maturities, and lower collateral requirements, but political loans also exhibit higher default rates. The favorable lending increases with the strength of a firm’s political connection, varies gradually along the political cycle, and is mainly offered by large and domestic private banks. Consistent with the quid pro quo hypothesis, private banks that extend political loans receive significantly more government borrowings with better credit quality. Also the greater credit supply due to political connection leads to a large and significant increase in firm-level employment and assets. The study estimates the total social cost of political lending and net revenue for banks that are engaged in rent provision activity.

World Bank Policy Research Working Paper 7577 by Sumit Agarwal, Bernardo Morais, Claudia Ruiz, and Jian Zhang, February 2016.

How restrictions in land markets hinder movement of labor out of agriculture in Sri Lanka

Policy restrictions in land markets can constrain the process of structural change from agriculture to non-farm employment. Such restrictions increase the costs of migration, adversely affecting non-farm entrepreneurship and expansion of non-farm business. A model is used to show that sales and mortgage restrictions can result in reverse structural change. Reverse structural change can occur if demand for the non-agricultural good is income-inelastic (assuming the non-farm good is non-tradable), or is less labor intensive relative to agriculture (assuming the non-farm good is tradable). Empirical evidence from a natural experiment in Sri Lanka shows adverse effects of land restrictions on manufacturing and services employment, rural wages, and per capita household consumption. The evidence on occupational choices suggests that land restrictions increase wage employment in agriculture, but reduce it in manufacturing and services, with no perceptible effects on self-employment in non-agriculture. The results are consistent with the migration costs model, but contradict two widely discussed alternative mechanisms: collateral effect and property rights insecurity.

Policy Research Working Paper 7525 by M. Shahe Emran and Forhad Shilpi, December 2015.

Abolishing access to land based on family size reduces fertility in Ethiopia

In 1997 the historic practice of redistributing land based on family size was abolished in the southern part of the Amhara region of Ethiopia. This research looks at the arrangement and rearrangement of property rights in influencing fertility rates. In particular, it evaluates fertility outcomes in the area where pronatal property rights were abolished by matching census data before and after the reform with administrative data on the roll-out of the reform. The reform reduced the life-time fertility of women in rural areas by 1.2 children.

World Bank Policy Research Working Paper 7419 by Daniel Ayalew Ali, Klaus Deininger, and Niels Kemper, September 2015.

Income disparities for marginalized groups fell during the post-apartheid period

When apartheid ended in South Africa in 1994 the dismantling of coercive institutions affected the distribution of rents (surplus value after all costs and normal returns have been accounted for) from natural resource exports. This research examines spatial income disparities in the post-apartheid period, when marginalized racial groups and labor unions became empowered. The 1996 census shows large income gaps between communities located just-inside and just-outside the former self-governing territories set aside for black inhabitants. Between 1996 and 2011, spatial income convergence increased among marginalized communities with higher initial exposure to resource rents. These results support standard bargaining theory in which the dismantling of coercive institutions improves the negotiating position of unionized workers in the mining industry.

World Bank Policy Research Working Paper 7572 by Paulo Bastos and Nicolas Bottan, February 2016.

UPCOMING EVENTS

All upcoming events

MEDIA AND BLOGS

Health and the SDGs: Out of the doldrums, heading for the rapids (Let’s Talk Development blog, March 23, 2016)  

“Until quite recently, things were looking good for health in the SDG process. It wasn’t always so. Two and a half years ago, at the time of the high-level panel report on the SDGs, the health SDG discussion was actually stuck in the doldrums. Health was the only area to get less column inches than in the MDGs."

Read the blog by Adam Wagstaff and Joseph Kutzin.

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So what can be done to contain volatility and spur growth in these countries? (Latin America and Caribbean blog, March 22, 2016)

Understanding Macroeconomic Volatility: Part 5. Read parts 1-4 here
"The evidence suggests a country needs a tandem effort: Develop policies that strengthen macroeconomic fundamentals, and develop the domestic financial system. Together, these initiatives would bring the maximum benefits for long-term growth and stability. It would be an interactive process, with the two efforts reinforcing each other: Strengthened financial systems could be achieved in part by improving macroeconomic fundamentals, while better fundamentals would flow partly from better developed financial systems."

Read the blog by Francisco G. Carneiro, Ha Minh Nguyen, and Rei Odawara.

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Psychometrics as a tool to improve screening and access to credit (All About Finance blog, March 21, 2016)

"Small and medium enterprises (SMEs) often face financial constraints because they lack audited statements and other information about their operations, and as a result, financial institutions have difficulties assessing the risk of lending to them. Studies have shown that information sharing, credit bureaus, and credit scoring can increasing credit to SMEs, but not all countries have well-developed credit bureaus that gather the level of information needed to build a reliable credit-scoring model. For example, the average credit bureau in Latin America and the Caribbean complies with only half of best practices and covers only 40.5 percent of the adult population (Doing Business Report 2016)."

Read the blog by Miriam Bruhn, Irani Arraiz, and Rodolfo Stucchi.

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Middle-class dynamics and the Arab Spring (Future Development blog, Brookings, March 18, 2016)

“What do middle-class dynamics in the 2000s tell us about the Arab Spring events? In modern economies, the middle class not only bolsters demand for private goods and services, but also insists on good governance and public services, such as education, health, and infrastructure. Investments in these areas improve the capacity of the economy to grow not only more rapidly, but also sustainably and inclusively. Therefore, understanding how the middle class fares in the Arab world is of crucial importance.”

“In our research, we’ve estimated the size of the middle class in Egypt, Jordan, the Palestine territories, Syria, Tunisia, and Yemen using the vulnerability approach. Under this method, middle-class status is assigned to people with income higher than a specified vulnerability line; namely those who are reasonably secure from falling into poverty. We calculate this vulnerability line at $4.9 per day per person in 2005 terms; above this line the probability of falling into poverty in the next period is less than 20 percent.”

Read the blog by Elena Ianchovichina and Hai-Anh Dang.

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Are bank accounts a key to happiness? (Let’s Talk Development blog, March 18, 2016)

“This week we celebrate International Happiness Day and the launch of the World Happiness Report, making it a perfect time to highlight the ways economic participation makes women happier. The benefits of having a bank account are well documented. People with accounts are better able to start businesses. Women who get paid into an account spend more money on their children's health and education.”

Read the blog by Leora Klapper, Neli Esipova, and Liz Kellison.

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The top 8 active researchers in developing countries according to RePEc (Impact Evaluation blog, March 16, 2016)

"The Research Papers in Economics (RePEc) database has over 46,000 researchers registered. Each month they send out rankings based on downloads, citations, and other metrics. Their ranking of economists based on publications in the last 10 years is topped by some of the best known names in economics (the top 5 are Acemoglu, Shleifer, Heckman, Barro and Rogoff). But looking through their top 100 (as of January 2016), I found 8 of the top 100 researchers are based in developing countries (taking World Bank client countries as “developing countries” for this purpose). Since I was only familiar with the work of one of these eight individuals, I thought it might be of interest to note some of this work going on outside of the usual top schools. I contacted the authors to ask them also what idea or work they were most proud of, or would most like to draw policy attention to."

Read the blog by David McKenzie.

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Once poor, forever poor? (Africa Can End Poverty blog, March 14, 2016)

““Static poverty measures fail to distinguish between an individual who has been in poverty all her life, and another who happens to have had a small misfortune for the year the measurement was carried out. But these distinctions matter. The forces that conspire to condemn some individuals to remain stuck in poverty for years are generally somewhat different from those that randomly drag them down for a brief period. The latter group may need only some temporary relief—perhaps only some short-term employment insurance till they get the next job—while the former would need also longer-term interventions aimed at breaking the persistence of poverty. Indeed, the longer people spend in poverty, the lesser tends to be their chance of exiting it. As Africa rose, has its poverty remained mainly chronic, or has it become a more transient state of affairs?

Researchers interested in understanding poverty dynamics in Africa now have access to an emerging collection of nationally representative panel surveys (see, for example, Living Standards Measurement Study–Integrated Surveys on Agriculture). This is a vast improvement over the situation just a decade ago. However, data coverage remains low—only seven countries—and the time period spanned is limited to 2–4 years. So, what to do to get a picture of poverty dynamics for most of SSA, and over a longer time period?

In a background paper for the recent Poverty in a Rising Africa report, we construct synthetic panels instead from available cross sectional household surveys, which have been proven to perform well when validated against data from actual panels (for details see our earlier blog). These synthetic panels are much more widely available and span longer time periods; they also enable a more systematic application of the same methodology across countries, which improves comparability. A similar approach has been applied recently for countries in the Latin America and Middle East and North Africa regions.”

Read the blog by Hai-Anh Dang.

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Harnessing the data revolution and improving land management through geospatial technology (Let’s Talk Development blog, March 13, 2016)

Advances in earth observation, computing power, and connectivity have tremendous potential to help governments, and us at the World Bank, support better land management, and ultimately reduce poverty and promote shared prosperity.

There are three ways in which these technologies profoundly change the scope of our work. First, they help us observe and track land use at a level of detail not possible before. Second, they provide avenues for greater participation. Third, they can helps increase transparency and independent monitoring.

Unfortunately, the above examples are still more the exception rather than the rule. In fact, many governments fail to harness opportunities because they either don’t have policies to facilitate information-sharing, have information locked up in incompatible systems (sadly, many of them acquired through foreign assistance) or drown in data without being able to see patterns.

In such a situation, the private sector, academia, and civil society (such as the open street map community) can play a critical role by: institutionalizing interoperability and making it the norm establishing incentive-compatible and self-sustaining business models to manage information and ensure transparency ensuring monitoring standards and public availability of information to allow all players to reap the benefits from the information revolution.

Closer collaboration between the Bank and the geospatial community will be key to achieving these objectives.”

Read the blog by Klaus Deininger | Visit the 2016 Land and Poverty Conference website.

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Could the digital revolution get more women into work? (World Economic Forum blog, March 9, 2016)

This piece is part of an in-depth series on Women at Work. For regular updates on gender issues ‘like’ our Facebook Page and sign up to The Gender Agenda weekly email digest.

“This week, International Women’s Day focused on accelerating gender parity, which makes it a perfect time to highlight the urgent need to boost women’s economic participation worldwide. One way of doing that is by tapping into the power of digital payments and digital financial services.”

Read the blog by Ruth Goodwin-Groen and Leora Klapper.

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The political economy of bank lending: evidence from an emerging market (All About Finance blog, March 7, 2016)

Our paper studies the existence of political rents in bank lending in Mexico. Unlike prior studies examining political rent seeking in public sector banks, we focus on an economy with a fully privatized banking sector where the existence of political rent seeking is not obvious.

The data that we use corresponds to the universe of commercial bank loans in Mexico from 2003 to 2012. We classify firms as politically connected if they are located in a state that elected a senator who at a particular time chaired an important senate committee. We then narrow down our definition of political connection by focusing on firms that, in addition to being headquartered in the same state, operate in an industry related to the purview of the chairman’s commission, or are located in the same municipality in which the chairman lives. Having this classification of political connection allows us to exploit within-firm variation over time, and compare a firm’s loan terms and performance when it is politically connected and when it is not.”

Read the blog by Claudia Ruiz, Sumit Agarwal, Bernardo Morais, and Jian Zhang.

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How land rights institutions affect the path to productive urbanization (Let’s Talk Development blog, February 29, 2016))

“The industrial revolution in Western Europe and North America soon triggered both increased urbanization and accelerated economic development, placing countries in these regions onto paths of sustained income growth over the following three centuries. Economists have long pointed to the crucial role that favorable institutions played in triggering and supporting these historic changes. Surprisingly, however, very little attention has been given to the role played by property rights in land in the interrelated processes of urbanization and growth.

Looking back in more detail at the long process of urbanization in the now developed countries, it is notable that, in many cases, formal land property rights were only gradually phased-in. This progressively stimulated the development of manufacturing activities by lowering transaction costs for the transfer of land to the emerging industries that were locating in cities, and made investments more secure and thus more productive. The strengthening of institutions defining and facilitating the enforcement of land property rights seems to have had a very considerable positive effect on economic efficiency.”

Read the blog by Yongyang Cai, Harris Selod, and Jevgenijs Steinbuks.

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Education is the topic for the new World Development Report (Let’s Talk Development blog, February 24, 2016)

Education is central to improving human welfare and to achieving the goals of eliminating extreme poverty and boosting shared prosperity. Schooling was recognized as vital to achieving the MDGs, and it remains front and center in the SDGs. Yet there has never been a World Development Report (WDR) on education.”

Read the blog by Kaushik Basu, Senior Vice President and Chief Economist, World Bank

List of New Policy Research Working Papers
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